Modi Government is leaving no stone unturned to financially include the under-served and unserved people of India. In Budget 2014-15, two types of banks to operate in entirely different niche were proposed i.e. Payment Banks and Small Finance Banks aka Microfinance Banks.
Few weeks back, RBI has granted payment bank license to 11 entities namely 1) National Securities Depository Limited (NSDL), 2) Reliance Industries, 3) Aditya Birla Nuvo, 4) Airtel M Commerce, 5) Department of Posts, 6) Fino Paytech, 7) Tech Mahindra, 8) Vodafone m-pesa, 9) Cholamandalam Distribution services, 10) Paytm and 11) Sun Pharma.
Today RBI has granted licenses for running Small Finance Banks aka Microfinance Banks to 10 entities namely:
- Au Financiers (India) Limited, Jaipur
- Capital Local Area Bank Limited, Jalandhar
- Disha Microfin Private Limited, Ahmedabad
- Equitas Holdings P Limited, Chennai
- ESAF Microfinance and Investments Private Limited, Chenna
- Janalakshmi Financial Services Private Limited, Bengaluru
- RGVN (North East) Microfinance Limited, Guwahati
- Suryoday Micro Finance Private Limited, Navi Mumbai
- Ujjivan Financial Services Private Limited, Bengaluru
- Utkarsh Micro Finance Private Limited, Varanasi
Eight out of ten entities are required to comply with guidelines within 18 months, the exceptions are Au Financiers (India) Limited and Capital Local Area Bank Limited.
What are Small Finance Banks or Microfinance Banks?
As the name suggests, these banks are mainly set-up to provide credit facility only to the small and marginal farmers, small, medium and micro enterprises and other unorganized sector entities.
Along with lending money, these banks will provide all other basic banking operations of accepting deposits and distribution of mutual fund schemes, pension funds and insurance products.
Even though small finance banks are restricted to limited area of operation, they are required to comply with the statutory laws of RBI including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) like any other scheduled commercial bank.
The minimum paid-up equity capital requirement for small finance banks were fixed at Rs.100 crore of which not less than 40% should be of promoters. Further, these banks are also required to adhere to the FDI guidelines i.e. foreign investment in a small finance banks from all sources should not exceed 74% of the paid-up capital.
What would be Loan Amount under Small Finance Banks?
Though small finance banks do not have any limitations on amount of finance but
- Maximum amount of loan and advances to single/group borrowers/issuers is restricted to 15% of capital funds.
- 75% of the total loans and advances issued by small finance banks in a year should be towards agriculture and small businesses.
- Atleast 50% of the total loans and advances of the small finance banks should be of Rs.25 lakhs or lesser.
Difference between Payment Banks and Small Finance Banks
The major difference between payment banks and small finance banks is their area of operation. Payment bank can only open savings account and current accounts but cannot lend money while small finance bank’s main aim is to lend money to farmers and small businesses.
Usually, major earnings of the bank come from interest difference between deposits and lending but payment banks would run on different niche and their earnings would be from the charges levied on transactions. But in case of small finance banks, their source of earnings would be same as of any other scheduled commercial banks.
Payment banks aims to provide banking through high-technology and low-cost operations while small finance banks may or may not be tech-savvy.