Reaching unbanked people: Payments Bank vs Small Finance Banks

It is estimated that in India, there is more than 40% of 120 million are unbanked, the reasons are many. To reach every corner of India, 19 August 2015 Reserve Bank of India has introduced new 2 new segments in differentiated banks Payments Bank and Small Finance Banks. To serve the specific demographic areas mainly for remote villages in India. The initial capital that is required to start both Payments Banks and Small finance banks is Rs. 100 Crore; however, the initial contribution to promoters are different.

Payments Banks

Payments banks are differentiated banks, these banks can offer normal financial benefits like savings accounts, debit cards, remittance and issuing chequebooks. Unlike traditional banks, payment banks cannot provide loans and credit cards. As of now, reserve bank of India has given licenses to 11 payments banks and four of them are already started their services.

Payment banks that are licensed are Aditya Birla Nuvo, FINO PayTech, Airtel M Commerce Services, Paytm, National Securities Depository, India Post, Cholamandalam Distribution, Reliance Industries, Vodafone M-Pesa, Sun Pharmaceuticals and Tech Mahindra.

Active Payment Banks

1. Airtel Payments Bank
2. India Post Payments Bank
3. PayTm Payments Bank &
4. FINO Payments Bank

The first payments bank in India, Airtel provide 7.5% interest on a savings account, India post offers 5.5 and PayTm and FINO offers 4%. Maximum deposit that is allowed in these banks is 100,000 rupees.

On 17 July 2014, the Reserve Bank of India (RBI) released the draft guidelines for small finance banks, seeking comments for interested entities and the general public. The final guidelines were released by RBI on 27 November 2014. It was also announced that interested parties should submit applications before 16 January 2015.
In February 2015, RBI released the list of entities which had applied for a small finance bank license. There were 72 applicants. It was also announced that an external advisory committee headed by Usha Thorat will evaluate the license applications.

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Small Finance Banks

The man idea behind forming such banks is to serve the small businesses, farmers and daily wage labor small industries and entities that are not recognized by normal banks. Along with savings accounts, small banks can also provide loans but limited to the area of operation.

Any individual or companies with ten years of experience in banking and finance sector are eligible as promoters to set small finance banks. Existing micro finance institutions and Local Area Banks can convert their branches into a small finance bank.
The main agenda of small banks are to empower rural unbanked population, so the 25% of branches should be in rural unbanked areas. These banks are primarily focusing on micro enterprises, Loans and advances offered by these banks should not be more than Rs 25 lakhs. The loan portfolio of each small banks should be atleast of 50%.

Major Small Finance Banks

1. Ujjivan Small Finance Banks
2. Au Financiers Ltd
3. Disha Micro Finance
4. Janalakshmi Micro Finance Bank
5. Suryoday Small Finance

I will try to list out the importance and functionalities of Payments Bank and Small Finance banks in my upcoming posts.