Small And Payment Banks

Small Banks
Small banks have been recommended by several experts and committees like Narsimhan committee etc.
In 2014 RBI invited licences for small banks and so far 10 entities have been granted permission to start operations as small banks. These will be registered under the Company's Act.
Small banks are just like regular banks but they operate on a smaller scale targeting small businesses, MSMEs, unorganized sector, agriculture etc.
Just like regular commercial banks they can open current accounts, savings accounts, fixed deposits, recurring deposits etc. They can offer loan and other banking services and even FDI is permitted in them to the tune of 74%.
The small banks so opened are mandated to- a) Open 25% of their branches in rural areas; b) Forward 50% of their loans to MSMEs
Payment Banks
Payment banks are stripped down versions of existing banks which will offer services like current account, debit card etc. and payment services for utility/services, bills etc.
They are expected to reach customers mainly through their mobile phones rather than traditional bank branches.
Features of payment banks-

• They can’t offer loans but can raise deposits of upto Rs. 1 lakh, and pay interest on these balances just like a savings bank account does.
• They can enable transfers and remittances through a mobile phone.
• They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.
• They can issue debit cards and ATM cards usable on ATM networks of all banks.
• They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.
• They can provide forex cards to travellers, usable again as a debit or ATM card all over India.
• They can offer forex services at charges lower than banks.
• They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’

It’s a step to redefine banking in India. The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking. It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. The innovation is also expected to accelerate India’s journey into a cashless economy.
India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
Such experiments have worked remarkably well in other developing countries like Kenya.

By: Vishal