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RBI Issues Draft Rules for Small & Payment Banks
Jul 22, 2014

Reserve Bank of India recently issued draft guidelines for setting up of local feel small banks, which will disburse small-ticket loans to farmers and businesses. The central bank also issued draft guidelines for setting up of payment banks, which will cater to marginalised sections of society, including migrant labourers, for collecting deposits and remitting funds. Such banks can be set up with a minimum capital of Rs. 100 crore as against Rs. 500 crore required for normal commercial banks. Both payments banks and small banks are differentiated banks, with the common objective of furthering financial inclusion. 

The proposed small banks will provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation. On the other hand, payments banks will offer a limited range of products such as acceptance of demand deposits and remittances of funds. They will have a widespread network of access points particularly in remote areas, either through their own branch network or through Business Correspondents (BCs) or through networks provided by others. 


Foreign investments in these new category banks would be as per the FDI policy. 


The existing non-bank pre-payment instrument issuers, non-banking finance companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a payments bank. 


In case of small banks, resident individuals with 10 years of experience in banking and finance, companies and societies will be eligible as promoters to set up small banks. NBFCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can also opt for conversion into small banks. Preference will be given to professionals from banking or financial sector, NBFCs and MFIs to set up small banks, if they meet the 'fit and proper' criteria. 


Local focus and the ability to serve smaller customers will be a key criterion in licensing such banks. The area of operations of the small bank will normally be restricted to contiguous districts in a homogeneous cluster of States/Union Territories so that the bank has the 'local feel' and culture. The bank may be allowed to expand in one or more states with geographical proximity. 


Earlier in April this year, the RBI had given in-principle approval to IDFC and Bandhan Financial Services to set up full-fledged banking operations.  


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