BS Primer: Banking on small and payment banks

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Only 35% of Indians have accounts with financial institutions, according to World Bank estimates. To service the remaining population, the Reserve Bank of India (RBI) has created two new banking categories, called small finance banks and payment banks.

Small banks will be similar to existing commercial banks but will offer only basic products such as deposits and loans. At least half of a small bank's loan portfolio should constitute loans and advances of up to Rs 25 lakh, according to RBI.

Payment banks are meant for simple banking transactions. These institutions will not be allowed to lend or accept term deposits. Customers can't keep more than Rs 1 lakh in their account.

Let's take a look at services these banks can and cannot offer:

Are the account opening formalities for these different?
No. The central bank has said a customer needs to provide the same set of documents as required by existing commercial banks.

Will these banks have higher or lower charges for services?
These charges will be similar to what commercial banks charge customers now. For example, if RBI allows the existing banks to charge up to Rs 750 in case of cheque bounce, these banks can charge similar fees.

Will they have their own ATMs?
Yes. They can either set up their own ATMs or tie up with existing banks to offer the service. The existing norms on free ATM transactions will apply here, too. For example, RBI allows banks to charge a fee if a customer withdraws money more than five times a month using the home bank's ATMs.

Will these banks compromise on cheque books, passbooks and other paper-based products to keep overhead costs low?
No. The regulator has said these banks have to issue cheque books, maintain passbooks and other paper-based products prevalent today.

Will these banks allow the customer to send and receive money from another country?
While these banks are permitted to handle outward and inward foreign remittances, payment banks are not allowed to offer NRI deposits.

Can these institutions offer credit card and pre-paid payment instruments?
Payment banks are not allowed to offer credit cards. In the case of pre-paid cards, the money on these will be clubbed with the then existing amount in the bank account and the total cannot exceed Rs 1 lakh. Small banks can offer both products.

Will customers be pestered with executives selling insurance and other financial products?
Small banks in this regard will operate the same way existing banks do. Payment banks, too, are allowed to market third-party products.

And, though they cannot accept deposits or lend money, they can tie up with banks for deposits and loans. Both institutions can also offer locker/vault services.

Can these banks pay utility bills (electricity, telephone and so on) on a post-paid basis and take money from customers later?
Small finance banks can offer to do this but not payment banks. This is because payments made on a post-paid basis will be considered as credit.

How will these institutions ensure reach in remote areas?
The regulator has allowed even grocery (kirana) stores to become business correspondents. These intermediaries can help in account opening, deposits and withdrawal, using technologies such as hand-held devices and chip-based secure cards.

Can you expect these institutions to offer non-risk government services like Aadhaar enrolment or selling forms of state housing corporations such as Mhada in Maharashtra or DDA in Delhi?
While small finance banks can undertake all activities that existing commercial banks are allowed, payment banks can only carry out activities where they don't have to commit their own funds.