Small Finance Bank (SFB) Vs Payment Banks (PB) – Difference

Small Finance Bank (SFB): Basic objectives of setting up of small finance banks are : To promote financial inclusion through “(a) provision of savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations”.

Small Finance Bank (SFB)

SFBs can be promoted by resident individuals/professionals with 10 years of experience in banking and finance as well as companies and societies owned and controlled by residents. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents are also permitted to convert themselves in to SFBs. Promoter/promoter groups should have a five year successful record of professional experience or of running their businesses are eligible to promote small finance banks.

Scope of activities for SFBs include acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. There are no restrictions in the area of operations of small finance banks.

The minimum paid-up equity capital for SFB should be Rs. 100 crore. The promoter’s minimum initial contribution has to be at least 40% of paid-up equity capital of and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank. The foreign shareholding is allowed and would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time. SFBs are subject to all prudential norms applicable to existing Commercial banks including CRR, SLR. The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh. If a SFB wants to convert in to a universal bank, it would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks, its track record of performance as a SFB and the RBI’s due diligence exercise.

For granting of licenses an External Advisory Committee (EAC) comprising eminent professionals will evaluate the applications. On the basis of evaluation, RBI will issue an in-principle approval for setting up of a SFB or otherwise. RBI decision will be final. The in-principle approval issued by the Reserve Bank will be valid for eighteen months.

Payment Banks (‘PB’)

Payment banks were set up to increase financial inclusion by providing “(i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users”.

Payment Banks can be promoted by:

  • (i) Existing non-bank Pre-paid Payment Instrument (PPI) issuers;
  • (ii) Individuals/professionals;
  • (iii) NBFCs, Corporate Business Correspondents(BCs);
  • (iv) Mobile telephone companies;
  • (v) Super-market chain;
  • (vi) Companies;
  • (vii) Real sector cooperatives; that are owned and controlled by residents; and
  • (viii) Public sector entities.

A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank. Scheduled commercial banks can take equity stake as permitted under Section 19 (2) of the Banking Regulation Act. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or running their businesses for at least a period of five years in order to be eligible to promote payments banks.

PBs can accept demand deposits and they will initially be restricted to hold a maximum balance of Rs. 100,000 per individual customer. PBs are also permitted to issue ATM/debit cards (but cannot issue credit cards); offer Payments and remittance services through various channels; function as Business Correspondent of another bank as per RBI guidelines; distribute non-risk sharing products like mutual fund units and insurance products, etc.

PBs cannot undertake lending activities. Apart from maintaining CRR with the RBI, a PB is required to invest minimum 75% of its “demand deposit balances” in SLR securities with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other Scheduled Commercial banks for operational and liquidity management.

A PB should have a minimum paid-up equity capital of Rs. 100 crore with a leverage ratio not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves). Minimum initial contribution from the promoter will be 40% of the paid-up equity capital of the PB for the first five years from the commencement of its business. Foreign shareholding is allowed and is subject to prevailing FDI policy applicable for private sector banks.

Right from the beginning a PB should be “fully networked and technology driven” as per the standards generally accepted and norms. Should also have a high powered Customer Grievances Cell to handle customer complaints. Procedure for granting license and its validity is similar to that of SFBs.

Following table depicts salient differences between Payment Banks and Small Finance Banks.

Difference Between Payment Banks and Small Finance Banks

Payment BanksSmall Finance Banks
Payment Banks (PBs) received deposits and remittances but can not lend.Small Finance Banks( SFBs) will lend to unserved and underserved sections including small business unit, micro and small industries and small and marginal farmers.
Deposits from a customer should not exceed Rs. 1 Lakhs.It can provide basic services of excepting deposits and lending.
Cannot give loans and cannot issue credit cards but can issue ATM/Debit Card.No restriction of area of operation.
Can distribute non-risk financial product. Such as, Mutual Funds and Insurance Products.Loan portfolio to the extent of 50% or more should constitute loans and advances of upto Rs. 25 Lakhs.

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