Many poor families and small traders in India still find it hard to use a bank. Big banks may be far away or may not want small accounts. To reach them, the Reserve Bank of India created two new kinds of banks in 2014. These are payments banks and small finance banks. They are called differentiated banks, because each does only some banking work. Exams ask about their rules, limits and the committee behind them. This post explains both in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- Both were recommended by the Nachiket Mor Committee, set up by the RBI in 2013.
- The RBI issued final guidelines for both in November 2014.
- A payments bank can take deposits but cannot give loans.
- A payments bank can hold up to ₹2 lakh per customer. The limit was raised from ₹1 lakh in 2021.
- A small finance bank can take deposits and give loans, mainly to small borrowers.
1. Why were these banks created?
The aim was financial inclusion - bringing every person into the banking system. In 2013 the RBI set up a committee under Nachiket Mor on comprehensive financial services for small businesses and low-income households. It gave its report in January 2014.
The committee suggested new types of banks that do a few things well, instead of everything. The RBI accepted the idea and created:
- Payments banks - for small savings and payments.
- Small finance banks - for small savings and small loans.
Both need a licence from the RBI under the Banking Regulation Act, 1949.
2. Payments banks - what they can and cannot do
What they can do:
- Accept demand deposits - savings and current accounts.
- Issue ATM and debit cards.
- Offer remittance, bill payment and mobile payment services.
- Sell simple products like insurance and mutual funds as an agent.
What they cannot do:
- They cannot give loans.
- They cannot issue credit cards.
- They cannot take fixed or term deposits from customers.
The deposit limit is ₹2 lakh per customer at the end of a day. Since they cannot lend, they must keep most of their money safe. At least 75% of their demand deposits must go into short-term government securities and treasury bills.
3. Payments banks in India
In August 2015, the RBI gave in-principle approval to 11 applicants for payments banks. Some later dropped out.
- Airtel Payments Bank was the first to begin operations.
- India Post Payments Bank (IPPB) was launched on 1 September 2018. It is owned by the Department of Posts and uses post offices and postal staff to reach villages.
- Other payments banks were set up by telecom, technology and financial companies.
The RBI allows a payments bank to apply to convert into a small finance bank after it completes five years of operation, if it meets the rules.
4. Small finance banks - what they do
A small finance bank is a full bank for small customers. It can:
- Accept all kinds of deposits, including fixed deposits.
- Give loans to small farmers, small businesses, micro and small industries and the unorganised sector.
- Issue debit and credit cards and offer other basic banking services.
Two key lending rules apply:
- At least 75% of its adjusted net bank credit must go to the priority sector.
- At least 50% of its loan portfolio must be loans of up to ₹25 lakh.
These rules keep the bank focused on small borrowers.
5. Small finance banks in India
In September 2015, the RBI gave in-principle approval to 10 applicants for small finance banks. Many of them were earlier microfinance institutions or NBFCs.
- Capital Small Finance Bank in Punjab was the first to begin operations, in 2016. It was earlier a local area bank.
- Others include Equitas, Ujjivan, Jana, Suryoday, ESAF and Utkarsh small finance banks.
In 2019, the RBI started "on tap" licensing for small finance banks, so applicants can apply at any time. The minimum paid-up capital, which was ₹100 crore at first, was raised to ₹200 crore for new applicants.
6. Payments bank vs small finance bank
| Point | Payments bank | Small finance bank |
|---|---|---|
| Deposits | Savings and current only; up to ₹2 lakh per customer | All types, no such cap |
| Loans | Not allowed | Allowed, mainly small loans |
| Credit cards | Not allowed | Allowed |
| Main purpose | Small savings and payments | Credit and savings for small borrowers |
| Example | India Post Payments Bank | Capital Small Finance Bank |
7. Previous year questions
- Which committee recommended payments banks and small finance banks? – Nachiket Mor Committee
- In which year did the Nachiket Mor Committee submit its report? – 2014
- When did the RBI issue final guidelines for payments banks? – November 2014
- Can a payments bank give loans? – No
- What is the maximum deposit a payments bank can hold per customer? – ₹2 lakh
- In which year was the payments bank deposit limit raised to ₹2 lakh? – 2021
- Can a payments bank issue credit cards? – No
- What minimum share of demand deposits must a payments bank keep in government securities? – 75%
- When was India Post Payments Bank launched? – 1 September 2018
- Which department owns India Post Payments Bank? – Department of Posts
- Which was the first payments bank to start operations? – Airtel Payments Bank
- Which was the first small finance bank to start operations? – Capital Small Finance Bank
- What minimum share of adjusted net bank credit must a small finance bank lend to the priority sector? – 75%
- How many applicants got in-principle approval for small finance banks in 2015? – 10
- What is the minimum paid-up capital for a new small finance bank under on-tap licensing? – ₹200 crore
8. How to revise this topic
Start with the origin: Nachiket Mor Committee set up in 2013, report in January 2014, RBI guidelines November 2014, approvals in August and September 2015.
Next, fix the payments bank rules: deposits up to ₹2 lakh, no loans, no credit cards, 75% in government securities.
Then learn the small finance bank rules: 75% priority sector lending, 50% loans up to ₹25 lakh, ₹200 crore capital for new banks.
Finally, keep the firsts ready: Airtel Payments Bank, India Post Payments Bank on 1 September 2018, and Capital Small Finance Bank.
9. Frequently Asked Questions
What is a payments bank?
A payments bank is a differentiated bank licensed by the RBI that can accept savings and current deposits up to ₹2 lakh per customer and offer payment services. It cannot give loans or issue credit cards.
What is a small finance bank?
A small finance bank is a bank licensed by the RBI to provide deposits and loans mainly to small farmers, small businesses and the unorganised sector. It must lend 75% of its adjusted net bank credit to the priority sector.
Who recommended payments banks in India?
The Nachiket Mor Committee of the RBI, set up in 2013 and reporting in January 2014, on financial services for small businesses and low-income households, recommended payments banks and small finance banks.
What is the deposit limit of a payments bank?
A payments bank can hold up to ₹2 lakh per customer at the end of a day. The limit was raised from ₹1 lakh in 2021.
Can a payments bank become a small finance bank?
Yes. Under RBI rules, a payments bank that has completed five years of operation can apply to convert into a small finance bank, if it meets the conditions.
For more Economy topics in simple language, see our Banking System in India, Financial Inclusion in India and RBI and Its Functions posts, or browse the Economy section. Preparing for a banking exam? Start with the IBPS Clerk guide or join the 100 Hour GS Course.