Small Finance Banks and Payments Banks: RBI Rules

The correct answer is B, 2014. The Reserve Bank released the final guidelines for licensing both payments banks and small finance banks on the twenty seventh of November 2014, acting on the report of the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households. Option A, 2012, is before the committee was even constituted, which was in September 2013. Option C, 2016, is the year the first small finance bank began operations, when Capital Small Finance Bank opened in April of that year, so it marks the start of business and not the making of the rules. Option D, 2019, is the year the Reserve Bank issued the on tap licensing guidelines for small finance banks, on the fifth of December, which raised the minimum net worth requirement to two hundred crore rupees; it is the strongest distractor because it is also a guidelines date, so read whether the question asks for the original guidelines or the on tap ones.

The correct answer is C, two lakh rupees. A payments bank may accept demand deposits, that is savings and current accounts, but the total balance of an individual customer with the bank cannot exceed two lakh rupees at the end of the day. Option B, one lakh rupees, was the original ceiling laid down in the guidelines of 2014 and is the commonest wrong answer, because the Reserve Bank raised the limit to two lakh in April 2021 to make these banks more useful to small savers and small businesses. Option A, fifty thousand rupees, is not a limit under these guidelines and is drawn from small account and basic savings account thresholds elsewhere in banking. Option D is wrong because the ceiling is the defining feature of a payments bank licence; a small finance bank, by contrast, has no per customer ceiling on deposits, which is exactly the contrast the question is testing.

The correct answer is B, granting loans and issuing credit cards. The licence of a payments bank excludes credit altogether: it may not lend to anyone and may not issue credit cards, and this single prohibition is what separates it from every other kind of bank in India. Option A is permitted, since a payments bank may issue ATM and debit cards to its customers and operate them on the usual payment networks. Option C is permitted, as accepting demand deposits in savings and current accounts is the core of its business, subject to the ceiling of two lakh rupees for each individual customer. Option D is permitted, because a payments bank may distribute simple financial products that carry no risk on its own books, such as units of mutual funds, insurance policies and pension products, and it may also act as a business correspondent of another bank.

The correct answer is C, seventy five per cent. Since a payments bank cannot lend, the guidelines direct where its deposits must go: at least seventy five per cent of demand deposit balances must be invested in government securities and treasury bills eligible for the statutory liquidity ratio, with a maturity of up to one year, and not more than twenty five per cent may be held in current accounts and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. Option A, forty per cent, is the priority sector lending target for a universal commercial bank and belongs to a different rule. Option B, fifty per cent, is the share of a small finance bank's loan portfolio that must be in loans of up to twenty five lakh rupees. Option D, one hundred per cent, is wrong because the remaining quarter is deliberately allowed in bank deposits, so that the payments bank can meet daily settlement needs.

The correct answer is C, seventy five per cent. A small finance bank exists to serve small borrowers, and the guidelines enforce that purpose by requiring seventy five per cent of its adjusted net bank credit to go to the sectors eligible as priority sector lending, which include agriculture, micro and small enterprises, education, housing and weaker sections. Option A, forty per cent, is the priority sector target for a universal domestic commercial bank, and it is the sharpest distractor because candidates remember that figure from the general priority sector chapter. Option B, sixty per cent, is not a target under these guidelines. Option D, fifty per cent, is a real figure in this chapter but for a different rule: at least half of a small finance bank's loan portfolio must consist of loans and advances of up to twenty five lakh rupees each, which limits the size of individual loans rather than the sector they go to.

The correct answer is B, twenty five lakh rupees. The guidelines require that at least half of a small finance bank's loan portfolio be made up of loans and advances of up to twenty five lakh rupees each, and the purpose is to keep the bank lending small even as it grows, so that it does not drift towards large corporate credit once it has a licence. Option A, ten lakh rupees, is not the threshold in these guidelines, although candidates often recall it from other small borrower schemes. Option C, fifty lakh rupees, and option D, one crore rupees, are both far above the ceiling and would defeat the purpose of the category; they are offered because they sound like plausible small business figures. Note that this rule limits the size of individual loans, while the separate rule of seventy five per cent of adjusted net bank credit governs the sector the lending goes to.

The correct answer is B, twenty five per cent. At least a quarter of the banking outlets of a small finance bank must be in unbanked rural centres, which the guidelines define as centres with a population of up to 9,999 according to the latest census, the same definition used for universal banks; the requirement exists so that a bank licensed in the name of financial inclusion actually opens where banking is absent. Option A, ten per cent, is too low and has no basis in the guidelines. Option C, fifty per cent, is the share of the loan portfolio that must be in loans of up to twenty five lakh rupees, so it belongs to a different rule in the same chapter. Option D, seventy five per cent, is the priority sector lending target and the payments bank investment ratio, and it is the figure most often misplaced by candidates, since seventy five and twenty five recur through this chapter with different meanings.

The correct answer is B, the Nachiket Mor Committee. The Reserve Bank set up the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households under Nachiket Mor in September 2013, and its report recommended differentiated bank licences, including payments banks, as a faster route to financial inclusion than waiting for full service banks to expand. Option A, the Narasimham Committee, reported in 1991 and 1998 on banking sector reform, capital adequacy and the structure of public sector banks, a full generation earlier. Option C, the Raghuram Rajan Committee on financial sector reforms, reported in 2008 and did discuss small banks, which makes it a genuine distractor, but the guidelines of 2014 followed the Mor Committee. Option D, the Urjit Patel Committee, recommended the move to inflation targeting and the monetary policy framework, which is a separate subject altogether.

The correct answer is C, India Post Payments Bank. It was launched on the first of September 2018, is wholly owned by the Government of India and operates under the Department of Posts, using the post office network and postal staff to reach customers, which makes it the payments bank with the widest physical reach in the country. Option A, Airtel Payments Bank, was the first payments bank in India to begin operations, in January 2017, and is promoted privately rather than by the government, which is why it is the strongest distractor in a question about firsts. Option B, Fino Payments Bank, is another privately promoted payments bank. Option D, Capital Small Finance Bank of Jalandhar, belongs to the other category altogether and was the first small finance bank to begin operations, in April 2016. Keep the two firsts and the government owned bank distinct.

The correct answer is A, section 22 of the Banking Regulation Act, 1949. That section is the provision under which the Reserve Bank grants a licence to carry on banking business in India, and both differentiated categories are licensed under it; once the Reserve Bank is satisfied, they are also included in the second schedule of the Reserve Bank of India Act of 1934 and become scheduled banks. Option B refers to a different set of provisions of the Reserve Bank of India Act dealing with agency and other functions, not with the grant of a banking licence. Option C is wrong because registration as a public limited company under the Companies Act of 2013 is only the corporate form these banks must take; it does not by itself permit banking business. Option D, the Payment and Settlement Systems Act of 2007, governs payment systems and their operators, such as clearing houses, rather than the licensing of banks.