At least 50 per cent of a small finance bank's loan portfolio must consist of loans and advances of up to which amount?

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.