CONCEPT OF DIFFERENTIAL BANKING:
- These Banks are said to be differential as they differ with common Parlance "Universal Bank".
- Differentiation could be on account of capital requirement, target audience, scope of activities or area of operations.
- These banks offer a limited range of services / products under a different regulatory dispensation.
- In pre-LPG periods, UCBs, the PACS, the RRBs and LABs could be considered as Differentiated Banks as they operate in localized areas.
Post LPG Differential Banking:
- In 2013, RBI invited private entities for issuance of new banking licenses.
- There were 26 applicants including Tata Sons, India Post and IFCI. Out of these, India Post and Bandhan bank and IDFC Bank were given licenses for private banking.
- Apart from Private bank licenses, RBI on November 27, 2014 granted in-principle approvals to set up 10 small finance banks and to 11 Payments Banks.
Pre-Paid Instrument Providers (PPI):
- PPI are payment instruments that facilitate purchase of goods and services against the value stored on such instruments.
- The value stored on such instruments represent the value paid for by the holder, by cash, by debit to a bank account, or by credit card.
- The Prepaid instruments can be in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers.
For eg in case of Paytm —
Pre-Paid Instrument model working:
Individual deposit money in PPI wallet from your regular bank account
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PPI provides for a “digital wallet” tied with your mobile
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Digital wallet can be used to pay bills, shopping, movie tickets etc.
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PPI are regulated by RBI under Payment and Settlements Act of 2007
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PPI’s don’t give interest on your money and You cant withdraw the deposited money.
- Nachiket Mor Committee find this helpful for financial inclusion but observed that PPI doesn’t offer interest rate on the wallet deposits.
- From financial inclusion point of view, PPI model is good, if they gave interest on your money.
- Nachiket More recommended for a new type of banks called “payment banks” under the banking regulation Act.
The guidelines for payment banks:
(i) eligible promoters can be non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities like mobile telephone companies etc.
(ii) shall primarily accept demand deposits upto maximum balance of Rs. 1,00,000 per individual customer.
(iii) Issue ATM/debit cards, payments and remittance services but can not issue credit cards
(iv) maintain CRR with the Reserve Bank on its outside demand and time liabilities and invest at least 75 per cent of its “demand deposit balances” in SLR eligible Government securities/treasury bills.
They will not lend to customers and will have to deploy their funds in government papers and bank deposits.
Small Finance Banks (SFBs):
These banks serve the needs of a certain demographic segment of the population.
The objectives of setting up of small finance banks :
(1) the provision of savings vehicles
(2) 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.
The guidelines for small finance banks :
(i) eligible promoters could be resident individuals/professionals with 10 years of banking and finance experience including companies controlled by them etc.
(ii) shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections
(iii) The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore and
(iv) all prudential
norms and regulations of RBI as applicable to existing commercial banks
including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR).
SFB can not extend large loans and can not float subsidiaries and deal in sophisticated products.
