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A brief comparison of Regulatory Requirements of Payments Banks, Small Finance Banks and Universal Banks

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RBI recently released the operating guidelines for the Small Finance banks and Payments Banks on October 6, 2016. To take stock of these, we have put together a brief comparison of the regulatory requirements of these banks against those for universal banks.

Payments Banks (PB) Small Finance Banks (SFB) Universal Banks (scheduled commercial bank /
Payments and Remittances Yes Yes Yes
Credit No Yes,

a)75% of ANBC to qualify under PSL. While 40% of its ANBC should be allocated to different sub-sectors under PSL as per the extant PSL prescriptions, SFBs can allocate the balance 35% to any one or more sub-sectors under PSL where it has competitive advantage, and,

b) Atleast 50% of loan portfolio should have loans and advances not exceeding Rs. 25 Lakhs

SFBs can participate in securitisation as originators for risk transfer but not as purchasers of other banks’ loans


40% of ANBC to qualify under PSL

Savings Yes, only demand deposits (savings and current accounts), aggregate limit per customer shall not exceed ₹100,000. Amounts beyond this limit can be swept into accounts opened for customer at a SFB/SCB, with prior written consent of customer. Yes – both demand and term deposits Yes – both demand and term deposits
Business Correspondent (BC) Yes. Can become BC to another bank, and in the process offer credit. Also can engage BCs, including those of promoter/ partner/ group companies at an arm’s length basis, for expanding their business. Cannot be a BC to another bank. Yet can engage BCs, including those of promoter/ partner/ group companies at an arm’s length, for expanding their business. Interoperability of BCs is allowed, though it is unclear what interoperability means in this context, except for opening of deposit accounts. Offline BCs will not be allowed. No requirements to have base branch for a set number of BCs/ access points. Can use BCs to expand their business with no restrictions on having a set number of BC’s to be mapped to a base branch. While a BC can be a BC for more than one bank, at the point of customer interface, shall represent and provide banking services of only one bank. Offline BCs are allowed provided that all off-line transactions are accounted for and reflected in the books of the bank by the end of the day.
Prudential Requirements
Capital Adequacy Requirements 15% – their risk exposure would be almost entirely limited to operational risk* 15% – risk exposure includes credit risk, market risk, operational risk* 9% – risk exposure includes credit risk, market risk, operational risk
CET1 Capital 6.0% 6.0% 5.5%
Minimum Tier 1 Capital 7.5% 7.5% 7.0%
Capital Conservation Buffer NA NA 1.25%
SLR/CRR Yes Yes Yes
Investment Norms Only in Govt Securities (atleast 75% of Demand Deposit Balances) and in demand and time deposits in SCBs As applicable to commercial banks As per extant guidelines
Other Activities
Products Some form of prior RBI approval required for
products to be sold by PB. RBI also reserves the right to restrict or discontinue the products being sold by the PB
Derivatives Only for the purposes of hedging foreign currency positions arising from business activities. Only the below mentioned derivatives can be used. Also no credit derivatives cannot be purchased or sold:
a) interest rate futures for proprietary hedging;
b) Foreign exchange derivatives to hedge foreign currency positions arising from business activities
No such restrictions
Para Banking Activities Can undertake other non-risk sharing simple financial services activities, not requiring any commitment of their own funds, such as distribution of mutual,fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products Same as PBs Can undertake other financial activities like investment in VC Funds, equipment Leasing , Hire Purchase and Factoring,
Primary Dealership, Mutual fund (both Risk Sharing and Broking), insurance (both Risk Sharing and Broking),Portfolio Management Services, among other activities
Risk Management As applicable to commercial banks As applicable to commercial banks As per extant guidelines

Please let us know your thoughts/feedback on the above comparisons in the comments section below.

* The prudential frameworks for market risk and operational risk are being examined by RBI and the instructions in this regard are expected to be issued separately.

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3 Responses

  1. Hi Madhu, it’s a nice summary of comparison. I think you can add couple of things. 1. What about deposit protection (insurance)? 2. Is existing ombudsman applicable to these new entrants? 3. Who will refinance PBs n SFBs in case of CRAR shortage?

    A side note: frankly speaking this is so difficult to post a comment. It will surely discourage people from commenting? After all, who has time to go through all this pain? I took much time to post this comment than to read and understand your blog post. It’s like putting indirect restrictions. It can be better if you can ease comments section posting.

    PhD student, IFMR

    1. Hi Santosh,

      Thanks for your detailed comment. To address your points –

      1. Yes the deposit protection does apply to both Payments banks and Small finance banks
      2. The existing ombudsman will be applicable to the new entrants as well
      3. Much like all other banks currently in operation, the promoters and management of the Payments and Small finance banks would have to ensure that their bank is adequately capitalised for the business they undertake. Let’s hope that there would not be a requirement for external recapitalisation such as through the Indradhanush scheme for public sector banks.

      I hope this clarifies your queries.

      Also, we acknowledge your suggestion on easing the commenting process on our blog. We’ll try to take steps to remedy the same.

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