Payment & Small Banks — Set 1

Correct Answer: C. Nachiket Mor Committee

• **Nachiket Mor Committee (2013)** = appointed by RBI to study 'Comprehensive Financial Services for Small Businesses and Low Income Households'; its report recommended differentiated bank licences to deepen financial inclusion. • **RBI acted in 2015** — guidelines for Payment Banks were issued in August 2015 and for Small Finance Banks in November 2014, directly implementing the committee's vision. • The committee's key insight was that universal banks were not reaching the unbanked; specialised, technology-driven entities with limited mandates would fill the gap. • 💡 Urjit Patel Committee is wrong — it dealt with monetary policy framework (inflation targeting), not bank licences; Narasimham Committee is wrong — it addressed banking sector reforms (1991 & 1998), not new differentiated banks; Bimal Jalan Committee is wrong — it reviewed RBI's economic capital framework (2019).

Correct Answer: B. Rs. 2,00,000

• **₹2,00,000** = maximum deposit a Payment Bank can hold per individual customer; RBI raised this limit from ₹1 lakh to ₹2 lakh in March 2021 to make Payment Banks more attractive and competitive. • **No interest on excess** — amounts above this cap cannot be kept in the account; customers must transfer surplus to a linked full-service bank account. • Payment Banks can offer savings accounts and current accounts; they cannot hold time deposits (FDs/RDs) — only demand deposits within this ₹2 lakh ceiling. • 💡 ₹1 lakh is wrong — that was the original limit set in 2015, since revised upward; ₹5 lakh is wrong — that is the DICGC deposit insurance cover per depositor per bank, a different concept; ₹50,000 is wrong — no such threshold exists for Payment Bank deposits.

Correct Answer: C. Issuing Credit cards

• **Issuing credit cards** = Payment Banks cannot issue credit cards because they are prohibited from any lending activity — a credit card is a revolving credit product, which would put credit risk on the bank's books. • **What they CAN do** — accept demand deposits (up to ₹2 lakh), provide domestic remittances, issue prepaid instruments, issue RuPay debit cards, sell insurance/mutual funds/pension products as third-party agents, offer mobile and internet banking. • Payment Banks must invest ≥75% of demand deposits in government securities with maturity up to one year; the strict no-lending rule is the foundation of their low-risk model. • 💡 Accepting demand deposits is wrong as an answer — it is explicitly permitted; Providing remittance services is wrong — core service of Payment Banks (especially for migrant workers); Issuing debit cards is wrong — RuPay debit cards are allowed and widely issued.

Correct Answer: B. Rs. 100 crore

• **₹100 crore** = minimum paid-up equity capital fixed by RBI for both Payment Banks and Small Finance Banks under the 2014–15 guidelines; this was intentionally kept lower than the ₹500 crore required for universal banks to encourage new entrants. • **Important update** — for new SFB licences under the 'on-tap' licensing window (opened 2019), RBI raised the minimum capital to ₹200 crore; the ₹100 crore figure applies to the original batch. • The promoter must contribute at least 40% of paid-up equity capital at inception and maintain it for the first five years. • 💡 ₹500 crore is wrong — that is the minimum for a new universal/commercial bank licence; ₹200 crore is wrong for Payment Banks (it applies to SFBs under on-tap licensing); ₹50 crore is wrong — no such threshold exists in Payment Bank or SFB guidelines.

Correct Answer: D. 75%

• **75% of ANBC** = Priority Sector Lending (PSL) target for Small Finance Banks — nearly double the 40% target mandated for universal commercial banks — reflecting their core mission to serve underserved segments. • **Sub-target** — within the 75%, at least 40% must go to micro enterprises (loans up to ₹1 lakh); agriculture and weaker sections also carry specific sub-targets. • Additionally, 75% of an SFB's loan portfolio must consist of loans of ₹25 lakh or less, reinforcing the small-ticket lending focus. • 💡 40% is wrong — that is the PSL target for scheduled commercial banks (universal banks), not SFBs; 100% is wrong — no bank is mandated to lend 100% to priority sector; 50% is wrong — this figure is not the prescribed PSL target for SFBs.

Correct Answer: B. 75%

• **75% of demand deposits** = Payment Banks must invest at least 75% of their demand deposit balances in SLR-eligible government securities/treasury bills with maturity up to one year — far stricter than the ~18% SLR applicable to commercial banks. • **Remaining 25%** — can be kept as deposits with other scheduled commercial banks; this dual-layer liquidity structure ensures public money is always recoverable. • This rule exists because Payment Banks cannot lend; investing in G-Secs is their primary income source besides fees from transactions. • 💡 50% is wrong — the actual threshold is higher at 75%; 25% is wrong — that is the portion allowed to be placed in commercial banks, not the G-Sec investment minimum; 100% is wrong — keeping all deposits in G-Secs is not mandated and would leave nothing for the commercial bank deposit allowance.

Correct Answer: D. 25%

• **25% of branches** = at least one-quarter of an SFB's total branches must be located in unbanked rural centres (Tier 5 and Tier 6 centres with population below 10,000), ensuring physical banking presence where it is most absent. • **Why this rule** — SFBs are licensed specifically to serve underserved populations; the rural branch requirement prevents them from concentrating only in profitable urban/semi-urban markets. • This is the same rural branch requirement mandated for domestic scheduled commercial banks under RBI's branch authorisation policy. • 💡 20% is wrong — this percentage is not the prescribed rural branch floor for SFBs; 10% is wrong — it is too low and not the stipulated requirement; 50% is wrong — requiring half the branches in rural areas is not mandated and would be operationally impractical.

Correct Answer: A. Airtel Payments Bank

• **Airtel Payments Bank** = launched operations on 23 January 2017, becoming the first entity to go live as a Payment Bank in India; it leveraged Airtel's 300+ million telecom subscriber base to onboard customers at telecom retail outlets. • **Licence background** — RBI issued in-principle licences to 11 entities in August 2015; Airtel was among the first to convert its in-principle approval into a final licence and commence operations. • Paytm Payments Bank started later in 2017; India Post Payments Bank launched in September 2018; Fino Payments Bank went live in 2017 but after Airtel. • 💡 India Post Payments Bank is wrong — it launched in September 2018, over a year after Airtel; Fino Payments Bank is wrong — Fino launched operations in 2017 but was not the first; Paytm Payments Bank is wrong — it launched in May 2017, four months after Airtel's January 2017 launch.

Correct Answer: C. Small Finance Bank

• **Small Finance Banks only** = SFBs are permitted to accept all types of deposits including Fixed Deposits (FDs), Recurring Deposits (RDs), and savings/current accounts — functioning like full-service banks for deposits. • **Payment Banks are excluded** — Payment Banks can only accept demand deposits (savings and current accounts); they are explicitly barred from accepting time deposits or issuing fixed deposit receipts. • This distinction is crucial: Payment Banks focus on transaction banking, while SFBs offer the complete deposit suite to build long-term customer relationships and fund their lending operations. • 💡 Payment Bank is wrong — it is explicitly prohibited from accepting time/fixed deposits; Both Payment and Small Finance Bank is wrong — Payment Banks cannot accept FDs under any circumstances; Neither is wrong — SFBs clearly are permitted to accept time deposits.

Correct Answer: C. 10% of its capital funds

• **10% of capital funds** = an SFB cannot lend more than 10% of its capital funds to a single individual borrower — this exposure limit prevents concentration risk to any single counterparty. • **Group limit** — for a group of connected borrowers, the limit is 15% of capital funds; this is consistent with the norms applied to other scheduled commercial banks. • Capital funds include Tier 1 (paid-up equity + reserves) and Tier 2 capital; the limits apply to both loans and investments combined. • 💡 15% is wrong — that is the limit for a group of connected borrowers, not a single individual; 20% is wrong — no such threshold exists for SFB single-borrower exposure; 5% is wrong — the actual limit is twice this at 10% for individual borrowers.