Payment & Small Banks — Set 4

Correct Answer: B. 2019

• **2019** = RBI issued guidelines for 'on-tap' licensing of Small Finance Banks in December 2019, allowing eligible entities to apply at any time of the year — not just during specific licensing rounds. • **On-tap vs. specific rounds** — Earlier SFB licences (2015 batch) were issued in a one-time window; on-tap licensing makes the process open-ended and continuous. • RBI requires applicants to have 10 years of track record in financial services and a minimum net worth of ₹200 crore to qualify for on-tap SFB licensing. • 💡 2021 is wrong — that year saw no new SFB licensing milestone; 2014 is wrong — that was when Payment Bank guidelines were first issued; 2017 is wrong — that was when the first batch of SFBs actually commenced operations, not when on-tap licensing opened.

Correct Answer: B. Fees from payment services and commission on third-party products

• **Fees from payment services and commission on third-party products** = Since Payment Banks cannot lend, their revenue comes from transaction fees (NEFT, IMPS, bill payments) and commissions earned by distributing insurance, mutual funds, and other third-party financial products. • **Government securities interest** — Payment Banks must invest at least 75% of customer deposits in government securities (SLR-eligible), earning a steady but modest interest income from this mandated portfolio. • Their business model relies on high transaction volumes and a wide distribution network rather than credit spreads, unlike universal banks. • 💡 Interest from credit card late fees is wrong — Payment Banks cannot issue credit cards; Interest from loans is wrong — Payment Banks are prohibited from lending to any entity; Investment in risky corporate bonds is wrong — they are restricted to investing in government securities, not corporate bonds.

Correct Answer: C. Basel III norms

• **Basel III norms** = Small Finance Banks are required to maintain the Liquidity Coverage Ratio (LCR) under the Basel III framework, ensuring they hold enough high-quality liquid assets (HQLA) to survive 30 days of stressed outflows. • **Basel III scope** — Basel III is a global banking supervisory framework developed by the Bank for International Settlements (BIS); RBI applies it to all scheduled commercial banks including SFBs. • SFBs also follow Basel III's Capital Adequacy Ratio (CAR) requirement of 15%, higher than the 9% minimum for universal banks, reflecting their riskier small-ticket lending portfolios. • 💡 IMF regulations is wrong — IMF does not set bank liquidity standards; World Bank standards is wrong — World Bank focuses on development finance, not bank regulation; WTO guidelines is wrong — WTO governs trade, not banking prudential norms.

Correct Answer: A. 10%

• **10%** = RBI caps a Small Finance Bank's exposure to a single borrower at 10% of its capital fund, preventing concentration risk where the bank's health depends on one large borrower. • **Group exposure limit** — For a single group of borrowers, the cap is 15% of the SFB's capital fund; these limits mirror those applicable to universal banks. • This rule reinforces the SFB mandate of serving many small borrowers rather than a few large corporate clients. • 💡 25% is wrong — that is the single-borrower exposure limit for some other financial entities, not SFBs; 15% is wrong — that is the group exposure limit, not the single-borrower limit; 20% is wrong — no such single-borrower cap exists for SFBs.

Correct Answer: D. Both Cheque books and Debit cards

• **Both cheque books and debit cards** = Payment Banks are authorised to issue both physical debit/ATM cards and cheque book facilities to their savings and current account holders. • **What they cannot issue** — Payment Banks cannot issue credit cards, as issuing credit implies lending, which is prohibited for them. • Debit cards issued by Payment Banks operate on RuPay or other networks and can be used at ATMs, PoS terminals, and for online purchases. • 💡 ATM/Debit cards only is wrong — cheque books are also permitted; Cheque books only is wrong — debit cards are equally permitted; They are not allowed to issue any physical instrument is wrong — RBI explicitly permits both cheque books and debit cards.

Correct Answer: D. Section 22

• **Section 22** = Section 22 of the Banking Regulation Act, 1949 empowers the RBI to grant licences to banking companies wishing to commence banking business in India; every new bank — including SFBs and Payment Banks — must obtain this licence. • **Section 22 conditions** — RBI grants a licence only if satisfied that the applicant has adequate capital, earns or can earn profits, and that its directors/promoters are 'fit and proper'. • Other key sections: Section 35 relates to RBI's power of inspection; Section 11 deals with minimum paid-up capital and reserves requirements. • 💡 Section 35 is wrong — it deals with RBI's inspection powers, not licensing; Section 42 is wrong — that section relates to the scheduled bank status under the RBI Act, 1934, not the Banking Regulation Act; Section 11 is wrong — it deals with minimum capital requirements, not the licensing power itself.

Correct Answer: D. Same as applicable to commercial banks

• **Same as applicable to commercial banks** = Small Finance Banks are treated on par with scheduled commercial banks for SLR purposes; the current SLR stands at 18% of Net Demand and Time Liabilities (NDTL), set by RBI and revised periodically. • **SLR definition** — SLR is the mandatory portion of deposits that banks must hold in government-approved securities (gold, cash, or government bonds), ensuring liquidity and supporting government borrowing. • SFBs must also maintain CRR (Cash Reserve Ratio) at the same rate as commercial banks; both requirements apply from the day they commence operations. • 💡 Always 25% is wrong — 25% was the old SLR ceiling under the Banking Regulation Act before amendments; They are exempt from SLR is wrong — SFBs are fully subject to SLR norms; Always 75% is wrong — 75% is the priority sector lending target for SFBs, not the SLR requirement.

Correct Answer: C. Payment Bank

• **Payment Bank** = Payment Banks are the closest real-world implementation of 'narrow banking' — a theoretical model where banks accept deposits but invest only in safe government securities and do not lend, eliminating credit risk entirely. • **Why 'narrow'** — Traditional (universal) banks take deposits and make loans, creating credit risk (NPAs). Narrow banks strip out the lending function, making deposits essentially risk-free. • Payment Banks invest ≥75% of customer deposits in government securities (SLR-eligible), earning returns from the spread between deposit rates paid and government bond yields. • 💡 Cooperative Bank is wrong — cooperative banks do lend and are not narrow banks; Universal Bank is wrong — it is the opposite, performing all banking functions including large-scale lending; Small Finance Bank is wrong — SFBs lend actively (especially to priority sector), so they are not narrow banks.

Correct Answer: A. Jana Small Finance Bank

• **Jana Small Finance Bank** = Jana Lakshmi Financial Services (Janalakshmi) was one of India's largest microfinance institutions before converting into Jana Small Finance Bank; it received its RBI licence in 2017 and began banking operations in 2018. • **Janalakshmi background** — Founded by Ramesh Ramanathan, it served urban microfinance customers; the conversion to SFB allowed it to accept public deposits and diversify beyond microloans. • Jana SFB is headquartered in Bengaluru and serves primarily urban and semi-urban low-income customers across India. • 💡 Ujjivan SFB is wrong — it was formerly Ujjivan Financial Services (a different MFI), headquartered in Bengaluru; ESAF SFB is wrong — it was formerly ESAF Microfinance, headquartered in Thrissur, Kerala; Suryoday SFB is wrong — it was formerly Suryoday Micro Finance, headquartered in Pune.

Correct Answer: C. Time deposits (FD/RD)

• **Time deposits (FD/RD)** = Payment Banks can only accept demand deposits (savings accounts and current accounts); they are strictly prohibited from taking time deposits such as Fixed Deposits (FD) or Recurring Deposits (RD). • **Why no time deposits?** — FDs and RDs require banks to commit funds for a fixed term and typically fund loans; since Payment Banks cannot lend, accepting term deposits would mismatch their asset-liability structure. • This restriction also reflects the 'narrow bank' design: Payment Banks keep funds liquid, investing in short-term government securities. • 💡 Current deposits is wrong — Payment Banks can and do offer current accounts to businesses; Demand deposits is wrong — demand deposits (savings + current) are exactly what Payment Banks are allowed to accept; Savings Bank deposits is wrong — savings accounts are the primary product of Payment Banks.