Payment & Small Banks — Set 5

Correct Answer: C. Capped at 10% as per Banking Regulation Act

• **Capped at 10% as per Banking Regulation Act** = Under the Banking Regulation Act, 1949, the voting rights of any shareholder in a banking company — including Payment Banks — are capped at 10%, regardless of their actual shareholding, to prevent any single entity from dominating governance. • **Gradual relaxation** — RBI can allow voting rights to be raised beyond 10% in stages up to 26% if it is satisfied the shareholder is 'fit and proper'; complete control through unlimited voting rights is never permitted. • This cap applies to all private sector banks in India, not just Payment Banks, and was introduced to prevent monopolistic control over credit-sensitive institutions. • 💡 Full voting rights given with RBI approval is wrong — RBI approval can raise the cap beyond 10% but never to proportional/full voting rights automatically; No voting rights allowed for promoters is wrong — promoters do have voting rights, just capped; Voting rights are proportional to stake is wrong — proportionality is precisely what the Act prevents.

Correct Answer: A. Second Schedule

• **Second Schedule** = Once an SFB's paid-up capital reaches ₹5 lakh and RBI is satisfied it meets eligibility criteria, it is included in the Second Schedule of the RBI Act, 1934, granting it 'Scheduled Bank' status. • **Benefits of scheduled status** — Scheduled banks can borrow from RBI at the Bank Rate, participate in the call money market, and are eligible for clearing house membership; this access to RBI's liquidity support is critical for SFBs. • All existing SFBs (Ujjivan, Equitas, AU, etc.) are scheduled banks; non-scheduled banks have very limited operations. • 💡 Third Schedule is wrong — there is no Third Schedule relevant to banking in the RBI Act; Fourth Schedule is wrong — similarly irrelevant to bank categorisation; First Schedule is wrong — the First Schedule of the RBI Act deals with the constitution of the RBI's Central Board, not bank classification.

Correct Answer: A. One97 Communications

• **One97 Communications** = One97 Communications Ltd is the parent company of the Paytm brand and promoted Paytm Payments Bank, which commenced operations in May 2017; Vijay Shekhar Sharma is the founder and held the majority stake. • **Regulatory action** — In January 2024, RBI directed Paytm Payments Bank to stop onboarding new customers and restricted it from accepting deposits after March 2024, citing persistent non-compliance issues. • One97 Communications is a publicly listed company (NSE: PAYTM) and was one of India's largest fintech firms by user base. • 💡 Aditya Birla Group is wrong — it promoted Aditya Birla Payments Bank, which surrendered its licence in 2019; Reliance Industries is wrong — Reliance backed Jio Payments Bank (a separate entity); Bharti Airtel is wrong — Airtel promoted Airtel Payments Bank, a different and still-operating entity.

Correct Answer: D. Setting up of subsidiaries

• **Setting up of subsidiaries** = RBI's SFB guidelines generally prohibit Small Finance Banks from setting up subsidiaries or joint ventures in financial services without prior RBI approval, to keep their corporate structure simple and prevent regulatory arbitrage. • **Why the restriction?** — Subsidiaries can be used to take on risks off-balance-sheet or circumvent SFB-specific restrictions; RBI wants SFBs to stay focused on their core mandate of credit and savings for underserved segments. • SFBs are, however, permitted to act as Business Correspondents for other banks and can offer the full suite of credit products (microfinance, agri-loans, MSME loans) directly. • 💡 Micro-finance is wrong — SFBs actively do microfinance lending; it is a core activity; Agricultural lending is wrong — agriculture is a priority sector and SFBs are required to lend 75% of loans to priority sectors including agri; Small business loans is wrong — MSME/small business lending is explicitly part of the SFB mandate.

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

• **₹2,00,000 (₹2 lakh)** = RBI revised the maximum end-of-day balance limit for Payment Bank customer accounts from ₹1 lakh to ₹2 lakh in 2021, allowing more customers to keep larger amounts and improving the viability of the Payment Bank model. • **Purpose of the cap** — The ₹2 lakh ceiling prevents Payment Banks from becoming large deposit-holders competing with commercial banks on scale, keeping them focused on small savers and transaction services. • This deposit cap applies per individual account; Payment Banks cannot offer FDs and invest excess deposits only in government securities. • 💡 ₹50,000 is wrong — that was never the regulatory limit for Payment Bank balances; ₹1,00,000 is wrong — that was the earlier limit before the 2021 revision; ₹5,00,000 is wrong — ₹5 lakh is the DICGC deposit insurance limit applicable to all banks, not the Payment Bank balance cap.

Correct Answer: B. Rs. 25 lakh

• **₹25 lakh** = RBI's SFB guidelines require that at least 50% of the loan portfolio consist of loans and advances of size up to ₹25 lakh; loans up to this amount are defined as 'small-ticket' for this purpose. • **75% PSL mandate** — Separately, SFBs must also ensure 75% of their Adjusted Net Bank Credit (ANBC) goes to priority sector; the ₹25 lakh small-ticket rule ensures they serve micro and small borrowers within that. • Together these two mandates — 75% PSL and 50% small-ticket — prevent SFBs from drifting towards larger corporate lending and abandoning their financial inclusion mandate. • 💡 ₹50 lakh is wrong — loans above ₹25 lakh do not count towards the 50% small-ticket requirement; ₹10 lakh is wrong — that was the earlier threshold used by some MFI guidelines, not the SFB small-ticket definition; ₹1 crore is wrong — ₹1 crore loans would be considered medium-ticket and are not part of the 50% mandate.

Correct Answer: A. Fino Payments Bank

• **Fino Payments Bank** = Fino Payments Bank (formerly Fino PayTech) built its network around 'Fino Points' — local kirana store merchants who act as Banking Correspondents, offering deposit, withdrawal, remittance, and account-opening services in neighbourhoods. • **Focus segment** — Fino primarily targets the domestic remittance market: migrant workers who send money home from cities to rural India, using the vast kirana network as cash-in/cash-out points. • Fino became a publicly listed Payment Bank (NSE: FINO) in 2021, the first Payment Bank to list on Indian stock exchanges. • 💡 Paytm Payments Bank is wrong — Paytm's model is digital-first through its app and QR code merchant network, not kirana BC points; NSDL Payments Bank is wrong — NSDL PB focuses on securities-related services and has a limited customer-facing branch network; Airtel Payments Bank is wrong — Airtel leverages its telecom retailer network, not specifically kirana stores positioned as Fino Points.

Correct Answer: C. Mandatory within 3 years of reaching a net worth of Rs. 500 crore

• **Mandatory within 3 years of reaching a net worth of ₹500 crore** = RBI's SFB guidelines require compulsory stock exchange listing within three years of the bank's net worth crossing ₹500 crore, ensuring public accountability and an exit route for early investors. • **Why mandatory listing?** — Listing subjects SFBs to SEBI disclosures and market discipline, reducing information asymmetry; it also allows the general public to invest in and benefit from SFB growth. • Several SFBs have already listed: Equitas SFB (2020), Ujjivan SFB (2019 holding co, 2021 merged), AU SFB (2017, listed earlier as NBFC), Suryoday SFB (2021), Jana SFB (pending as of 2024). • 💡 Listing is optional for all SFBs is wrong — listing becomes mandatory once net worth hits ₹500 crore; Mandatory within 1 year of starting operations is wrong — the trigger is the ₹500 crore net worth milestone, not the commencement date; Listing is prohibited for SFBs is wrong — listing is not only permitted but mandated.

Correct Answer: B. Lending to big Corporates

• **Lending to big Corporates** = Payment Banks are prohibited from lending to any entity — individuals, SMEs, or large corporates — as their core design restricts them to accepting deposits and providing payment/remittance services only. • **What they can participate in** — Payment Banks can invest in government securities, participate in the call money market for liquidity management, and access the inter-bank settlement system for payments. • The no-lending restriction is the defining feature of Payment Banks; it is what separates them from SFBs, which can lend across all segments. • 💡 Government Securities market is wrong — Payment Banks are required to invest ≥75% of deposits in G-secs; Inter-bank payment market is wrong — they actively participate in NEFT/RTGS/IMPS settlement; Call Money market is wrong — Payment Banks can access the call money market for overnight liquidity needs.

Correct Answer: C. Small Finance Bank

• **Small Finance Bank** = SFBs are mandated to direct 75% of their Adjusted Net Bank Credit to priority sector, which includes agriculture, and must serve small and marginal farmers, making them structurally best suited for farm credit among differentiated banks. • **Payment Banks vs SFBs** — Payment Banks cannot lend at all; they cannot issue Kisan Credit Cards or crop loans. SFBs, by contrast, actively lend to farmers, SHGs, and rural micro-enterprises. • SFBs originated from MFIs and NBFCs already serving rural and semi-urban markets, giving them the ground-level infrastructure to deliver last-mile agricultural credit. • 💡 Foreign Bank is wrong — foreign banks focus on corporate and trade finance, with minimal rural agricultural presence; Payment Bank is wrong — Payment Banks are legally prohibited from lending; Corporate Bank is wrong — corporate banks (like IDBI earlier) target large industries, not small farmers.