Payment & Small Banks — Set 6

Correct Answer: A. 2015

• **August 2015** = RBI granted in-principle approval to 11 entities for Payment Bank licences on 19 August 2015, following the Nachiket Mor Committee recommendations and RBI guidelines issued in November 2014. • **Who were the 11?** — Included Airtel M Commerce, Vodafone M-Pesa, Paytm, India Post, Reliance Industries, Aditya Birla Nuvo, Cholamandalam Distribution, FINO PayTech, National Securities Depository, Tech Mahindra, and Dilip Shanghvi (Sun Pharma promoter); not all converted to operational banks. • As of 2024, only 6 Payment Banks are operational: Airtel PB, India Post PB, Fino PB, Paytm PB (restricted), NSDL PB, and Jio PB. • 💡 2013 is wrong — 2013 had no Payment Bank licensing action; 2016 is wrong — by 2016, in-principle approvals had already been given and final licences were being issued; 2014 is wrong — RBI issued the final Payment Bank guidelines in November 2014 but in-principle approvals came in August 2015.

Correct Answer: B. Provision of savings vehicles and supply of credit to small business units

• **Provision of savings vehicles and supply of credit to small business units** = RBI established SFBs to extend formal banking — both deposits and credit — to small farmers, micro-industries, unorganised sector workers, and small business units that are underserved by large commercial banks. • **Financial inclusion mandate** — SFBs bridge the gap between MFIs (which only lend at high rates) and commercial banks (which avoid small-ticket, high-risk borrowers); they provide affordable institutional credit and safe deposit facilities simultaneously. • SFBs must maintain 75% of loans in priority sector and 50% in small-ticket (≤₹25 lakh) advances, keeping them structurally focused on their financial inclusion objective. • 💡 Conducting international sovereign debt auctions is wrong — that is handled by RBI on behalf of the Government of India; To replace the Reserve Bank of India is wrong — SFBs are regulated by RBI, they cannot replace it; Serving large multi-national corporations is wrong — that is the domain of universal banks and foreign banks; SFBs are explicitly restricted to small-ticket lending.

Correct Answer: D. Deposit-only

• **Deposit-only** = Payment Banks are effectively 'deposit-only' institutions — they accept deposits from customers but cannot lend those funds back out; they are a stripped-down version of universal banks that retain only the liability (deposit) side. • **Why deposit-only?** — Universal banks intermediate between depositors and borrowers; Payment Banks remove the borrower side entirely, investing deposits only in government securities; this eliminates credit risk but also limits income. • This design makes Payment Banks extremely safe for depositors but commercially challenging, as the spread between deposit rates and G-sec yields is thin. • 💡 Foreign-only is wrong — Payment Banks can be promoted by Indian companies (Airtel, India Post) and are not limited to foreign entities; Lending-only is wrong — Payment Banks do exactly the opposite; they cannot lend; Investment-only is wrong — Payment Banks primarily hold customer deposits and provide transaction services; they invest only as a regulatory requirement, not as their core purpose.

Correct Answer: C. There is no upper limit on deposits

• **No upper limit on deposits** = Unlike Payment Banks (capped at ₹2 lakh per account), Small Finance Banks have no regulatory ceiling on deposits; they can attract savings, current accounts, and term deposits of any size from individuals or corporates. • **Key distinction from Payment Banks** — The no-cap rule makes SFBs compete directly with universal banks on the liability side; they can offer FDs, RDs, and high-interest savings accounts without restriction. • Deposits in SFBs are covered by DICGC insurance up to ₹5 lakh per depositor per bank, just like any other scheduled commercial bank. • 💡 ₹2 lakh is wrong — ₹2 lakh is the per-account balance cap for Payment Banks, not SFBs; ₹10 lakh is wrong — no such limit exists for SFBs; ₹5 lakh is wrong — ₹5 lakh is the DICGC deposit insurance coverage limit, not a deposit cap for SFBs.

Correct Answer: A. Ujjivan Small Finance Bank

• **Ujjivan Small Finance Bank** = Ujjivan Small Finance Bank, headquartered in Bengaluru, commenced operations as an SFB in February 2017; it was originally Ujjivan Financial Services Ltd, a prominent urban microfinance institution founded in 2005. • **Urban MFI roots** — Unlike many SFBs that focused on rural areas, Ujjivan targeted urban and semi-urban low-income households; its SFB conversion allowed it to mobilise savings deposits from the same customers it had been lending to. • Ujjivan SFB went public in December 2019 (subsidiary listing) and has a network of over 700 banking outlets across India. • 💡 Equitas SFB is wrong — it is headquartered in Chennai, Tamil Nadu, not Bengaluru; ESAF SFB is wrong — it is headquartered in Thrissur, Kerala, and focuses on rural Kerala and Tamil Nadu; Fincare SFB is wrong — it was headquartered in Bengaluru but was acquired by AU Small Finance Bank (merger completed 2024), and it started later than Ujjivan.

Correct Answer: B. Banks whose licenses are restricted to certain activities

• **Banks whose licences are restricted to certain activities** = Differentiated banks are a category introduced by RBI where the banking licence is limited in scope — permitting only specific activities — unlike universal banks that can engage in the full spectrum of banking services. • **Examples of differentiated banks in India** — Payment Banks (deposits + payments only, no lending), Small Finance Banks (lending to priority sector, no large corporate loans), and Local Area Banks (operate in 2-3 contiguous districts only). • The concept emerged from the Nachiket Mor Committee (2014) recommendations to improve financial inclusion by creating specialised institutions for underserved niches. • 💡 Banks that only deal in digital currency is wrong — no RBI-licensed bank is limited to digital currency; Payment Banks handle physical cash too; Banks that only operate in one specific district is wrong — that partially describes Local Area Banks (2-3 districts), but not differentiated banks broadly; Payment Banks and SFBs operate nationwide; Banks that offer different interest rates to different castes is wrong — interest rates are determined by market forces and RBI policy, not caste.

Correct Answer: C. 15%

• **15%** = RBI mandates a minimum Capital Adequacy Ratio (CAR/CRAR) of 15% for Small Finance Banks — significantly higher than the 9% minimum for scheduled commercial banks — reflecting the higher credit risk of small-ticket, unsecured lending to low-income borrowers. • **Tier-1 capital requirement** — Of the 15% CAR, at least 7.5% must be Tier-1 (equity) capital, ensuring the bank's core capital buffer is strong enough to absorb unexpected losses. • A higher CAR means SFBs must hold more equity capital per unit of risk-weighted assets, which constrains their ability to rapidly scale lending without raising fresh capital. • 💡 18% is wrong — 18% is not the prescribed CAR for any bank category in India; it is sometimes confused with Basel III's combined buffer requirements; 11% is wrong — 11% was the earlier transitional CAR for new private sector banks, not SFBs; 9% is wrong — 9% is the minimum CAR for regular scheduled commercial banks; SFBs are held to a stricter 15% standard.

Correct Answer: B. Banking Regulation Act, 1949

• **Banking Regulation Act, 1949** = Section 22 of this Act grants RBI the power to issue banking licences, and Sections 35–36 give RBI broad supervisory powers including the authority to cancel a licence and direct winding up if a bank fails to meet conditions or poses risk to depositors. • **Section 35A** — This section allows RBI to issue binding directions to any banking company, including Payment Banks; non-compliance can lead to licence cancellation (as seen with Paytm Payments Bank in 2024). • The Banking Regulation Act is the primary legislation governing all banking companies in India; it supersedes the Companies Act for banking-specific matters. • 💡 Companies Act, 2013 is wrong — it governs general corporate law but not bank-specific licensing and winding up; Insolvency and Bankruptcy Code, 2016 is wrong — IBC deals with corporate insolvency resolution, not RBI's banking supervisory powers; Payment and Settlement Systems Act, 2007 is wrong — PSS Act governs payment system operators but does not give RBI authority to cancel a bank's banking licence.

Correct Answer: B. A Vehicle Finance NBFC

• **A Vehicle Finance NBFC** = AU Small Finance Bank was originally AU Financiers (India) Ltd, a prominent NBFC specialising in vehicle loans and SME financing; it received its SFB licence from RBI in 2017 and converted from NBFC to bank in April 2017. • **Headquarters and scale** — AU SFB is headquartered in Jaipur, Rajasthan, and is the largest Small Finance Bank in India by asset size; it serves customers across 25+ states with a mix of vehicle, housing, MSME, and agricultural loans. • After 5 years of profitable SFB operations, AU SFB applied for a Universal Bank licence in 2022, which if granted would remove the SFB restrictions on its operations. • 💡 A Telecom company is wrong — Airtel Payments Bank has telecom roots, not AU SFB; An Asset Management company is wrong — AU Financiers was a lending NBFC, not an AMC managing mutual funds; A Real Estate firm is wrong — AU Financiers had no real estate business; it was purely a vehicle and SME finance lender before the SFB conversion.

Correct Answer: D. Both physical and virtual cards

• **Both physical and virtual cards** = Payment Banks can issue physical debit/ATM cards (used at ATMs and PoS terminals) as well as virtual debit cards (linked to the app for online and contactless payments), giving customers flexibility across transaction types. • **Card networks** — Payment Bank debit cards typically run on the RuPay network (NPCI's domestic payment scheme) or Visa/Mastercard, enabling acceptance at all ATMs and merchants accepting those networks. • Virtual cards are especially important for Payment Banks' digital-first strategy: users can generate a virtual card number instantly within the app for e-commerce purchases without needing a physical card. • 💡 They cannot issue any cards is wrong — RBI explicitly permits Payment Banks to issue debit cards; Only physical cards is wrong — virtual cards are also issued and are a key part of their digital offering; Only virtual cards is wrong — physical cards for ATM cash withdrawal are also offered, as cash access remains essential for Payment Bank customers.