Payment & Small Banks — Set 7

Correct Answer: D. Unserved and underserved sections like small farmers

• **Unserved and underserved sections like small farmers** = SFBs were specifically licensed to serve the 'bottom of the pyramid' — small and marginal farmers, micro-enterprises, and low-income households that regular banks ignore. • **Financial inclusion goal** — SFBs fill the credit gap in areas where traditional banks find it commercially unviable to operate, bringing formal banking to the excluded. • **Regulated by RBI** — They hold a full banking license but with a focused mandate; unlike Payment Banks, SFBs can give loans. • 💡 High net-worth individuals and MNCs are already well-served by commercial banks; stock market traders are served by brokers and capital market intermediaries — none of these are the target for SFBs.

Correct Answer: C. No, Payment Banks cannot provide any type of loan

• **No, Payment Banks cannot provide any type of loan** = Lending is completely prohibited for Payment Banks — they cannot give loans, advances, or credit of any form to anyone, regardless of purpose or RBI permission. • **Why no lending?** — The Payment Bank model is designed purely for payments and deposits; keeping them away from credit risk makes them safer for small depositors. • **They can only: accept deposits (≤₹2L), offer remittances, issue debit cards, sell insurance/mutual funds** — but never extend credit. • 💡 'Only for agricultural purposes' and 'Yes with RBI permission' are wrong because no RBI permission can override this structural prohibition; '₹10 lakh limit' is fictitious — no such lending allowance exists.

Correct Answer: A. Reserve Bank of India

• **Reserve Bank of India (RBI)** = RBI is India's central bank and the sole authority that licenses, regulates, and supervises both Payment Banks and Small Finance Banks under the Banking Regulation Act, 1949. • **RBI issued the guidelines** — It released the framework for Payment Banks in 2014 and granted in-principle approvals in 2015, following the Nachiket Mor Committee's recommendation. • **Monetary policy + supervision** — RBI sets deposit limits, investment norms, capital requirements, and branch rules for both bank types. • 💡 SBI is a commercial bank, not a regulator; NABARD regulates rural cooperative banks and RRBs, not payment/small finance banks; World Bank is an international development institution with no regulatory role in India.

Correct Answer: B. 75%

• **75%** = RBI mandates that at least 75% of a Small Finance Bank's total loan portfolio must consist of loans up to ₹25 lakh — ensuring they stay focused on small borrowers. • **Prevents mission drift** — Without this rule, an SFB could shift toward large corporate loans for higher profits, defeating its financial inclusion purpose. • **Complements PSL rule** — SFBs must also lend 75% to priority sectors; together these two rules lock in their 'small borrower' identity. • 💡 25% is far too low and would allow SFBs to mostly ignore small loans; 50% is the old understanding but the correct RBI norm is 75%; 100% would be impractical as some operational/treasury loans are unavoidable.

Correct Answer: C. Rs. 2 lakh

• **Rs. 2 lakh** = RBI raised the per-customer end-of-day deposit ceiling for Payment Banks from ₹1 lakh to ₹2 lakh in 2021 to encourage greater adoption and usage. • **End-of-day limit** — Any amount above ₹2 lakh received during the day must be automatically swept to a linked savings account at a partner commercial bank. • **Why a cap?** — Since Payment Banks cannot lend, they park deposits in G-Secs; a deposit cap limits their liability and systemic risk. • 💡 ₹1 lakh was the old limit (before 2021), now outdated; 'No limit' is wrong because Payment Banks are structurally restricted; ₹5 lakh is the DICGC insurance limit for regular banks, not the Payment Bank deposit cap.

Correct Answer: D. Debit Cards

• **Debit Cards** = Payment Banks can issue debit cards (including RuPay debit cards) linked to the customer's deposit account, enabling ATM withdrawals and POS transactions. • **Credit cards are banned** — Issuing a credit card is an act of lending (you spend now, pay later); since Payment Banks cannot lend, credit cards are strictly off-limits. • **Prepaid Payment Instruments (PPIs)** — Payment Banks can also issue prepaid wallets and instruments, but these are distinct from credit cards. • 💡 'Both credit and debit cards' is wrong because the credit card part involves lending; 'Prepaid gift cards only' is too narrow — debit cards are the primary product; 'Credit cards only' directly contradicts the no-lending rule.

Correct Answer: D. Nachiket Mor Committee

• **Nachiket Mor Committee (2013)** = The RBI committee chaired by Dr. Nachiket Mor submitted its report in January 2014, recommending 'differentiated banks' — specialized institutions like Payment Banks and Small Finance Banks — to deepen financial inclusion. • **'Differentiated' means limited-purpose** — Unlike universal banks that do everything, these banks have a narrow, focused mandate (payments only, or small loans only). • **Outcome** — RBI issued Payment Bank guidelines in November 2014 and granted 11 in-principle licenses in August 2015. • 💡 Narasimham Committee (1991, 1998) recommended banking sector reforms and NPAs, not differentiated banking; Y.H. Malegam Committee (2011) examined microfinance regulation after the AP MFI crisis — a separate topic entirely.

Correct Answer: C. 25%

• **25%** = RBI requires that at least 25% of an SFB's total branches must be located in unbanked rural centres — areas with no existing bank branch of any scheduled commercial bank. • **Same as RRBs and universal banks** — The 25% rural branch rule applies to all newly licensed banks in India, not just SFBs; it is a standard financial inclusion condition. • **Unbanked rural centre** — Defined as a centre (village/town) with population under 9,999 that has no scheduled commercial bank branch. • 💡 50% and 75% would make SFB branch expansion economically unviable; 10% would be too permissive to drive meaningful rural outreach — RBI chose 25% as the practical balance.

Correct Answer: A. 75% of loans

• **75% of loans** = SFBs must direct 75% of their Adjusted Net Bank Credit (ANBC) toward priority sectors — agriculture, micro-enterprises, weaker sections, education, housing — far higher than the 40% target for regular commercial banks. • **Why 75%?** — SFBs were granted licenses specifically to serve underserved borrowers; the higher PSL target prevents them from becoming regular banks in disguise. • **Sub-targets within PSL** — At least 40% of the SFB's ANBC must go to micro and small enterprises, and 15% to weaker sections. • 💡 40% is the PSL target for ordinary scheduled commercial banks, not SFBs; 50% is midway with no regulatory basis; 100% is practically impossible as banks also need liquidity reserves and operational credit.

Correct Answer: B. Government Securities (G-Secs)

• **Government Securities (G-Secs)** = Payment Banks must invest a minimum of 75% of their demand deposit balances in Government Securities (central/state) or Treasury Bills with maturity up to one year — the safest possible investment. • **Protects depositors** — Since Payment Banks cannot lend, G-Secs generate income while keeping depositor money risk-free and liquid. • **Remaining 25%** — Can be kept as current and time deposits with other scheduled commercial banks for day-to-day liquidity needs. • 💡 Foreign currencies would expose deposits to exchange rate risk, violating the safety mandate; corporate stocks are equity and highly volatile — RBI would never permit this; real estate is illiquid and unrelated to banking operations.