Which Committee’s Recommendation Proposed the Establishment of Payments and Small Finance Bank?
Nachiket Mor Committee Recommendations
The Nachiket Mor Committee was formed by the Reserve Bank of India (RBI) in 2013 to suggest measures to improve access to finance for low- and middle-class people.
Following the committee’s recommendations, the RBI created two types of new banks: payments banks and small finance banks.
**Here are some of the key recommendations made by the Nachiket Mor Committee:**
1. **Establishment of Payments Bank:** To provide basic banking services (like deposits, remittances, mobile payments, etc.) in a technology-led model.
2. **Setting up of Small Finance Bank:** To provide banking services focusing on small businesses, farmers, and low-middle-class people who typically don’t have access to regular banking services.
3. **Relaxation of Licensing Norms:** To ease licensing criteria for setting up new banks and enhance competition in the banking sector.
4. **Prompt Corrective Action ( PCA):** To facilitate early recognition of stressed banks and prompt regulatory actions.
5. **Differentiated Bank Licensing:** To introduce specialized banking licenses for various types of banks, including payments, small finance, and differentiated banks.
6. **Strengthening of Reserve Bank of India ( RBI) Supervisory Tools:** To enhance RBI’s ability to effectively supervise banks and maintain financial stability.
Financial Inclusion Agenda
The establishment of payment banks and small finance banks in India was recommended by the Nachiket Mor Committee, constituted by the Reserve Bank of India (RBI) in 2013.
Payment Banks
- Objective: Provide basic banking services to the unbanked population.
- Services: Accept deposits up to ₹1 lakh, offer payment services, and facilitate bill payments.
- Restrictions: Cannot provide loans or issue credit cards.
Small Finance Banks
- Objective: Extend financial services to marginalized and unbanked sections of society.
- Services: Provide a range of banking services, including loans, deposits, and payments.
- Restrictions: Maximum loan size of ₹50 lakh for micro-enterprises and ₹10 lakh for individuals.
Table: Comparison of Payment Banks and Small Finance Banks
| Feature | Payment Banks | Small Finance Banks |
|---|---|---|
| Objective | Provide basic banking services to the unbanked | Extend financial services to marginalized and unbanked sections |
| Services | Accept deposits, offer payment services | Provide loans, deposits, payments |
| Restrictions | Cannot provide loans or issue credit cards | Maximum loan size limits |
Pradhan Committee Framework
The expert committee led by Mr. Nachiket Mor Committee created the framework for Payment Banks and Small Finance Banks (SFB). Here’s a summary of the framework:
Payment Banks
- Can accept deposits up to INR 1 lakh.
- Can issue debit cards and pre-paid payment instruments.
- Can offer mobile banking and internet banking.
- Cannot offer loans or advances.
- Can invest in government securities and other liquid assets.
Small Finance Banks
- Can accept deposits up to INR 100 crore.
- Can issue loans and advances up to INR 25 lakh.
- Can offer a range of financial services, including savings accounts, current accounts, loans, and insurance.
- Must have a minimum capital of INR 200 crore.
- Must have a focus on serving the underbanked and unbanked population.
| Criteria | Payment Banks | Small Finance Banks |
|---|---|---|
| Minimum capital | INR 5 crore | INR 200 crore |
| Business focus | Payment services and remittances | Providing a range of financial services to the underbanked |
| Deposit limit | INR 1 lakh | INR 100 crore |
| Loan limit | Not permitted | INR 25 lakh |
Regulatory Framework for Payments System
The Payments and Settlements Systems in India (PSS) are overseen by various regulatory bodies, including the Reserve Bank of India (RBI), the National Payments Corporation of India (NPCI), and the Securities and Exchange Board of India (SEBI). The Reserve Bank of India (RBI) is the primary regulator of the PSS and is responsible for formulating and implementing policies related to payments and settlements systems in India. The NPCI is a non-profit organization that operates the retail payments and settlement systems in India, including the Unified Payments Interface (UPI) and the Immediate Payment Service (IMPS). The Securities and Exchange Board of India (SEBI) is responsible for regulating the securities market in India, including the issuance and trading of securities, and plays a role in regulating payment systems related to the securities market.
The PSS in India has evolved significantly over the past few years, with the introduction of new technologies and the increasing use of digital payments. The RBI has been proactive in promoting innovation and the adoption of new technologies in the PSS, while also ensuring that the system remains safe and secure. The NPCI has played a key role in the development of retail payment systems in India, and has been responsible for the launch of several successful initiatives, such as UPI and IMPS. The SEBI has also taken steps to streamline and regulate payment systems related to the securities market, and has introduced measures to improve the efficiency and transparency of the settlement process.
The regulatory framework for the PSS in India is constantly evolving to keep pace with the changing needs of the market and the increasing use of digital payments. The RBI, NPCI, and SEBI continue to work together to ensure that the PSS remains safe, secure, and efficient, and that it meets the needs of the Indian economy.
Small Finance Banks
Small Finance Banks (SFBs) are a type of banking institution that was introduced in India in 2014. SFBs are designed to provide financial services to the underserved and unbanked population in India. They are typically smaller in size than traditional banks and have a more focused approach, with a focus on providing basic banking services, such as savings accounts, loans, and insurance. SFBs are subject to the same regulations as traditional banks, and are required to meet the same prudential requirements.
SFBs have played a significant role in increasing financial inclusion in India. They have been able to reach out to populations that were previously unbanked, and have provided them with access to essential financial services. SFBs have also been able to provide more personalized and flexible services to their customers, which has been well-received by the market. The success of SFBs in India has led to the establishment of similar institutions in other countries, and has helped to promote financial inclusion on a global scale.
Payment Banks
Payment Banks are a type of banking institution that was introduced in India in 2015. Payment Banks are designed to provide basic banking services, such as savings accounts, debit cards, and mobile payments. They are not allowed to lend money or issue credit cards. Payment Banks are typically smaller in size than traditional banks and have a more focused approach, with a focus on providing digital banking services. Payment Banks are subject to the same regulations as traditional banks, and are required to meet the same prudential requirements.
Payment Banks have played a significant role in increasing financial inclusion in India. They have been able to reach out to populations that were previously unbanked, and have provided them with access to essential financial services. Payment Banks have also been able to provide more convenient and affordable services to their customers, which has been well-received by the market. The success of Payment Banks in India has led to the establishment of similar institutions in other countries, and has helped to promote financial inclusion on a global scale.
| Criteria | Payment Banks | Small Finance Banks |
|---|---|---|
| Establishment | 2015 | 2014 |
| Purpose | Provide basic banking services, such as savings accounts, debit cards, and mobile payments | Provide financial services to the underserved and unbanked population in India |
| Services Offered | Savings accounts, debit cards, mobile payments | Savings accounts, loans, insurance |
| Lending | Not allowed to lend money | Allowed to lend money |
| Credit Cards | Not allowed to issue credit cards | Allowed to issue credit cards |
| Regulation | Subject to the same regulations as traditional banks | Subject to the same regulations as traditional banks |
| Prudential Requirements | Required to meet the same prudential requirements as traditional banks | Required to meet the same prudential requirements as traditional banks |
Well, folks, that’s all for today. I hope you found this journey into the world of banking committees both enlightening and entertaining. Remember, the financial landscape is ever-evolving, so be sure to check back later for the latest updates and insights. Until next time, keep your money safe and your curiosity strong. Thanks for reading!