Payments Banks Will Now Be Able To Offer Loans, Here’s How

The Reserve Bank of India (RBI), on December 5, relaxed the small finance bank (SFB) licensing for payments banks (PBs) who have been in operations for more than five years.

In addition, the apex bank has also raised the net worth requirement from INR 100 Cr to INR 200 Cr. However, primary urban cooperative banks (UCBs) can switch to SFB, if they have a net worth of INR 100, but they will have to double their net worth to INR 200 Cr within five years of its SFB status.

Currently, SFBs will be given the status of a scheduled bank with the commencement of operations and they will have general permission to open banking outlets. India Post Payments Bank (IPPB) and Paytm Payments Bank have both said they would look to migrate to the SFB model.

In September, Inc42 reported that RBI was planning to offer the new licences to set up small finance banks, which will allow payments banks to enter this domain.

A payments bank is just like any other regular bank but operates on a smaller scale. It offers savings accounts, which do not require any account opening charges and minimum balance. Customers can only deposit up to INR 1 lakh ($1,433). It also offers other services like remittance services, mobile payments, money transfers and purchases, among other banking services — ATM/debit cards, net banking and third-party fund transfers. However, it cannot advance loans or issue credit cards.

Though RBI had licenced 11 payments banks, only six payments banks began their operations in India. These include Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, and Paytm Payments Bank.

Whereas a small finance bank has the license to provide basic banking service — acceptance of deposits and lending — as well. Till now, RBI has approved 10 such banks which include Au Small Finance Bank, Equitas Small Finance Bank and Ujjivan Small Finance Bank among others.

With updated licensing, most payments banks will switch to small finance bank services to add more services to its customers, which includes microloans. However, small finance banks have to lend 75% of their total credit to borrowers in the priority sector  —  agriculture, small enterprises and low-income earners. Whereas a commercial bank has to lend out 40%.