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The Reserve Bank of India (RBI) via notification has allowed Scheduled Payments Banks and Scheduled Small Finance Banks to become agents of the RBI who wish to undertake government agency business. The decision has been taken by the Department of Financial Services, Ministry of Finance, Government of India with a view to extend quality government services through better and efficient services of the private management. This step taken by the RBI has given a further scope to these banks to undertake the government agency business and extend the benefits of financial inclusion schemes to the downtrodden section of the society.
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A schedule payment bank according to RBI is one which operates on a smaller scale without involving the risk of credit i.e. without providing the services of extending loans and credit card services. However, it provides all the other services involved with the bank like accepting demand deposits but only upto the upper limit of 1 lakh rupees, offering remittance services, mobile banking services, issuing debit cards, net banking service and third party fund transfers.
The RBI has given recognition of payments banks to the following banks only. They are:
The main objective of establishing payments banks was financial inclusion and to penetrate banking services to the remotest locations of the country. These payments banks serve the banking needs of the small scale businessmen, migrant labour workforce, and low income households and link them with a technology driven environment.
A Scheduled Small Finance bank is a bank listed in the second schedule of the RBI Act, 1934. These banks have been allowed to take deposits of any amount unlike small payments banks where the upper limit is set at 1 lakh rupees.
These banks mainly focus on lending in small sums to small scale businesses, unorganised sectors of the economy, micro and small industries, small and marginal farmers etc. with the objective of financial inclusion of those sections of society over which the other commercial banks do not pay much attention.
Unlike Scheduled Payments Banks, they have the mandate to remittances and credit cards. They have been tasked to maintain a loan portfolio of lending where minimum 50 percent of their lending constitutes of loans upto Rs. 25 lakhs and 75 percent of net credits in priority sector lending.
They have also the freedom to launch financial products such as Mutual Funds, pension, insurance etc.
These banks are supposed to maintain capital of 200 crores with promoters having minimum 10 years of experience in the banking and finance industry. Even NBFCs, Micro finance Institutions, Local Area banks have been allowed to apply to become Small Finance Banks. Recently, BharatPe and Centrum Financial Services Limited Joint Venture has been granted license to function as Small Finance Banks.
Some of the Banks that belong to the scheduled small finance banks are:
Setting aside its restrictions imposed by the Department of Financial Services, Ministry of Finance, Government of India in the year 2012 regarding further extension of the government services to the private sector banks, the RBI has come out with a notification allowing the Scheduled Payments Banks and Scheduled Small Finance Banks to undertake government agency business provided that the statutory requirements for setting up of these banks have been complied with by the applicant private bank.
These private sector banks, after execution of the agreement with the RBI and obtaining a permit of running a government agency business, will be able to participate in the following tasks:
The RBI has prescribed that those private sector banks willing to undertake government agency business but not having the agency banking agreement with the RBI can be appointed as the agents of RBI provided that they execute an agreement with the RBI.
However, execution of such an agreement shall be subjected to a condition that the applicant bank must not be embroiled under the Prompt Corrective Action (PCA) proceedings or under a moratorium at the time of making the application or executing the said agreement with the RBI.
The Central Government/ State Governments have been empowered to grant permission of running the government agency business. These departments are also empowered to revoke the given permission after giving a notice to the said private bank and informing the RBI of such revocation.
The category of above-mentioned banks finds a place in the second schedule of the RBI Act, 1934. These are those banks that have been able to satisfy the RBI that their affairs are not against the interests of the depositors.
The executives of these banks are of the opinion that this step taken by the RBI would improve the delivery of services by the government. However, there is no guarantee about the volume of work that will be available with these banks. These banks need to figure out the strategy as to which sectors they will prioritise and how will they be able to access maximum amount of work from the government.
At the outset, this attempt by the RBI to involve scheduled payments banks and scheduled small finance banks for extending the government services agency seems attractive because of the expected improvement in the delivery of government services and extension of financial inclusion schemes of the government. However, suspicions are raised whether these private banks driven by the profit motive will be able to deliver those services including those of financial inclusion.
Read our article:Online Payments through PPIs in India
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.
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