New Banks: Big Changes in Small Change

Thought for the day

What are Payment and Small Finance Banks?

  • The RBI granted licenses for Payment Banks to 11 entities. This includes telecom firms Vodafone and Airtel; NBFC Cholamandalam Distribution Services; groups Reliance Industries and Aditya Birla Nuvo; and individuals Dilip Sanghvi, MD of Sun Pharma and Vijay Shekhar Sharma (Paytm). The Dept. of Posts, Fino Paytech, Tech Mahindra and National Securities Depository Ltd also made the cut.
  • The purpose of having payment banks is to reach customers mainly through their mobile phones rather than traditional bank branches. The RBI expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.
  • It also granted 10 entities licenses to open Small Finance Banks for expanding access to financial services in rural and semi-urban areas. They are Au Financiers, Capital Local Area Bank , Disha Microfin, Equitas Holdings, ESAF Microfinance and Investments, Janalakshmi Financial Services, RGVN (North East) Microfinance, Suryoday Micro Finance, Ujjivan Financial Services and Utkarsh Micro Finance.
  • Small finance banks will offer basic banking services, accept deposits and lend to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector.



 So what can payment and SMALL finance banks do?

  • Payment banks can do everything a regular bank can do – take deposits, pay bills, issue cheques and drafts etc. The only thing they can’t do is lend to the public in general. Payment banks can only lend to the government. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
  • In the case of Small Finance Banks 75% percent of the credit advanced will need to go to sectors that are considered part of the so-called priority sector, which includes agriculture, small enterprises and low-income earners.

So how are they going to benefit us?

  • Small Finance Banks will improve the penetration of banking services. It will also help in self-employment and micro & small business creation and support.
  • Payment Banks will usher in the 2nd generation of benefits from the Telecom revolution. They will provide massive convenience to consumers in small day to day transactions, by replacing cash and reducing the cost of transactions, largely enabled by mobile phones.
  • The eCommerce and traditional Retail sectors may benefit from lower transaction costs and greater ease of payments.
  • The Banks will move more money online into formal banking channels, improving reporting, audit trails and tax collections.The persistence of cash in consumer payments in India is 68% versus 14% in the US and 11% in the UK. There is a cost associated with this, of currency and coins production and maintenance. The RBI and commercial banks are spending Rs 21,000 crore annually in currency operations. With these banks growing rapidly, currency costs to the govt. would reduce significantly.
  • These new sectors will create a lot of new jobs, both direct and indirectly. New industries are emerging because of these initiatives.

Effect on the existing Banking Sector

  • These new banks are largely going to provide incremental banking services to the underserved, so we do not expect the current banking industry to be much affected by these new banks
  • While payment technologies are going to get a massive boost from the Small Payment Banks, there is no restriction on the current PSBs and Private Banks to enter and expand in this space. Some aggressive private banks have already launched their offerings in this space.
  • Some products like Credit and Debit cards, ATMs and NEFT / RTGS type money transfer services may face some direct competition due to easier and more efficient channels of money transfer and shopping.

Happy Investing,

Punit Jain


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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in companies named above. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at .