India Post Payments Bank to be converted into Small Finance Bank

Indian Posts has made a decision to convert India Post Payments Bank into Small Finance Bank. This will enable the Bank to offer small loans to customers.

Payment Banks

Payments banks were introduced by the Reserve Bank of India (RBI) to meet the government’s financial inclusion target.

A payment Bank will be set up as a differentiated bank and will confine its activities to acceptance of demand deposits, remittance services, Internet banking and other specified services but cannot undertake lending services.

Payments banks can accept deposits up to Rs. 1 lakh per account from individuals and small businesses. They can issue ATM/debit cards but not credit cards. They can also issue other prepaid payment instruments.

They can distribute non-risk sharing simple financial products like mutual funds and insurance products. Non-resident Indians (NRIs) are not be allowed to open accounts in payment banks. This new model of banking allows mobile firms, supermarket chains and others to cater to banking requirements of individuals and small businesses.

Small Finance Bank

The Small Finance Banks were introduced by the RBI to further financial inclusion by providing:

  • Basic banking facilities to the unbanked and thereby boosting saving habits.
  • Supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganized sector entities, through high technology-low cost operations.

The Small Finance Banks model is for local players or niche players. Since objective behind the establishment of such banks is to serve unbanked, marginal customers; they have been mandated to extend 75% of their credit to priority sector lending. Further, at least half of these loans should be below Rs. 25 Lakh.

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