"The business model of the small finance banks is such that they are aimed to serve the small borrowers."Discuss differentiating them from Payment banks.

Published: February 4, 2016

If we examine the business model of small finance banks and payment banks, we find that the Small Finance Banks model is for local players or niche players. For example, various banking activities such as to Accept Deposits, Issue Debit Cards, Remittance services etc. have been kept out of their purview and put in Payment Banks scope.  RBI has made it very clear that small finance banks are there to further financial inclusion by providing basic banking facilities to the unbanked and supply of credit to small business units of unorganized sectors. It is also evident from the condition that they need to extend 75% of their loans to priority sector lending and at least half of these loans should be below Rs. 25 Lakh.
Comparison of Payment Banks and Small Finance Banks

DifferenceSmall BankPayments Bank
EligibilityProfessionals with 10 years in financial services or promoter group with 5 year track recordCard Issuers, Finance Companies, Business Correspondents, Telecom Companies, Retailers etc.
Capital RequirementRs. 100 Crore Equity CapitalRs. 100 Crore Equity Capital
Scope of ActivityProviding basic banking facilities to poor and small businessmenAccept Deposits, Issue Debit Cards, Remittance services. Can not issue credit cards
Promoter ContributionPromoter’s initial contribution should be 40% lowered to 26% in 12 yearsPromoters should retain a 40% stake for first five years.

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