A brief comparison of Regulatory Requirements of Payments Banks, Small Finance Banks and Universal Banks

By Madhu Srinivas, IFMR Finance Foundation 

RBI recently released the operating guidelines for the Small Finance banks and Payments Banks on October 6, 2016. To take stock of these, we have put together a brief comparison of the regulatory requirements of these banks against those for universal banks.

Payments Banks (PB) Small Finance Banks (SFB) Universal Banks (scheduled commercial bank /
Payments and Remittances Yes Yes Yes
Credit No


a)75% of ANBC to qualify under PSL. While 40% of its ANBC should be allocated to different sub-sectors under PSL as per the extant PSL prescriptions, SFBs can allocate the balance 35% to any one or more sub-sectors under PSL where it has competitive advantage, and,

b) Atleast 50% of loan portfolio should have loans and advances not exceeding Rs. 25 Lakhs

SFBs can participate in securitisation as originators for risk transfer but not as purchasers of other banks’ loans


40% of ANBC to qualify under PSL

Savings Yes, only demand deposits (savings and current accounts), aggregate limit per customer shall not exceed ₹100,000. Amounts beyond this limit can be swept into accounts opened for customer at a SFB/SCB, with prior written consent of customer. Yes – both demand and term deposits Yes – both demand and term deposits
Business Correspondent (BC) Yes. Can become BC to another bank, and in the process offer credit. Also can engage BCs, including those of promoter/ partner/ group companies at an arm’s length basis, for expanding their business. Cannot be a BC to another bank. Yet can engage BCs, including those of promoter/ partner/ group companies at an arm’s length, for expanding their business. Interoperability of BCs is allowed, though it is unclear what interoperability means in this context, except for opening of deposit accounts. Offline BCs will not be allowed. No requirements to have base branch for a set number of BCs/ access points. Can use BCs to expand their business with no restrictions on having a set number of BC’s to be mapped to a base branch. While a BC can be a BC for more than one bank, at the point of customer interface, shall represent and provide banking services of only one bank. Offline BCs are allowed provided that all off-line transactions are accounted for and reflected in the books of the bank by the end of the day.
Prudential Requirements
Capital Adequacy Requirements 15% – their risk exposure would be almost entirely limited to operational risk* 15% – risk exposure includes credit risk, market risk, operational risk* 9% – risk exposure includes credit risk, market risk, operational risk
CET1 Capital 6.0% 6.0% 5.5%
Minimum Tier 1 Capital 7.5% 7.5% 7.0%
Capital Conservation Buffer NA NA 1.25%
SLR/CRR Yes Yes Yes
Investment Norms Only in Govt Securities (atleast 75% of Demand Deposit Balances) and in demand and time deposits in SCBs As applicable to commercial banks As per extant guidelines
Other Activities
Products Some form of prior RBI approval required for
products to be sold by PB. RBI also reserves the right to restrict or discontinue the products being sold by the PB
Derivatives Only for the purposes of hedging foreign currency positions arising from business activities. Only the below mentioned derivatives can be used. Also no credit derivatives cannot be purchased or sold:
a) interest rate futures for proprietary hedging;
b) Foreign exchange derivatives to hedge foreign currency positions arising from business activities
No such restrictions
Para Banking Activities Can undertake other non-risk sharing simple financial services activities, not requiring any commitment of their own funds, such as distribution of mutual,fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products Same as PBs Can undertake other financial activities like investment in VC Funds, equipment Leasing , Hire Purchase and Factoring,
Primary Dealership, Mutual fund (both Risk Sharing and Broking), insurance (both Risk Sharing and Broking),Portfolio Management Services, among other activities
Risk Management As applicable to commercial banks As applicable to commercial banks As per extant guidelines

Please let us know your thoughts/feedback on the above comparisons in the comments section below.

* The prudential frameworks for market risk and operational risk are being examined by RBI and the instructions in this regard are expected to be issued separately.


Modernisation of India’s Banking Sector

By Deepti George, IFMR Finance Foundation

This research paper titled “Modernisation of India’s Banking Sector” is published as part of IFMR Finance Foundation’s “Notes on the Indian Financial System” research series.

India’s banking sector is characterised by a few large national banks and many smaller banks of a regional nature, all of which have traditionally been forced to adopt similar strategies in expanding their banking business. Such strategies have been characterised by an almost exclusive Originate-To-Hold-till-Maturity (HTM) approach to managing asset books in an environment where a significant portion of credit continues to be targeted to specific ‘priority’ sectors at artificially low prices based on policy mandates. These high cost and high risk approaches have resulted in several anomalies that currently plague the Indian banking system. The high accumulation of non-performing assets on banks’ books and the continued multi-year government-led capital infusion are only symptomatic of these anomalies. This paper seeks to lay out a set of ideas that look at root causes of bank performance, which will then pave way for the modernisation of the sector.

At the heart of these recommendations is an attempt to go back to first principles of banking and to reflect on what banks’ managements and boards (notwithstanding their ownership patterns), and the banking supervisor need to focus on in order to set the course for a globally competitive banking sector for India, and the paper is organised into two broad sections that reflect these two categories of recommendations. A third section deals with recommendations to improve risk management outcomes for credit institutions by enabling the adoption of derivatives and insurance.

Below is a summary list of recommendations.

  1. Banks must undertake better risk-based pricing of their loan assets and for this, banks need to rely on processes and frameworks that reveal the true costs incurred in originating loans for various borrower profiles and asset classes. These frameworks include Matched Fund Transfer Pricing (MFTP) to understand cost of funds, Activity Based Costing (ABC) to understand transaction costs, and Risk-Adjusted Performance Measurement (RAPM) for measuring the cost of equity.
  1. In its risk-based supervisory process, the RBI must move away from detailed instructions in its Monitorable Action Plan (MAP) and shift towards an approach of specifying targeted risk scores for each bank based on its unique risk position. As a prudent target to place on banks, RBI can focus on ensuring that Systemically Important Financial Institutions (SIFIs) consistently meet low risk scores, while non-SIFIs have more leeway to take on risker endeavours and therefore are to meet higher capital norms commensurate with their riskiness.
  1. RBI must provide differential provisioning (both standard and impaired assets) and asset classification norms that reflect the underlying riskiness of each asset class.
  1. RBI must require banks to demonstrate IFRS parallel run on their books, and also require the 21 new bank licensees to become compliant with IFRS from start of business to prevent the establishment of legacy systems.
  1. Banks will need to be permitted to move away from an exclusive originate-and-hold-till-maturity strategy and gradually start to document all their loans using debenture / bond documentation so that the liquidity of their balance sheet improves. Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether originated directly or purchased in the secondary markets should be permitted to be held to maturity (HTM) based on declared intent. To this end, there is no longer a need for an artificial distinction between the banking book and the trading book that prevents banks from holding bonds in the former. RBI or FIMMDA must develop and publish Standardised Debenture Trust Deed (DTD) templates that can be used by banks for bonds and loans to improve investor confidence in lower rated bonds and the tradability of loans.
  1. There is a need to reimagine the role of universal banks as one that is no longer engaged as risk originators but rather as being risk aggregators, with freedoms to rebalance their portfolios based on risk-profiles and diversification outcomes that each bank decides for itself. Tools such as the Generalised Herfindahl-Hirschman Index (HHI) are useful for banks in quantifying the extent of diversification in portfolios containing a mix of assets that are correlated to various degrees. It is worthwhile to consider the use HHI as a measure of concentration risk, as has been used by the U.S. Department of Justice in its Horizontal Merger Guidelines.
  1. RBI must require greater levels of disclosures from all banks with regard to concentration levels to each segment/sector, largest counterparties, as well as results of stress tests, both at an overall balance sheet level as well as at a segmental level at least annually so that these banks compete with each other on the strengths of their balance sheets alone, in a level playing field where no entity gets favoured over others due to lesser disclosure requirements.
  1. Banks must equip themselves with instruments such as credit derivatives for better risk management of their portfolios. The permission from the RBI to use CDSs for loans held on banks’ books would make CDSs much more useful as a risk management tool, and this is especially so for regional banks who can purchase CDSs from large national banks who are better placed to warehouse those risks that regional banks are exposed to.
  1. Banks must be permitted to hedge commodity price risks on their agri lending portfolios and offer them to their customers on an OTC basis. In order to permit this, the Government can notify agri-commodity futures and options under the “Any other business” category of the Banking Regulations Act.
  1. In order to guard against large scale defaults resulting from catastrophic events, banks must work closely with insurance companies to purchase bank-wide portfolio level insurance against events such as large scale rainfall failure on a regional or national basis, instead of having an expectation that relief would be provided from national or state budgets.

Click here to download the full paper.

Please do share your comments/feedback in the comments section below.


Financial Inclusion: Indian Women Have Something to Bank On


By Bindu Ananth and Amy Jensen Mowl, IFMR Finance Foundation

For the first time, the majority of Indian women have been financially included. Fresh data show that the proportion of Indian women with individual accounts in formal financial institutions (primarily banks) reached 61% in 2015, a sharp increase from 48% in 2014, lagging men by only eight percentage points. A close look at these numbers reveals opportunities and challenges to build on this quiet, and important, victory.

The Intermedia India Financial Inclusion Insights (FII), an annual, nationally representative survey, confirms that both individuals and households show growth in bank registration, largely driven by the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) and its emphasis on individual accounts (rather than household). By capturing demand-side data from individual citizens, the FII survey found that overall individual bank account ownership in India increased from 52% in mid-2014 to 63% in mid-2015. While the survey shows growth in financial inclusion for all adults, the gains were the highest in rural areas and for individuals below the poverty line, and, most of all, women. These encouraging numbers suggest financial inclusion is widening to reach the most vulnerable adults in India. Additionally the gender gap has decreased, as Indian men experienced an increase of nine percentage points, from 60% to 69% in the same period. These data mirror other recent studies such as Anjini Kochar’s finding that business correspondents (BCs) have increased the savings of both landowning and landless households in India; with the savings of the landless increasing more than those of landowning households. She explains this difference in terms of the fact that access to a BC increased the wage income and hours of work of landless households, particularly those of women, a likely consequence of the tie-up between the financial system and the MGNREGA.

So, what does this mean for the broader pursuit of economic empowerment for women in India? Does account ownership translate into broader economic and social gains? We looked at evidence from multiple studies and the conclusions are clear — women and their families benefit greatly from individual account ownership. Esther Duflo’s study of South African pensions reveals that when the pension recipient is a woman in the household, it translates into strong health effects for girls in the family. Pascaline Dupas, in her work in Kenya, shows that access to fairly simple savings tools has a significant impact on health-related investments of families. Silvia Prina, in a randomised experiment in Nepal, offered flexible savings accounts to female-headed households with no opening, deposit or withdrawal fees. After one year, the study found that 80% of those offered the account opened one and used it actively. After one year, household assets had increased by 16%. All these studies strongly suggest that the gender of the account-holder matters and drives differential outcomes for the family. As a universally targeted programme, women’s empowerment and economic inclusion were not direct objectives of the PMJDY. But the programme design of targeting individual accounts, and the disproportionate impact this focus has on women’s empowerment and economic inclusion, may prove to be one of the PMJDY’s most lasting and transformative features.

This remarkable achievement for women should now be extended to the remaining 39% of them. This will require commitment to implementation, quality of service, and a willingness to look beyond one-size-fits-all solutions in addressing the diversity of women’s financial needs. For women, some of the features valued most in formal accounts are trust, privacy, and security from theft and harassment. When providers do not treat their customers in a fair manner — particularly low-income customers and women — trust in financial services is eroded. Experience has shown that efforts such as the “no-frill accounts” were abandoned by clients when payments were not received in time, and customers lost confidence in their financial providers. In the FII data, PMJDY holders reported experiencing issues with transactions and account terms. Specifically, they were more likely to complain about banks deducting fees without informing them, and a decrease in available account funds due to mishandling or fraudulent activities. A commitment to customer protection in implementation, and thinking through women’s needs at all stages, are one way to ensure sustainable growth and outreach.

In addition, while technology and digital finance offer a promising solution to some of the traditional physical and other access barriers to extending financial inclusion to all of India’s women, women face a stark “digital divide”. To date only 44% of women — compared to 75% of men — own an individual mobile phone, and the simple difference between owning a phone and being able to “borrow one” plays a significant role in women’s technological skills development and privacy in financial transactions.

Ensuring that first-time users learn that banking is an experience of convenience and trust, and recognising the diversity of needs of Indian women in accessing financial services are the only ways to continue the remarkable trajectory of financial inclusion for women. We must build on this success to extend the gains to other important financial services such as insurance and credit. In this same FII survey, only 15% of women reported having a financial plan for unexpected events. Inability to deal with these events can be devastating for women and their families.

This article first appeared in Hindustan Times.


Being ‘Sachet’ in Curbing Illegal Money Deposits

By Monami Dasgupta, IFMR Finance Foundation

Taking a significant step towards curbing illegal collection of deposits by unauthorized and illegal entities, RBI recently set up a website named ‘Sachet‘ (Alert). This initiative is in line with a recommendation made by the Committee for Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS, 2014)[1] on Citizen led-surveillance, namely that “RBI should create a system by which any customer can effortlessly check whether a financial firm is registered with or regulated by RBI.”

The website is a one-stop point for citizens to lodge and track a complaint against illegal acceptance of deposits/money by any scrupulous individual or entity. The website will enable citizens to lodge a complaint with a plethora of regulators. The information provided here is expected to be immediately shared with the concerned Regulator/Law Enforcement Authority who would initiate necessary action as per their procedures and processes. Citizens can also check whether an entity is registered with any regulator and whether they are permitted to accept deposits. The website also serves as an easy point of access to inform citizens about the regulations prescribed by all financial regulators and across central and state legislations. Having said this, it would have been greatly beneficial for the public to understand legislation if there were links that would direct to helpful content such as that on the NCFE website that provides impartial and easy to understand financial educational content (a similar example in another jurisdiction is that provided by ASIC’s MoneySmart website for Australia).

The Sachet website is also a platform for State Level Coordination committee[2] (SLCC) to disseminate information among members of SLCC, which in turn will help in curbing illegal and unauthorized money raising activities.

A snapshot of the regulators listed on the website (provided below) interestingly excludes certain categories of institutions in whose name fraudulent activities can be performed, such as banks, cooperative banks, and regional rural banks, as well as those types of entities that do not fall under the purview of any of the financial sector regulators, such as cooperative societies, trusts, NGOs and so on.


The Complaint Filing process is illustrated below:


If the SLCC does not forward the complaint to the respective authority within 30 days, the complainant can send a reminder to them.

It is important to note that this website is not intended as a solution to the last mile problem of difficulties in accessing external customer grievance redressal mechanisms. There is no link to the external grievance redressal mechanisms such as the Banking Ombudsman (for banks), Insurance Ombudsman (for insurance companies), SCORES for SEBI-regulated entities, or PFRDA (for pension products). Once a complaint enters the Sachet system, a seamless link to these websites would bring down customer distress considerably.

This is a significant first step in the right direction towards protecting customers from illegal and unauthorized individuals or entities that collect deposits, whether or not they are able and willing to repay these deposits. For a holistic last-mile solution, practitioners like various financial institutions as well as post-offices and district-level government offices can also get involved in the process of disseminating information about Sachet.

1 – CCFS Report – https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf, Pg 187.
2 – State Level Coordination Committee (SLCC) is the joint forum formed in all States to facilitate information sharing among the Regulators viz. RBI,SEBI,IRDA,NHB, PFRDA, Registrar of Companies (RoCs) etc. and Enforcement Agencies of the States viz Home Department, Finance Department, Law Department, Economic Offences Wing (EOW)


The Nexus of Financial Inclusion and Stability: Implications for Holistic Financial Policy-Making


Guest Post by Dr. Martin Melecky, Lead Economist, South Asia Region, World Bank

Both financial inclusion and financial stability are high on international policy makers’ agenda. For instance, the G-20 has called for global commitments to both advancing financial inclusion (the Maya Declaration and the Global Partnership for Financial Inclusion) and enhancing financial stability (the Financial Stability Board, Basel III Implementation, and other regulatory reforms). One challenge is that there can be important policy trade-offs between the two objectives.

A rapid increase in financial inclusion in credit, for example, can impair financial stability, because not everyone is creditworthy or can handle credit responsibly—as illustrated in the last decade by the subprime mortgage crisis in the United States and the Andhra Pradesh microfinance crisis in India. In addition, trade-offs between inclusion and stability could arise as an unintended consequence of bad or badly implemented polices.

At the same time, there may be important synergies between inclusion and stability. For example, a broader use of financial services could help financial institutions diversify risks and aid stability. Similarly, financial stability can enhance trust in financial systems and the use of financial services. It follows that understanding the synergies and trade-offs is paramount for policy makers who strive to advance financial inclusion and stability in tandem.

When evaluating financial sector outcomes, and prioritizing the design and implementation of alternative financial policies, policymakers could miss important aspects by ignoring the interactions between financial stability and inclusion. To illustrate this point, it is useful to consider the following intuitive framework:


Deploying policies to achieve financial stability and policies to achieve financial inclusion may not deliver the intended results if there are major tradeoffs between the two outcomes. But if the deployed policies can generate synergies between inclusion and stability, mutual reinforcement of the two goals can occur. The last term in the equation above highlights the possible interdependence between inclusion and stability, which can thus either add or subtract from the independent goals of stability and inclusion. While most studies and policies have typically focused on either achieving the outcome of stable or inclusive financial systems independently, limited attention has been paid to the interdependence between the two outcomes.

In a recent paper, Cihak, Mare, and Melecky examine a wide array of measures of household and firm inclusion to estimate an overall tradeoff between financial inclusion and stability. They find that, particularly for individuals, the use of financial services is negatively correlated with higher bank capitalization. Moreover, there is a positive correlation (tradeoff) between many inclusion indicators and the costs of banking crises. Greater financial inclusion (increase in account ownership or debit card penetration) is associated with more costly financial crises (output and fiscal costs, as well as the peak NPL ratios during crises).

Interestingly, synergies between inclusion and stability are almost equally probable as tradeoffs—as indicated by the two-peak (bimodal) histogram or correlations in Figure 1. Dissecting financial stability into resilience measures, volatility measures, and crises measures reveals that financial inclusion can help mitigate volatility of growth in bank deposits and the volatility of bank deposit rates. While financial inclusion of individuals, such as account ownership, use of electronic payments, formal savings and credit, help reduce the volatility of bank deposit growth and bank deposit rates, savings by firms can help enhance financial stability across all three dimension: resilience, volatility, and low probability and cost of crises.

Figure 1: Although tradeoffs between financial inclusion and stability prevail on average, synergies between the two outcomes could arise with almost equal probability


The relationship between inclusion and stability is systematically influenced by country characteristics, such as financial openness, tax rates, education, informality, population density, and the depth of credit information systems. While financial openness and formalization of the economy increases tradeoffs between inclusion and stability, low tax rates, education, and credit information depth help generate synergies between the two goals (Figure 2).

Figure 2: The inclusion-stability nexus is systematically influenced by country characteristics


Greater financial openness and movement of capital is particularly challenging in middle and low income countries, which tend to have a limited capacity to manage capital flows and ensure prudent and efficient allocation of the funding to creditworthy firms and individuals.

Countries with higher informality, as measured by the number of years firms operated without formal registration, experience a lower tradeoff between financial inclusion and stability. A potential explanation is that previously informal firms that enter the formal sector tend to be greater risk-takers. Being higher risk-takers may have allowed these firms to earn higher returns to pay for more expensive informal credit. Because risk appetites are unlikely to change fast after becoming formal, rapid increases in credit to previously informal firms that enter the formal sector should be monitored for potential threats to financial stability.

Low tax rates may generate synergies by stimulating precautionary savings due to smaller social safety nets and greater probability of unexpected increases in taxes. Education can generate a positive relationship between inclusion and stability by improving financial literacy and responsible financial inclusion that helps the financial system reap the benefits of economic scale and risk diversification.

The depth of credit information systems generates synergies by improving screening of creditworthy customers, including new users of credit, and aids stability by, for example, improving the accuracy of estimations of expected losses. Finally, greater information depth also promotes competition in oligopolistic markets, decreases the cost of finance, and encourages more firms and people to start using a financial service or use more than one financial service. Particularly if financial policy focuses on advancing the financial inclusion of individuals, complementary policies to deepen credit information systems could help mitigate the estimated tradeoffs with financial stability.

These findings have important policy implications. Because tradeoffs and synergies between financial inclusion and financial stability are significant, they need to be addressed in policymaking. In many countries, multiple government agencies (in many countries the central bank and other financial supervisors) and ministries (in many countries the ministry of finance, economic development, or strategic planning) are responsible for policy on both financial inclusion and financial stability. Therefore, the tradeoffs and synergies must be addressed at a high enough policy-making level to ensure effective coordination. One important tool to formulate high-level policy for the financial sector are the financial sector strategies that could be exploited for that purpose (Maimbo and Melecky, 2015).