Commercial Banks, Payment Banks & SFBs
The Indian commercial banking structure comprises a multi-tiered ecosystem governed by the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934. Commercial banks are classified into Scheduled Commercial Banks (SCBs)—which meet statutory capital and reserve criteria under the Second Schedule of the RBI Act—and non-scheduled banks. SCBs encompass 12 Public Sector Banks (PSBs), domestic private sector banks, foreign banks operating through branches or wholly owned subsidiaries (WOS), and Regional Rural Banks (RRBs). In 2014, acting upon the recommendations of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households chaired by Dr. Nachiket Mor, the RBI introduced differentiated bank licensing to foster financial inclusion: Payments Banks and Small Finance Banks (SFBs). While Small Finance Banks deliver basic credit and savings to unserved segments subject to rigorous 75% Priority Sector Lending (PSL) quotas, Payments Banks operate exclusively as remittance and payment service providers, strictly prohibited from issuing loans or credit cards and restricted to a deposit cap of ₹2 lakh per individual customer. Together with regulatory capital adequacy frameworks under Basel III, prompt corrective action (PCA) guidelines, and on-tap licensing regimes, these institutions drive financial deepened penetration across India.
Key Concepts & Examination Highlights
- Scheduled Commercial Banks (SCBs) are banks listed in the Second Schedule of the RBI Act, 1934, satisfying the criteria of paid-up capital and reserves of not less than ₹5 lakh and conducting operations that do not harm depositors' interests.
- Differentiated Banks (niche banks), comprising Payments Banks and Small Finance Banks (SFBs), were conceptualized based on the recommendations of the Dr. Nachiket Mor Committee report submitted in January 2014.
- The Raghuram Rajan Committee on Financial Sector Reforms (2008), titled 'A Hundred Small Steps', originally proposed the concept of small finance banks in India to promote inclusion.
- Payments Banks are strictly prohibited from lending money or issuing credit cards, operating exclusively to accept demand deposits and facilitate remittance and digital payments.
- Payments Banks are permitted to accept demand deposits (savings and current accounts) up to a maximum balance of ₹2,00,000 (₹2 lakh) per individual customer, raised from the initial limit of ₹1 lakh in April 2021.
- Payments Banks must invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) eligible government securities and Treasury bills with maturity up to one year.
- Payments Banks must maintain a maximum of 25% of their deposits in current and time/fixed deposits with other scheduled commercial banks for operational and liquidity management.
- Payments Banks are mandated to maintain a minimum Capital Adequacy Ratio (CAR/CRAR) of 15% of their risk-weighted assets (RWA), higher than standard commercial banks.
- Airtel Payments Bank, launched in January 2017, was the first payments bank to commence commercial operations in India.
- India Post Payments Bank (IPPB), established as a 100% Government of India-owned public entity under the Department of Posts, was nationwide launched on September 1, 2018.
- Small Finance Banks (SFBs) are mandated to extend at least 75% of their Adjusted Net Bank Credit (ANBC) to Priority Sector Lending (PSL), compared to 40% for universal commercial banks.
- At least 50% of the aggregate loan portfolio of Small Finance Banks must consist of micro-loans and advances up to ₹25 lakh.
- Small Finance Banks are required to open at least 25% of their total banking branches in unbanked rural centres (tier 5 and tier 6 centres).
- Small Finance Banks must maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15% on a continuous basis, with a minimum Tier 1 capital of 7.5%.
- Capital Small Finance Bank (formerly Capital Local Area Bank), headquartered in Jalandhar, Punjab, became India's first Small Finance Bank to commence operations on April 24, 2016.
- The minimum paid-up voting equity capital for setting up a Small Finance Bank was initially ₹100 crore, subsequently increased to ₹200 crore under RBI's on-tap licensing guidelines (and ₹300 crore for primary urban co-operative banks transitioning to SFB).
- The minimum paid-up equity capital requirement for establishing a Payments Bank is ₹100 crore, with the promoter required to contribute at least 40% of the paid-up equity for the initial 5 years.
- Small Finance Banks that have completed 5 years of successful operations and are listed on stock exchanges can apply for transition into full-fledged Universal Commercial Banks under RBI guidelines.
- AU Small Finance Bank (headquartered in Jaipur) and Equitas Small Finance Bank (headquartered in Chennai) represent prominent non-banking microfinance/finance companies that transitioned into SFBs.
- The Usha Thorat Committee was the external advisory committee constituted by the RBI in 2015 to evaluate license applications for Small Finance Banks.
- The external advisory committee for evaluating Payments Bank applications in 2015 was chaired by former Deputy Governor Dr. Nachiket Mor.
- Bandhan Bank (Kolkata) and IDFC First Bank (Mumbai) were granted in-principle approval for universal banking licenses by the RBI in April 2014 under the Bimal Jalan screening committee.
- The total number of Public Sector Banks (PSBs) in India stands at 12 following the mega-consolidation effective April 1, 2020.
- The 12 Public Sector Banks in India comprise State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Indian Bank, Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank.
- State Bank of India (SBI) is the largest commercial bank in India, holding over 20% total market share in deposits and advances.
- Domestic Systemically Important Banks (D-SIBs), designated by the RBI under the 'Too Big to Fail' framework, currently include State Bank of India (SBI), HDFC Bank, and ICICI Bank.
- Foreign Banks in India operate either as branch offices or as Wholly Owned Subsidiaries (WOS) incorporated in India under local capital and governance norms.
- SBM Bank India (State Bank of Mauritius) was the first foreign bank in India to receive a universal banking license to operate as a Wholly Owned Subsidiary (WOS) in December 2018.
- Priority Sector Lending (PSL) targets for domestic scheduled commercial banks (excluding RRBs and SFBs) mandate that 40% of Adjusted Net Bank Credit (ANBC) must be directed to designated priority sectors.
- Priority Sector Lending categories defined by the RBI include Agriculture, Micro Small & Medium Enterprises (MSME), Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, and Others (Weaker Sections).
- Under Priority Sector Lending guidelines, domestic commercial banks must allocate 18% of ANBC to agriculture, within which 10% is specifically sub-targeted for Small and Marginal Farmers (SMFs).
- The sub-target for lending to Micro Enterprises under Priority Sector Lending for commercial banks is set at 7.5% of ANBC or credit equivalent of off-balance sheet exposure.
- The sub-target for advances to Weaker Sections under PSL guidelines for commercial banks is set at 12% of ANBC.
- If commercial banks fail to achieve their statutory PSL targets, the shortfall amount is mandated to be deposited into the Rural Infrastructure Development Fund (RIDF) managed by NABARD.
- Regional Rural Banks (RRBs) are required to maintain a Priority Sector Lending target of 75% of their total outstanding advances, identical to Small Finance Banks.
- Prompt Corrective Action (PCA) framework is a supervisory mechanism invoked by the RBI against commercial banks that breach designated thresholds in Capital (CRAR), Asset Quality (NNPA), and Leverage.
- Under the Revised PCA Framework (2021), Capital to Risk-Weighted Assets Ratio (CRAR), Tier 1 Capital Ratio, Net Non-Performing Asset (NNPA) ratio, and Leverage Ratio serve as the core financial metrics for monitoring.
- Section 22 of the Banking Regulation Act, 1949, mandates that no company shall carry on banking business in India unless it holds a license issued by the Reserve Bank of India.
- Section 11 of the Banking Regulation Act, 1949, prescribes the statutory minimum capital and reserve requirements for banking companies operating in India.
- Section 19 of the Banking Regulation Act, 1949, restricts commercial banks from holding shares in any company as pledgee, mortgagee, or absolute owner beyond 30% of paid-up share capital or 30% of the bank's own capital and reserves.
- Statutory Liquidity Ratio (SLR) is mandated under Section 24 of the Banking Regulation Act, 1949, requiring banks to maintain a specified percentage of NDTL in gold, cash, or unencumbered approved securities.
- Cash Reserve Ratio (CRR) is mandated under Section 42(1) of the Reserve Bank of India Act, 1934, requiring scheduled banks to maintain cash balances with the RBI.
- Basel III norms require Indian scheduled commercial banks to maintain a minimum Common Equity Tier 1 (CET1) ratio of 5.5%, a Tier 1 capital ratio of 7%, and a total minimum CRAR of 9% (11.5% including Capital Conservation Buffer).
- The Capital Conservation Buffer (CCB) of 2.5% composed of Common Equity Tier 1 capital must be maintained by commercial banks over and above the minimum regulatory capital requirement.
- Local Area Banks (LABs) were introduced in August 1996 based on the 1996 Union Budget announcement to mobilize rural savings and cater to local credit needs across a maximum of three contiguous districts.
- Coastal Local Area Bank (headquartered in Vijayawada, Andhra Pradesh) and Krishna Bhima Samruddhi Local Area Bank (Mahbubnagar, Telangana) are active examples of surviving Local Area Banks in India.
- Non-Banking Financial Company (NBFC) Factor and Microfinance Institutions (NBFC-MFI) can convert into Small Finance Banks provided they have a minimum track record of 5 years of successful financial operations.
- In May 2016, RBI issued guidelines for 'On-Tap' Licensing of Universal Banks in the Private Sector, replacing the earlier window-based licensing rounds.
- The P.J. Nayak Committee (2014) on Bank Governance recommended reducing the government's shareholding in public sector banks to below 50% and establishing a Bank Investment Company (BIC).
- The Banks Board Bureau (BBB), constituted in 2016 based on P.J. Nayak Committee recommendations, was revamped and reconstituted as the Financial Services Institutions Bureau (FSIB) in July 2022 to recommend full-time directors and heads of PSBs and public insurers.
Sample Solved Questions & Concept Explanations
8 Verified Concept QuestionsWhat rate of interest does the Reserve Bank of India charge when commercial banks borrow funds overnight against eligible government securities under the Liquidity Adjustment Facility (LAF)?
On 19 July 1969, how many major Indian commercial banks with deposits exceeding ₹50 crore were nationalised through an ordinance promulgated by the Government of India?
What is the specified minimum percentage of deposits that commercial banks are required to maintain as cash balances with the RBI called?
Which monetary policy tool mandates commercial banks to invest a specified percentage of their NDTL in liquid assets such as government securities and gold?
Which bank is recognized as the first bank established on Indian soil, founded in 1770 at Calcutta?
State Bank of India (SBI) came into existence on 1 July 1955 following the nationalisation and renaming of which premier financial institution?
How many commercial banks were nationalised by the Government of India during the second phase of bank nationalisation on 15 April 1980?
Which was the first Regional Rural Bank (RRB) set up in India on 2 October 1975?