On Wednesday, the Reserve Bank of India (RBI) gave in-principle approval to

11 entities to open a new category of banks, ‘payment banks’ as part of the

government’s bid to increase financial inclusion and help expand banking
services. Payment banks, targetted towards people without access to the
formal banking system, will provide savings, deposit, payment and remittance
services. Unlike conventional banks, payment banks will not be in the business
of lending. Essentially, these banks are targeted towards financially excluded
customers like migrant workers, low-income households and small
businesses. The list of 11 entites includes nine organisations, including Aditya
Birla Nuvo Ltd, Airtel M Commerce Services Ltd, Cholamandalam
Distributions Ltd, Reliance Industries Ltd, Tech Mahindra Ltd, Vodafone m-
Pesa Ltd, Fino Pay Tech Ltd, Department of Posts and National Securities
Depository Ltd (NSDL). Two individuals, Dilip Shanghavi, founder of Sun
Pharmaceutical Industries Ltd, and Vijay Shekhar Sharma, founder of One97
Communications Ltd that runs mobile payment company PayTM, were also
included in the list.

Hailed for their disruptive, almost Uber-like effect on the banking industry,
the newly licensed payment banks will join India’s vast banking system, which
has several layers of banks, performing different roles and objectives, once
they full criteria laid down by RBI in 18 months.

Commercial Banks

According to the RBI, “Commercial Banks refer to both scheduled and non-
scheduled commercial banks which are regulated under Banking Regulation
Act, 1949.” Commercial banks operate on a ‘for-profit’ basis. They primarily
engage in the acceptance of deposit and extend loans to the general public,
businesses and the government.

Scheduled Banks

By definition, any bank which is listed in the 2nd schedule of the Reserve Bank
of India Act, 1934 is considered a scheduled bank. The list includes the State
Bank of India and its subsidiaries (like State Bank of Travancore), all
nationalised banks (Bank of Baroda, Bank of India etc), regional rural banks
(RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-
operative banks. These also include private sector banks, both classified as old
(Karur Vysya Bank) and new (HDFC Bank Ltd).

To qualify as a scheduled bank, the paid up capital and collected funds of the
bank must not be less than Rs5 lakh. Scheduled banks are eligible for loans

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from the Reserve Bank of India at bank rate, and are given membership to
clearing houses.

Non-scheduled Banks

Non-scheduled banks by definition are those which are not listed in the 2nd
schedule of the RBI act, 1934. Banks with a reserve capital of less than 5 lakh
rupees qualify as non-scheduled banks. Unlike scheduled banks, they are not
entitled to borrow from the RBI for normal banking purposes, except, in
emergency or “abnormal circumstances.” Jammu & Kashmir Bank is an
example of a non-scheduled commercial bank.

Co-operative Banks

Co-operative banks operate in both urban and non-urban areas. All banks
registered under the Cooperative Societies Act, 1912 are considered co-
operative banks. These are banks run by an elected managing committee with
provisions of members’ rights and a set of “communally developed and
approved bylaws and amdendments.”

In the urban centers, they mainly finance entrepreneurs, small businesses,

industries, self-employment and cater to home buying and educational loans.
Likewise, co-operative banks in the rural areas primarily cater to agricultural-
based activities, which include farming, livestocks, dairies and hatcheries etc.
They also extend loans to small scale units, cottage industries, and self-
employment activities like artisanship.

Unlike commercial banks, who are driven by profit, co-operative banks work
on a “no profit, no loss” basis. These are regulated by the Reserve Bank of
India under the Banking Regulation Act, 1949 and Banking Laws (Application
to Co-operative Societies) Act, 1965.

Regional Rural Banks

Regional Rural Banks or RRBs, simply put, serve the rural areas and
agricultural sectors with basic banking and adequate financial services. They
were set up in 1975, based on the recommendations of a committee. Based in
Moradabad, Prathama Bank, established on 2 October 1975, is the first RRB to
open in India. It was sponsored by Syndicate Bank. The RRBs are owned by
the central government (50%), the state government (15%) and the sponsor
bank (35%). Several commercial banks have sponsored RRBs. Prominent
examples include the Maharashtra Gramin Bank (sponsored by the Bank of

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Maharashtra) and the Himachal Gramin Bank (sponsored by Punjab National
Bank). RRBs were set up to eliminate other unorganized financial institutions
like money lenders and supplement the efforts of co-operative banks.

First Published: Thu, Aug 20 2015. 02 16 PM IST

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