The Reserve Bank of India (RBI) on Thursday announced draft guidelines for setting up of payments banks and small banks.

A payments bank will only be allowed to accept deposits and transfer money from one account to another (undertake remittances) but will not be allowed to undertake lending activities.

“Given that their primary role is to provide payments and remittance services and demand deposit products to small businesses and low-income households, payments banks will initially be restricted to holding a maximum balance of ₹1 lakh per customer,” the RBI said.

A small bank, on the other hand, will be allowed to accept deposits as well as lend but its operations will be restricted to a select category of customers, such as small farmers and unorganised sector entities.

Also, a small bank’s operations will be limited to a well-defined area geographically, such as a State or a Union Territory, to give a very “local feel.”

Both the payments bank and the small bank promoters will have to keep their other financial and non-financial services separate. A payments bank and a small bank can be set up with an initial capital of at least ₹100 crore, each.

It said existing pre-paid instruments providers, non-banking finance companies, corporate Business Correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities can apply for a payments bank licence.

Resident individuals/professionals with 10 years of experience in banking and finance, companies and societies will be eligible to set up small banks.

In addition, existing NBFCs, Micro Finance Institutions (MFIs), and Local Area Banks can also opt for conversion to small banks, the RBI said.

Thursday’s announcement also lends a fresh lease of life to those applicants who could not make the cut, when the RBI announced the names of entities who qualified for a universal bank licence. RBI will issue the final guidelines and initiate the process of inviting applications for setting up of payments banks and small banks after receiving feedback on the draft guidelines by August 28.

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