Origin and Scope of Differentiated Banks in India

Origin and Scope of Differentiated Banks in India

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Differentiated banks operate in a specific market, making them distinct from universal banks. The difference could be due to the need for capital, the scope of activities, or the area of operations. Mr. Nachiket Mor's RBI committee suggested licensing payments and small finance banks as distinct banks. The Advisory group thought that it would to have the administrative adaptability to move toward installments, investment funds, and credit freely and to unite them when productivity gains are high and different expenses are low. It can do most banking things, but it can't give out loans or credit cards. It is able to take demand deposits of up to Rs 1 lakh, offer remittance services, mobile payments, transfers, and purchases, and provide additional banking services such as ATM/debit cards, net banking, and third-party fund transfers.

By providing savings vehicles and credit to small business units, licensing small finance banks aims to promote financial inclusion; marginal and small farmers; small and micro businesses; and other entities in the sector that are not organized, through low-cost, high-tech operations. Nearly 40% of the population, according to estimates, does not have access to formal banking. A top priority is spreading financial literacy alongside the banking habit. A step toward financial inclusion is the establishment of these niche banks.

Analyzing Differentiated Banks' Performance in India

• Expanding Financial Inclusion: By lending more money to micro, small, and medium-sized businesses, small finance banks have been able to achieve their stated goal of increasing financial inclusion.

• Increase in Assets: According to a study about the business of small finance banks that was published by the RBI between the financial years 2017-18 and 2019-20, these banks' assets have increased by 150 percent annually.

• However, this expansion began at a low point. The sectors of agriculture, trade, and professional services were largely responsible for the asset growth.

• Increased Deposits: Deposits at small finance banks have also increased rapidly. Since most microfinance institutions became small finance banks, their primary goal has been to raise deposits in order to obtain cheaper funding.

• Increase in Expansion: There has been ascend in the quantity of Installment Banks and little money Bank offices.

Still, these banks may require a more effective approach to expand their network and reach underserved areas. The urban and semi-urban centers contain approximately 65% of these branches, demonstrating concentration. More than 25% of the branches of only three small finance banks were located in rural areas.