What is Differentiated Bank license Policy?

Differentiated bank license policy refers to the new guidelines by the RBI inviting individuals/entities to start banks in the form of either small finance banks or payment banks.

Differentiated licensing refers to the system of different licenses in contrast to the existing universal bank (SBI, ICICI etc). The universal banks including the PSBs and private sector banks can provide all banking services and products. On the other hand, under differentiated banking license, the Small Finance Banks and Payments Banks can provided only selected products (and in prescribed geographies).

They can engage in sub sectors of the banking sector such as Limited Banking License, Commercial Banking License etc. A differentiated license will allow a bank to offer products only in select verticals.

Several regulatory requirements for these banks also are different compared to the conventional universal banks. For example, the Payment Banks and Small Finance Banks should have a minimum capital of Rs 100 crores. On the other hand universal banks should have a capital of Rs 500 crore. Payment Banks can’t give loans. Small Finance Banks should give 75% of its loans to priority sectors.

RBI has adopted differentiated banking license policy to promote financial inclusion and to enable quick payment services using the new technologies.

This differentiated bank structure could help new banks focus on niche lending opportunities and get a regulatory treatment different from other banks.