Mumbai: The waiting is all over, unveiling the new era in the Indian banking space the Reserve Bank of India is all set to call for applications to set up small and payment banks by end of November, 2014.

It was revealed by the RBI Governor Raghuram Rajan at a conference on micro finance business organised by Nabard on Thursday.

These payment banks are aimed at catering to small businesses and low income households thus promoting financial inclusion a reality.

To recall, about five months back, the banking regulator had released draft guidelines for the payment banks, which are allowed to accept deposits and money transfers but not to undertake lending activities. Thus, the payments banks are initially be restricted to holding a maximum balance of Rs 1 lakh per customer.

On the other hand, the small bank can accept deposits as well as lend but its operations will be restricted to a select category of customers, such as small farmers or unorganised sectors. Besides, its operations will be limited to a well-defined area geographically, such as a State or a Union Territory, to give a very “local feel.”

Also, promoters of both these banks 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 Rs 100 crore, each. Addressing micro-financiers at a Nabard function here, Rajan also said that microfinance borrowers should be protected from arbitrary loan pricing. The RBI Governor also reiterated his reservation against repeated loan waivers by various state governments, saying the move distorts credit pricing, thereby also disrupting the credit market.

"There should be a reasonable ceiling on interest rate on loans from microfinance lenders for consumer protection," he said.

Following the October 2010 crisis in the then undivided Andhra Pradesh that crippled the MFI sector, an RBI-appointed Malegam panel had suggested 26 per cent monthly cap on interest rates for the sector. This cap was notified by the central bank in April 2012.

The Andhra Pradesh crisis began after the state government banned recovery by any coercive means, following a string of alleged suicides by micro-credit borrowers.Both Andhra Pradesh and Telangana governments have declared loan waivers for the farmers hit by cyclone Phailin last year.

While the Telangana government has given the mandated 25 per cent of the written off loan amount to the banks, Andhra Pradesh has not done it so far.

Banks have over Rs 1.3 trillion exposure to the farm sector in these two states.