RBI issues final norms for payment, small finance banks

Mumbai: Introducing a new concept of niche banking in India, RBI on Thursday issued final norms for payment banks and small finance banks that would allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses.

The move, aimed at deepening financial inclusion and boost saving habits, comes within seven months of RBI issuing two full-fledged banking licences in April this year after a gap of over a decade.

As per the guidelines, those seeking to set up these two new categories of banks would need minimum Rs 100 crore of capital and fulfil the necessary 'fit and proper' criteria, among other conditions. Those interested, would need to apply before January 16 for first round of such permits, while RBI may come up with another round at a later stage.

Among others, existing NBFCs and micro finance lenders would be allowed to set up small finance banks, while large public sector enterprises and big industrial houses would not be allowed to establish such banking entities.

For payment banks, which would not be allowed to undertake lending activities, the state-run entities would be eligible to apply.

Such banks will initially be restricted to holding a maximum balance of Rs 1 lakh per individual customer. They will be allowed to issue ATM/debit cards as also other prepaid payment instruments, but not the credit cards.

They can also distribute non-risk sharing simple financial products like mutual funds and insurance products, but Non resident Indians will not be allowed to open accounts.

RBI said it wants the new banks to leverage on technology and have a presence through internet banking, but was quick to clarify that it will not allow any "virtual" bank without a physical presence on the ground.

While such niche banks are common in advanced economies, there are 27 state-owned and 22 private sector banks with full fledged banking operations at present in India.
The small finance bank will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities, RBI said.

There will not be any restriction in the area of operations of small finance banks. However, at least 50 percent of its loan portfolio should constitute loans and advances of upto Rs 25 lakh.

Those eligible for setting up payment banks include individuals or professionals with necessary experience and eligibility, existing Non-Banking Finance Companies (NBFCs), corporate banking correspondents, mobile telephone companies, super-market chains, real sector cooperatives and corporate entities.

The foreign holdings in both two kinds of new banks would be allowed as per the applicable FDI limits for private banking sector.

The applicants for payment banks would need to approach RBI with a detailed business plan with all necessary disclosures on ownerships, among other parameters, the central bank said, while adding that preference will be given to those interested in setting up a network in areas in north-east and central India with low banking penetration.

At least a fourth of the access points of the bank would need to be in rural centres, the RBI said.

A host of entities, especially those who lost out to enter the universal banking fray, have expressed interest in turning themselves into a Payment Banks. These included gold lenders like Muthoot Finance and Manappuram Finance, while Department of Posts is also believed to have been interested.

Among telecom operators, Bharti Airtel's name has been doing the rounds as a possible contender.

As pe RBI norms, promoters will be allowed to tie up with an existing commercial bank to set up a Payments Bank, or take an equity stake in the new entity.

RBI said it would adopt a cautious approach in licensing payments banks in the initial years and it may not be possible to issue licenses to all applicants.

Earlier this year, RBI issued license to IDFC and Bandhan to set up full-fledged banks in first licenses, while initially 26 entities had applied including Tata group, Reliance Group, L&T and Bajaj among others.
RBI said that the "objectives of setting up of small finance banks will be to further financial inclusion by provision of savings vehicles, and supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations."

The eligible promoters for small finance banks would include resident individuals or professionals with 10 years of experience in banking and finance, and companies and societies owned and controlled by residents will be eligible to set up small finance banks.

Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

Promoter/promoter groups should be ?fit and proper? with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

The promoter's minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 percent for the first five years from the commencement of its business.

The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms. The bank should have a high powered Customer Grievances Cell too.

An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc, will evaluate the applications for both payments banks and small finance banks.

The decision to issue an in-principle approval for setting up of banks will be taken by the Reserve Bank. The validity of in-principle approvals issued by the Reserve Bank will be 18 months.

In the Union Budget 2014-2015, Finance Minister Arun Jaitley had said, "After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year.

"RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. Are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force."
Subsequently, RBI had released draft guidelines for licensing of payments banks in the private sector on July 17.

The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 percent and gradually brought down to 26 percent within 12 years from the date of commencement of business of the bank.

If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but would be subject to fulfilling minimum paid-up capital or net worth requirement as applicable to universal banks.

It would also depend on a "satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank's due diligence exercise".

The small finance banks will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

"No forbearance would be provided for complying with the statutory provisions," RBI said.

The small finance banks will be required to extend 75 percent of Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL).

On the remittances front, the Payments Bank will be allowed to use various media like ATMs, business correspondents and mobile handsets, while on the cash-out front, RBI has permitted the use of point of sale machines at merchant establishments.

On the fund allocation side, the RBI has mandated the Payments Banks to invest 75 percent of its demand deposits in government securities or treasury bills while it can hold a maximum of 25 percent in current accounts with commercial banks for liquidity management.

Due to the lower risk, the RBI has not put any upper cap on the promoter holding, but said it should not be lower than 40 percent during the first five years.

The RBI said the Payments Banks will be required to list within three years of touching a net worth of Rs 500 crore.

On foreign holding, RBI said it shall be at par with the guidelines for private banks, where the law caps the maximum overseas holding at 74 percent from all sources.