The Reserve Bank of India (RBI) has issued final guidelines for setting up new ‘small finance’ and ‘payments’ banks to support financial inclusion by providing small savings accounts, payments/remittance services to migrant labour workforce and low income households and supply of credit to small business units among others.
This follows the announcement in the Union Budget in July to create differentiated banks serving niche interests, local area banks, payment banks etc. to meet credit and remittance needs of small businesses, unorganised sector, low income households, farmers and migrant work force.
RBI had issued draft guidelines in the same month and has now frozen the guidelines based on comments from all stakeholders. Much of the original proposed guidelines have been retained in the final form.
RBI said an external advisory committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications. The decision to issue an in-principle approval for setting up of a bank will be taken by RBI, which would be final.
The validity of the in-principle approval issued will be eighteen months.
Here’s a quick snapshot of the guidelines
For payments banks, the promoter can be an existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.
It may also be set up as a JV with an existing scheduled commercial bank, with riders. Moreover, the promoters should be ‘fit and proper’ with a sound track record of professional experience or running their businesses for at least a period of five years in order to be eligible to promote payments banks.
For small finance banks, resident individuals/professionals with at least 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 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.
Scope of activities
Payments banks would be able to accept demand deposits with a cap of Rs 1 lakh per individual customer. They can issue ATM/debit cards but not credit cards. They can also provide payments and remittance services through various channels and become business correspondent of another bank. Moreover, they can distribute non-risk sharing simple financial products like mutual fund units and insurance products, etc.
The small finance bank shall 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. There will not be any restriction in the area of operations of small finance banks.
Deployment of funds
For payments bank, the guidelines reiterate that the payments bank cannot undertake lending activities and apart from amounts maintained as Cash Reserve Ratio (CRR) with the RBI on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
The minimum paid-up equity capital for both payments banks and small finance banks shall be Rs 100 crore. However, as an additional requirement, the payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
The promoter’s minimum initial contribution to the paid-up equity capital of payments bank shall at least be 40 per cent for the first five years from the commencement of its business.
In the case of small finance banks the promoter’s minimum initial contribution shall also be at least 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.
The foreign shareholding in both the cases would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
As per the current FDI policy, the aggregate foreign investment in a private sector bank from all sources will be allowed up to a maximum of 74 per cent of the paid-up capital of the bank (automatic up to 49 per cent and approval route beyond 49 per cent to 74 per cent). In the case of FIIs/FPIs the holding is restricted to below 10 per cent of the total paid-up capital, aggregate limit for all FIIs /FPIs / Qualified Foreign Investors (QFIs) cannot exceed 24 per cent of the total paid-up capital, which can be raised to 49 per cent of the total paid-up capital by the bank concerned through a resolution by its board. In the case of NRIs, the individual holding is restricted to 5 per cent and aggregate limit cannot exceed 10 per cent both on repatriation and non-repatriation basis. However, NRI holding can be allowed up to 24 per cent of the total paid-up capital provided the banking company passes a special resolution to that effect.
Prudential norms & transition path for small finance banks
It shall 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). The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the RBI and at least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs 25 lakh.
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 / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank’s due diligence exercise.