RBI committee moots banks for low income households

A Reserve Bank of India committee has recommended setting up a special category of banks with a primary role to provide payment services and deposit products to small businesses and low-income households.

Such banks, which may be categorised as Payments Banks, will be restricted to holding a maximum balance of Rs 50,000 (or around $800) per customer.

RBI had set up the Committee on Comprehensive Financial Services for Small Business and Low Income Households, under the chairmanship of Nachiket Mor, last September. RBI has sought comments from the public on the draft recommendations on or before January 24, 2014.

The committee said the proposed Payments Banks will be required to meet the CRR requirements applicable to all other banks and will also be required to deposit the balance proceeds in approved SLR securities with duration of no more than three months and will not be permitted to assume any kind of credit risks.

Given the near-zero risk of default, the minimum entry capital requirement for such banks will be Rs 50 crore compared to the Rs 500 crore required for full-service commercial banks in the country.

The existing banks should be permitted to create a Payments Bank as a subsidiary, the committee added.

The committee has also recommended a set of Wholesale Banks whose primary role would be to lend and would only accept deposits larger than Rs 5 crore.

Since other banks are expected to lend large amounts to such Wholesale Banks, those other banks will be permitted to deduct their net assets to the banking system from the computation of their ANBC (the amounts on which PSL requirements are to be applied).

In view of the fact that they will not take retail deposits, the minimum entry capital requirement for such banks will be Rs 50 crore compared to the Rs 500 crore required for full-service commercial banks.

Moreover, if such a bank has fewer than twenty branches, it will not be required to meet the 25 per cent branching requirement. Institutions with twenty or fewer branches could be referred to as Wholesale Investment Banks while those with a larger branch network could be referred to as Wholesale Consumer Banks, the committee noted in its draft report.

The committee, while laying down its vision statement for financial inclusion and deepening, has suggested providing a universal bank account to all Indians above the age of eighteen years.

On priority sector, the committee has recommended adjusted priority sector lending target of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending. It has also recommended risks and liquidity transfers through markets. In view of the fact that banks may choose to focus their priority sector strategies on different customer segments and asset classes, the committee has recommended that the regulator should provide specific guidance on differential provisioning norms at the level of each asset class.

On the definition of Non-Banking Finance Companies (NBFCs), the committee has recommended only two categories - one for core investment companies and another category for all other NBFCs. It has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

The committee has also said that a State Finance Regulatory Commission (SFRC) be created into which all the existing state government-level regulators could be merged and functions like the regulation of NGOs, microfinance institutions and local money services business could be added on.

Meanwhile, two members of the committee Axis Bank chief Shikha Sharma and SS Mundra, CMD of Bank of Baroda, noted their opposing views on some of the recommendations of the other members and in a separate note mooted the proposal for ‘Priority Sector Deposits’ (PSD).

They have suggested that RBI may consider identifying certain deposits as PSD and provide certain enablers to the banking system towards achievement of the same. They said PSD would act as a catalyst for the banking system to penetrate into hitherto unbanked regions.

The two bankers said such PSDs may include deposits originating from identified districts in under-banked/unbanked regions and deposits from weaker section and those below the poverty line. They added that since banks shall incur relatively higher costs for origination and servicing of PSD they may be incentivised for actively pursuing PSDs with relaxed Priority Sector Lending (PSL) targets and exemption from maintaining the requisite investments in CRR and SLR securities corresponding to these PSD.

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