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Final Norms Issued for Small, Payment Banks
Dec 03, 2014

Telcos, supermarkets, and even companies that run electronic wallets (or other prepaid instruments) can open payments banks in the country. Reserve Bank of India (RBI) released final rules for such entities.

The move is aimed at providing basic savings, deposit, payment, and remittance services to people who currently do not have a bank account, including millions of migrant workers. 50 percent of Indians don’t have bank accounts. The central bank also released rules for small banks, which will provide loans to small businesses and marginal farmers.

Draft guidelines for both were released on 17 July.

While the final norms are similar to those suggested in the draft rules, the central bank has expanded the scope of the business for such entities and given them more leeway in the manner in which deposits raised by them are deployed. In the case of payments banks, entities ranging from telecom companies and Prepaid Payment Instrument issuers (PPIs), to supermarket chains and Non-Banking Finance Companies (NBFCs) can apply.

A promoter can also choose to have a joint venture with an existing scheduled commercial bank to set up a payments bank. 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 payment banks. The minimum paid-up equity capital for these banks will be Rs.100 crore, while the promoter contribution has been set at a minimum of 40 percent at the start. Promoters are no longer needed to bring down their shareholding from 40 percent to 24 percent over 12 years, as was suggested in the draft norms.

Foreign shareholding limit will be at par with private banks—currently set at 74 percent.

Payments bank will initially be restricted to holding a maximum balance of Rs.1,00,000 per individual customer. They can offer payments and remittance services and issue ATM/debit cards, but not credit cards. Such entities can also distribute simple financial products such as mutual fund units and insurance products.

One important change in the final norms for payments banks, compared with the draft, is the manner in which they will be allowed to deploy their funds and the leverage ratio allowed. As per final guidelines, apart from amounts maintained as cash with the central bank (defined by the cash reserve ratio (CRR), payments banks will be required to invest at least 75 percent of their demand deposits in statutory liquidity ratio (SLR) eligible government securities or treasury bills with maturity up to one year. The remaining 25 percent of their fixed deposits can be parked with other scheduled commercial banks for operational purposes and liquidity management.

RBI also released guidelines for small banks which are intended to provide savings products and credit to small businesses, and small and marginal farmers. Unlike in the draft norms, there will be no geographical restriction on the area of operation for such banks. However, as a way to ensure that only those serious about the business set up such banks, 75 percent of loans must be to the so-called priority sector which includes agriculture and small businesses. And half the loan portfolio of the banks should be loans and advances of upto Rs.25 lakh.

The minimum paid-up equity capital for small banks is Rs.100 crore, lower than the Rs.500 crore for new full-fledged private banks, norms for which were issued earlier this year. However, these banks will have to maintain the mandatory 4 percent of their deposits as CRR and hold 22 percent  of their deposits in government securities.

RBI has also raised the priority sector lending requirement to 75 percent from 40 percent earlier, which means that only those players who are serious about small lending would be interested in applying. Promoters of small banks must own 40 percent equity in the new venture initially, but will need to bring this down to 26 percent within 12 years from the date of commencement of business.

Foreign shareholding in these banks has been capped at 74 percent just like in existing private banks.

Applications for these new kind of banks will be accepted till 16 January. Applications will be screened by an external advisory committee comprising of bankers, chartered accountants, finance professionals. The validity of the in-principle approval issued by the Reserve Bank will be 18 months.


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