Payments Banks & Small Banks

In the liberalized financial world, every citizen need to have a bank account to meet their financial needs may be savings, borrowings and remittances. This is more so with the unbanked and under-banked population. However, the fact remains that the transaction costs have become barriers for penetration of banking into rural and unbanked areas. In the above backdrop, Reserve Bank of India has initiated steps to introduce the concept of setting up of “Payments Banks” and “Small Banks”.

Payments Banks: The primary objective of setting up of Payments Banks will be to further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology driven environment.

The eligible promoters will include existing non-bank prepaid payment issuers and other entities such as individuals/professionals, NBFCs, Corporate Business Correspondents, Mobile telephone operators and Super market chains. A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payment bank subject to the stake holding complying with Banking Regulation Act. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of at least 5 years in running their businesses. The Payments Bank will be set up as a differentiated bank and shall confine its activities to further the objectives for which it is set up. Therefore, the Payments Bank would be permitted to undertake only certain restricted activities such as:

• Acceptance of demand deposits (current and savings bank deposits). Payments Banks will initially be restricted to holding a maximum balance of Rs.100,000 per customer. After the performance of the Payments Bank is gauged by the RBI, the maximum balance can be raised. However, the payments bank cannot undertake lending activities.
• The Payments banks will provide small savings accounts and payments/remittance facilities to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users through various channels including branches and BCs and payments of cash at the other end, through branches, BCs, and Automated Teller Machines (ATMs). Cash-out can also be permitted at Point-of-Sale terminal locations as per extant instructions issued under the PSS Act. In the case of walk-in customers, the bank should follow the extant KYC guidelines issued by the RBI. However, these banks are not allowed to issue credit cards.
• A Payments Bank may choose to become a BC of another bank for credit and other services which it cannot offer. The Payments Bank cannot set up subsidiaries to undertake non-banking financial services activities. The other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not comingled with the banking and financial services business of the Payments Bank.

The minimum paid up capital for Payments Bank shall be Rs.100 crore. The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank. Foreign Direct Investors (FDIs) are allowed to invest up to 74 per cent of the paid up capital of the bank.

The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I standards.

RBI has mandated that these banks are required to invest a minimum of 75% deposits collected from the public in government securities up to one year maturity. They are allowed to hold a maximum of 25% in current / fixed deposits with other scheduled commercial banks for operational and liquidity management purposes. These banks are required to maintain CRR and SLR as applicable to the existing commercial banks. The Payments Bank should have a leverage ratio of not less than 3.3 per cent, i.e., its outside liabilities should not exceed 33 times its net-worth / paid-up capital and reserves.

The most obvious candidates for payments banks are Shriram Capital, Magma Fincop, Muthoot Finance, Indian Post, Bharati Airtel, Vodafone India, Tata Teleservices, Western Union and online digital payment players such as Paytm, Oxigen, Mobikwik etc.

The Payments Bank has plenty of business potential as the command area (rural and semi-urban) is unbanked or under-banked. However, the players need to adopt appropriate cost effective innovative viable business model.

Small Banks: Majority of residents of Rural areas are deprived of basic banking services on account of non availability of bank branches due to high cost operations and low volume. To address this issue RBI allowed permitted to set up Local Area Banks (LAB) in the year 1996. At present four LABs are functioning satisfactorily and playing an important role in the supply of credit to micro and small enterprises, agriculture and banking services in the unbanked and under-banked regions. To strengthen the existing system further, RBI issued fresh guidelines for licensing of small banks in the private sector in the month of July 2014. The objective of Small Banks will be for furthering financial inclusion by extending basic banking services to underserved and unserved sections of the population and also to extend credit facilities to small business units, small farmers, micro and small industries and other unorganized sector entities in their limited areas of operations through high technology & low cost operations.

Resident individuals/professionals with 10 years of experience in banking and finance, Companies and Societies will be eligible as promoters to setup Small Banks. Existing NBFCs, MFIs and LABs can also opt for conversion into Small Banks after complying with all legal and regulatory requirements. Local focus and ability to serve small customers will be a key criterion in licensing Small Banks. RBI would assess the “fit and proper” status of the applicants on the basis of their past record of sound credentials and integrity etc., for at least a period of 5 years. However, the proposals from large public sector entities and industrial and business houses, including NBFCs promoted by them, will not be entertained to setup small banks.

The area of operations of the Small Banks will normally be restricted to contiguous districts in a homogeneous cluster of States/Union Territories. However, the bank will be allowed to expand its area of operations beyond contiguous districts in one or more States with reasonable geographical proximity. These banks must have at least 25% their branches in unbanked rural areas.

The minimum paid up capital for Payments Bank shall be Rs.100 crore. The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank.

These banks are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of CRR/SLR and priority sector lending targets. The maximum loan size and investment limit exposure to single/group borrowers/issuers will be restricted to 15% of its capital funds. At least 50% of its loan portfolio should constitute loans and advances of size up to Rs.25 lakh in order to extend loans primarily to micro enterprises. These banks are required to extend 75% of its Adjusted Net Bank Credit to priority sector which include agriculture, micro loans, rural home loans, education loans etc. Small banks are required to maintain a minimum capital adequacy ratio of 15% of the loans on a continuous basis.

Both Payments Banks and Small Banks are “niche” or “differentiated” banks, with the common objective of furthering financial inclusion. Technology plays a major role in this regard. The Payments Banks definitely unlocks business potential and paves the way to reach the bottom of pyramid, which is a long cherished desire of the nation.