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Mumbai: Telcos, supermarkets, and even companies that run electronic wallets (or other prepaid instruments) can open so-called payments banks in the country, with the Reserve Bank of India (RBI) releasing 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. Fifty per cent 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, said RBI, adding that 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," RBI said.

The minimum paid-up equity capital for these banks will be 100 crore, while the promoter contribution has been set at a minimum of 40% at the start.

Promoters are no longer needed to bring down their shareholding from 40% to 24% over 12 years, as was suggested in the draft norms.

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

“Diluting promoter shareholding is not required any more, as opposed to what was proposed in the draft guidelines. This is surely a positive. RBI seems to have realized that since these banks will not be involved in lending activities, the promoter shareholding can be relatively higher," said Vibha Batra, group head, financial sector ratings, Icra Ltd.

Payments bank will initially be restricted to holding a maximum balance of 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, said RBI.

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, or CRR), payments banks will be required to invest at least 75% of their demand deposits in statutory liquidity ratio (SLR) eligible government securities or treasury bills with maturity up to one year. The remaining 25% of their fixed deposits can be parked with other scheduled commercial banks for operational purposes and liquidity management.

SLR defines the proportion of deposits banks will have to keep in assets specified by RBI, including gold, and government bonds and securities.

The draft guidelines said the banks would be required to invest all their deposits in SLR securities with one year maturity. This would have limited their ability to generate adequate return on their deposits, consultants and potential applicants said after the release of the draft norms.

If payments banks were asked to hold 100% of their money in SLR holdings, the viability of these banks would have been an issue, said Aman Bhargava, director, financial services advisory, Grant Thornton India Llp. By bringing this down to 75%, RBI has helped them by allowing them to invest in slightly higher yielding products, he added. What remains to be seen is whether there will be any restrictions on how these banks choose to invest the remaining 25%, Bhargava said.

The leverage ratio requirements have also been eased to 3% from the earlier proposed 5%. The Tier 1 leverage ratio is calculated by dividing Tier 1 capital ratio by the firm’s average total consolidated assets. The leverage ratio defines the permitted proportion of outside liabilities to net worth.

“Guidelines for payments banks will be attractive to telecom companies because offering payment services will ensure that they get customers to stick to them in an era of number portability," said Abizer Diwanji, partner, head of financial services at EY.

Spokespersons for Bharti Airtel Ltd, Vodafone India Ltd, Idea Cellular Ltd and Reliance Communications Ltd declined to comment, saying they needed time to review the guidelines before taking any decisions. ​

“The final guidelines look more favourable than the earlier draft version. We will take it up with the board and decide on the next course of action," said Rishi Gupta, chief operating officer and executive director, FINO PayTech Ltd, a payments solution firm.

Small bank norms

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, RBI has said that 75% 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 25 lakh", RBI added, in an attempt to ensure that the borrowers are small businesses.

The restriction on the size of loans could make such banks unviable and “few people will apply for these because it will be difficult to scale up operations as half their loans have to be within 25 lakh", said Diwanji of EY.

Individuals with 10 years of experience in banking and finance and companies and societies controlled by Indian residents together with NBFCs, micro finance institutions and local area banks (LABs) can opt for conversion into small banks, RBI said.

The minimum paid-up equity capital for small banks is 100 crore, lower than the 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% of their deposits as CRR and hold 22% of their deposits in government securities.

“One of the biggest impediments for small finance banks was the geographic limitation that the draft guidelines had talked about. The final guidelines have removed that, which is a huge positive. Additionally, RBI has also raised the priority sector lending requirement to 75% from 40% earlier, which means that only those players who are serious about small lending would be interested in applying," said Batra of Icra. He added that microfinance firms and smaller NBFCs are already working with small borrowers who would be very keen on applying for small bank licences.

Promoters of small banks must own 40% equity in the new venture initially, but will need to bring this down to 26% within 12 years from the date of commencement of business. Foreign shareholding in these banks has been capped at 74% just like in existing private banks.

“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," RBI added.

Application process

Applications for these new kind of banks will be accepted till 16 January, but the central bank also plans to issue them on tap soon. Applications will be screened by a external advisory committee comprising of bankers, chartered accountants, finance professionals.

“The validity of the in-principle approval issued by the Reserve Bank will be eighteen months. The names of applicants for bank licences will be placed on the Reserve Bank’s website," the central bank said.

Beryl Menezes contributed to this story.

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