Mumbai: The Reserve Bank of India (RBI) said that payments banks and small finance banks would be required to maintain higher capital buffers than scheduled commercial banks. 

These new format banks should maintain a capital adequacy ratio of 15% when starting operations, RBI said in operational guidelines issued on Thursday.

Both tier-I capital, or core capital, and tier-II capital will have to be 7.5% each. In comparison, under Basel III norms, full-fledged commercial banks have been asked to maintain a capital adequacy ratio of 10.25% by March 2017 and 11.5% by March 2019.

Capital adequacy is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets. 

Payments banks and small finance banks would not be required to maintain any capital conservation buffers and countercyclical buffers. Universal banks are currently required to maintain a capital conservation buffer of 1.25% by March 2017 and 2.5% in the following two years. 

A capital conservation buffer is additional capital buffer over the minimum requirement that banks have to hold. When a bank breaches the buffer, automatic safeguards apply to limit the amount of dividend and bonus payments it can make. Countercyclical buffer is a capital reserve built in good times which may be used to maintain credit flow in difficult times.  “Small finance banks have ramped up their books significantly recently and it is a good move by the central bank to keep capital adequacy ratio at 15%. However, in the long run, this should be same as of (regular) banks for a level-playing field," said Abizer Diwanji, partner and head of financial services at EY.

However, higher capital requirements for payments banks do not make much sense since they do not have any lending risks, he added. 

Payments banks are only allowed to accept deposits up to Rs1 lakh from each customer and are mandatorily required to invest 75% of their total deposit base in government securities.

One reason why the regulator stipulated a higher capital for payments banks is to avoid the impact of operational losses, said Bhavik Hathi, managing director at Alvarez & Marsal India.

RBI has also allowed for electronic signatures to be used for know your customer (KYC) requirements in these new banks. In case of payments banks, where the owner is a telecom company, RBI has said that the KYC conducted by the owner firm can be used as KYC by the banks as well.

E-KYCs would allow these new-age banks to conduct banking activities without necessarily setting up physical locations. 

“This will help reduce the capital expenditure for the setting up of brick and mortar branches," said Rishi Gupta, managing director and chief executive officer of Fino Pay Tech Ltd.

For physical access points, the payments banks will be required to submit an annual growth plan to RBI for prior approval during the first five years. Later, RBI may choose to relax the prior approval norm, it said.

Payments banks and small finance banks will also be allowed to work with group companies, employing them as business correspondents (BCs) and using their premises to conduct banking business, albeit at an arm’s length. 

Small finance banks will be permitted to use interest rate futures and foreign exchange derivatives only for proprietary hedging, the regulator said.

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