Mumbai: A Reserve Bank of India (RBI) panel has recommended that a special category of banks, called payments banks, be set up to widen the spread of payment services and deposit products to small businesses and low-income households in Asia’s third-largest economy, where about 40% of the population still do not have access to formal financial services.

Such banks will have a minimum entry capital requirement of 50 crore, one-tenth of what a full-service bank requires, since they will have a near-zero risk of default, said the panel headed by Nachiket Mor, a member of RBI’s central board. Payments banks will be required to comply with all RBI guidelines relevant for commercial banks.

Existing banks should be permitted to create a payments bank as a subsidiary, the panel has said.

The Mor panel recommendations for dedicated banks for financial inclusion has come at a time when the central bank is in the process of giving entry to a third set of private banks in India’s 81 trillion banking sector.

An expert panel under former RBI governor Bimal Jalan is currently evaluating the credentials of 25 aspirants, including the Aditya Birla Group, the Bajaj Group and Anil Ambani’s Reliance Group. Besides, in a recent discussion paper on banking structure reforms in the country, the central bank had mooted the idea of differentiated banking licences for specific banking activities.

The central bank put up the report on its website on Tuesday and has invited comments till 24 January. The panel has also recommended the creation of a set of banks called wholesale banks to provide liquidity to other banks and financial institutions creating assets in the so-called priority sectors. Such banks, given that their primary role is to give loans, will only be permitted to accept deposits of more than 5 crore, the panel said. They too will have a minimum entry capital requirement of 50 crore.

Some experts say that existing institutions such as grameen banks can be used effectively to expand access to financial services to the poor.

“The system has failed to use the existing network of small banks such as grameen banks, which were ideally placed for the purpose of financial inclusion. Why does the country need to open new banks for this purpose?" said N.K. Thingalaya, former chairman and managing director of Syndicate Bank and an expert on rural banking. India has 57 grameen banks with more than 17,000 branches across the country.

RBI governor Raghuram Rajan announced the setting up of the Mor panel in September 2013 to study various aspects of financial inclusion, including institutional frameworks and regulations and a comprehensive monitoring framework to track the progress of the financial inclusion of small businesses and low-income households in India.

Members of the panel include Prakash Bakshi, former chairman of National Bank for Agriculture and Rural Development, and Bharat Doshi, chairman of Mahindra and Mahindra Financial Services Ltd.

The Mor panel has also proposed the creation of a universal electronic bank account (UEBA) for all adult Indian citizens and access to formal credit for low-income households and small businesses by January 2016 and major changes in priority sector lending norms, among other things. The country should have enough number and distribution of electronic payment access points so that “every single resident would be within a 15 minute walking distance from such a point anywhere in the country" by January 2016, the panel said.

Shikha Sharma, managing director and CEO of Axis Bank Ltd; and S.S. Mundra, chairman and managing director of Bank of Baroda—both members of the panel—in a note to Mor said that January 2016 can be “an aspirational goal" for nationwide spread of banking services but given the “scale of the task", January 2018 is a more realistic deadline.

On UEBAs, the panel said every resident should be issued a UEBA automatically at the time of receiving their Aadhaar number by a “high quality, national, full-service bank". An instruction to open the bank account should be initiated by Unique Identification Authority of India upon the issuance of an Aadhaar number to an individual over the age of 18. To open such an account the customers will not be charged an account opening fee but the banks will be free to charge for all transactions, including balance enquiry.

Financial inclusion has been a key objective of both the apex bank and the Congress-led United Progressive Alliance government for several years.

RBI introduced a three-year financial inclusion programme in April 2010 that saw banks opening outlets in 200,000 villages. The banking regulator has asked banks to draw up a financial inclusion plan for 2013-2016 to broaden access.

According to the panel, by 1 January 2016, each low-income household and small business would have “convenient" access to providers that have the ability to offer them “suitable" investment and deposit products, and pay “reasonable" charges for their services.

In order to encourage banks to actively manage their exposures to various sectors, including priority sector, the panel has proposed to make it mandatory for banks to disclose their concentration levels to each segment in their financial statements. Under the priority sector lending, banks are required to lend 40% of their loans to agriculture and economically weaker sections of the society.

The panel has also proposed to do away with the requirement of prior approvals from RBI to create dedicated subsidiaries for financial inclusion.

Even though banks are already permitted to set up specialized subsidiaries after getting specific approvals from RBI, no approvals have been granted potentially due to concerns around circumvention of branch licensing guidelines, the panel said.

Noting that banks may choose to focus their priority sector strategies on different customer segments and asset classes, the panel has recommended that RBI should provide specific guidance on differential provisioning norms at the level of each asset class.

Also, the panel has proposed that all loans given to landless labourers and small and marginal farmers be counted as a part of direct agriculture and not merely the wages component of a loan given to a farmer for financing her agricultural production.

At the end of November, banks have lent 1.7 trillion to various sectors under priority sector lending, compared with 1.4 trillion a year-ago.

To enable non-banking financial companies (NBFCs) to become more active in spreading financial inclusion, the Mor panel has recommended a partial convergence of norms for NBFC and banks with regard to bad loan norms.

Presently, if a loan is not repaid for 90 days, banks can qualify this as non-performing assets (NPAs), while for NBFCs, this period is 180 days. Also, if the account remains as an NPA for 12 months, banks have to classify this as a sub-standard asset, while for NBFCs, the period is 18 months. There is a case for convergence in norms on these areas for both types of institutions, provided risk-based approaches are followed, the panel said.

Besides, the panel has proposed to restore the permission of non-deposit taking NBFCs to act as business correspondents of a bank.

According to the panel, the apex bank must represent to the ministry of finance to restore the tax-free status of securitization deals conducted through pass-through vehicles for tax treatment, pointing out the role it would play in ensuring efficient risk transmission.

Also, banks must be permitted to purchase portfolio-level protection against all forms of rainfall and commodity price risks, through the use of financial futures and options bought either within India or globally.

Besides, universal reporting to credit bureaus should be mandated for all loans, both individual and small and medium enterprises, but in particular self-help group (SHG) loans, kisan credit cards, and general credit cards, the panel said. SHGs are groups of small women borrowers.

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