Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

RBI answers payments, small banks queries

The central bank's clarifications include the fact that payments banks can offer lockers and vaults

On 1 January, the Reserve Bank of India (RBI) gave an extension of 17 days to submit applications for licences of small finance and payments banks. Earlier, the deadline was 16 January. Since the RBI received many requests seeking an extension, it decided to extended the deadline to 2 February.

The central bank also issued clarifications on the guidelines for these niche banks. In November 2014, RBI had issued guidelines for licensing of small finance banks and payments banks, and had invited queries from applicants seeking clarifications. It received 176 queries on the small finance bank guidelines and 144 for payments banks. As of now, for both the types of banks, RBI is yet to give a timeline for the issuance of licences. The central bank has stated that this will depend on the number of applications received and the time taken to complete the approval process.

Here are some of the clarifications that the central bank gave on the kinds of products and services that these niche banks can offer.

Payments banks

The primary objective of payments banks, as stated by RBI before, will be to focus on domestic payments services.

According to the guidelines, payments banks can open small savings accounts and accept deposits of up to 1 lakh per individual customer and provide remittance services. Hence, the balance at the close of business on any day should not exceed 1 lakh per customer. RBI, on Thursday, clarified again that payments banks can’t accept fixed deposits (FDs), term deposits, recurring deposits (RDs) and any non-resident Indian deposits. However, in-bound remittance into accounts maintained by residents with payments bank will be considered as deposits.

These banks can offer locker or vault services to enhance revenue generating opportunities. This means that customers will now have more locker services options via payments banks.

The banks will have to provide normal banking services including accepting deposits repayable on demand or otherwise, and withdrawal by cheque, draft or order, except lending. This means, customers need to be given chequebooks and passbooks.

Payments banks can issue debit cards with Visa, MasterCard or Rupay, and are allowed to set up their own ATMs (automated teller machines). RBI stated that the current norms of free ATM transactions will be applicable to these banks as well.

“Allowing payments banks to offer lockers and set up ATMs is a good move. However, payments banks can’t be compared with a commercial bank and, hence, keeping the number of free ATM transactions at par with a large bank is not the best thing to do. It will be difficult for the payments bank to recover costs and can discourage setting up ATMs. Also, it may not be possible for a payments bank to offer many lockers since it works on an access point model, whereas banks have branches where they can offer lockers," said Pramod Saxena, chairman and managing director, Oxigen Services (India) Pvt. Ltd. The company plans to apply for a payments bank licence, and is ready with its application, added Saxena.

Payments banks are eligible to become members of clearing houses and electronic clearing services, so they can provide consumers the ease of transferring money. They will also be allowed to connect to the national unified unstructured supplementary service data platform of the National Payments Corp. of India. This simply means that customers of payments banks can avail mobile banking services.

Know-your-customer (KYC) norms will be as per the KYC guidelines applicable to other scheduled commercial banks.

These banks are allowed to appoint business correspondents who can facilitate activities such as loan sourcing for some other banks in addition to performing payment related activities for the payments banks. They can sell credit products, mutual fund schemes, insurance and trading products to customers on behalf of other banks and can recruit kirana stores across the country as business correspondent agents to promote their services.

The payments banks can undertake other non-risk sharing, simple financial services activities or non-risk government services—such as Aadhaar enrolment—that doesn’t require any commitment of their own funds.

Small finance banks

Small finance banks will be allowed to take deposits as well as lend money, and their focus will be on small lending.

One of the concerns raised was that since the new banks will have to use the words ‘small finance banks’ in its name, it will be a major challenge with regards to brand awareness and brand equity compared with existing banks. It is a worry that it will take a long time for these banks to build a good level of retail deposits and depositors would assume that since these are ‘small’ banks, they might not be not as safe as ‘larger’ banks. RBI, however, reiterated that the words ‘small finance bank’ has to be in the bank’s name.

In terms of products, these banks can offer payment or remittance products as well as access to ATMs and point-of-sale terminals. Analysts say these banks are not expected to come out with personal loan products. “Lending products will cater to day-to-day requirements and don’t expect long-term financing right now. You will mostly see micro-finance kind of lending products. Farm and gold loan products can be expected to be rolled out by these banks. The main objective will be to address the needs of cash-in and cash-out and the entire book will consist of retail products," said Abhishek Kothari, banking analyst, Quant Broking Pvt. Ltd.

RBI also stated that the operations of the bank should be technology-driven right from the beginning, conforming to generally accepted standards and norms. The banks are being encouraged to have new approaches for data storage, security, real time data update and so on. A detailed technology plan for the same has to be given to RBI. Expect innovation with the help of technology from these banks.

Through these clarifications, RBI has reiterated most of the points in the final guidelines. Read at: