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Fri, Jul 18 2014. 12 09 AM IST

RBI proposed to allow mobile telephone firms, prepaid
instrument issuers, supermarket chains and cooperatives
to set up payment banks, while also allowing banking
professionals and microfinance institutions to set up a
small bank. Photo: Pradeep Gaur/Mint
RBI releases draft guidelines on payments, small banks
Payments banks to be limited to deposits and remittances; small banks to provide full suite of services
Mumbai: A range of entities, from mobile phone companies to
supermarket chains, may be allowed to set up so-called payments
banks under draft guidelines unveiled on Thursday by the Reserve
Bank of India (RBI) in an attempt to widen access to financial
products and services in the country.
While these banks will be limited to accepting deposits and
remittances of funds, the central bank proposes to allow another
category of institutions called small banks to be set up by bankers
and microlenders that will provide a full suite of basic banking
services, including loans and deposits.
The proposals, part of two separate sets of draft guidelines, were
hailed by analysts and bankers, but some questioned the viability of
the proposed business models. RBI will accept feedback on the
proposals until 28 August before it releases the final guidelines.
The minimum capital needed to start the banks is `100 crore
double the amount suggested in January by an RBI committee
headed by Nachiket Mor, a former executive director at ICICI Bank
Ltd, that studied ways to promote financial inclusion in a country
where 40% of the adult population has no access to basic banking
services.
Both forms of banks cannot have other subsidiaries to sell non-banking financial services. Other activities of the promoters of a payments
bank should be kept distinctly ring-fenced and not comingled with the banking and financial services business, RBI said.
These basic forms of banks will primarily offer low-cost services and operate in the hinterland of the country where no bank has any
presence.
Mobile telephone companies may be suitable to promote such banks because India has the second largest mobile phone user base in the
world with over 900 million users.
The draft guidelines by RBI made it clear that payments banks can accept current and savings bank deposits, but such banks cannot
undertake lending activities.
Apart from maintaining a cash reserve ratio, or the portion of deposits a bank is required to keep with the central bank without earning any
interest on it, the payments bank will be required to invest all its monies in government securities/treasury bills with maturity up to one year
that are recognized by RBI as eligible securities for maintenance of statutory liquidity ratio (SLR).
SLR is the proportion of deposits that banks are required to invest in government securities.
One-year deposit rates at nationalized banks are roughly 7-8%. After adding the overhead cost, the payments banks will be left with a wafer-
thin margin to operate, analysts said.
Telecom companies will lap up the idea because they already have the infrastructure to reach the customers through their mobile
networks. For others to be profitable, they have to be very innovative with their technology in reducing cost, said Saurabh Tripathi, a
partner and director for financial institutions practice at Boston Consulting Group.
Large volumes are a possible solution, said M.D. Mallya, a former chairman of state-run Bank of Baroda.
The 100 crore tag (as minimum capital) doesnt look too big. A payments bank, though it has large potential, has restricted operations. A
viable business model needs to be worked out for such banks. The huge volumes in rural and semi-urban areas may help. Also, it needs
to be seen how these banks will be able to compete with established players in the market, Mallya said.
Payments banks can also act as business correspondents for larger banks and thus earn commissions.
RBI is also open to applicants transacting primarily using the Internet. The payments bank is expected to leverage technology to offer low-
cost banking solutions, said the central bank.
Entities applying to become a payments bank must be deemed fit and proper by RBI and have a successful track record of at least five
years in their respective business.
According to Tripathi, payments banks can deliver a big blow to established banks, scooping up the bottom of the pyramid in a much more
cost-effective manner, and this could lead to new technological innovations in the Indian banking industry.
In the case of the new category of small banks, which, unlike a payments bank, should be promoted by resident professionals with 10
years of experience in banking and finance, companies and societies will be eligible as promoters, RBI said.
Existing non-banking financial companies (NBFCs), microfinance institutions and local area banks can also convert into small banks, it
said.
A small bank ...shall primarily undertake basic banking activities of acceptance of deposits and lending to small farmers, small
businesses, micro and small industries and unorganized sector entities, RBI said. The bank will normally be restricted to contiguous
districts in a homogenous cluster of states/Union territories so that the bank has the local feel and culture.
If considered necessary, the bank will be allowed to expand in one or more states in the proximity of its base.
Vijay Mahajan, founder and chief executive of Basix Microfinance, said the group would like to set up a small bank. The group has four
institutions working in the area of financial inclusion, including the microfinance company, a local area bank, a non-profit organization and a
business correspondent company.
To start a bank, the group will have to consolidate everything into a small bank, which can be worth it.
By becoming a small bank, we would be able to offer a variety of services under one roof and can raise deposits, which will reduce a lot of
cost. said Mahajan.
Rishi Gupta, chief operating officer and executive director of FINO, a business correspondent for banks and technology provider for
financial inclusion, welcomed RBIs proposals, but said the company will have to closely look at the viability of such banks.
At least 50% of a small banks loan portfolio should constitute loans and advances of up to `25 lakh in order to extend loans primarily to
micro enterprises. The bank should also comply with the priority-sector lending targets and sub-targets as applicable to the existing
domestic banks, which are required to channel 40% of their loans to borrowers such as farmers and small industrial units.
Since both kind of banks will not deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I
standards. Full banks have moved on to the Basel III norms under which the capital requirement is much steeper. Capital adequacy is a
measure of a banks financial strength and is expressed as a ratio of capital to risk-weighted assets
Out of the minimum capital requirement of `100 crore for such banks, promoters would need to make an initial contribution of at least 40%
of the equity capital with a five-year lock-in. The banks would also be required to comply with CRR and SLR norms.