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RBI opens doors to niche banks

Mumbai, July 17: Companies that nursed ambitions of entering the banking arena but were left out in the cold in April have a chance to make a grab for a new set of licences for which the Reserve Bank of India put out draft guidelines on Thursday.

The banking regulator opened the doors a little wider by unveiling the rules of the game for two new categories of payment banks and small banks in the private sector with a minimum capital requirement of Rs 100 crore.

In April, the RBI had cherry-picked just two entities — IDFC and Calcutta-based Bandhan Financial Services — from a field of 25 for the award of full-service banking licences for the first time in a decade. The capital requirement for a full-service bank is Rs 500 crore.

The new guidelines for the so-called differentiated banks will open up the field with Bharti Airtel, the Future group and even Reliance Retail able to enter a crowded arena to wrest licences for a new set of niche banks.

Non-banking finance companies (NBFCs), co-operatives, pre-paid instrument issuers and micro-finance institutions (MFIs) will also be able to throw their hats into the ring.

The new banks will have a very limited scope of activity. For instance, payment banks will only accept demand deposits (current deposits and saving deposits) and provide payment and remittance services through various channels that include branches, business correspondents and mobile banking. They will not be allowed to lend money.

The draft guidelines say that the payments/remittance services would include the acceptance of funds at one end through various channels, including branches and business correspondents, and payments of cash at the other end, through branches, business correspondents, and ATMs.

More importantly, NBFCs, corporate business correspondents, mobile telephone companies, super-market chains, companies, co-operatives and public sector entities can apply for permission to set up a payments bank.

The central bank explained that the objective of these banks would be to further financial inclusion by providing small savings accounts and payments or remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

Since their primary role is to provide payments and remittance services and demand deposit products to small businesses and low-income households, the RBI said that a customer of a payments bank could hold a maximum balance of Rs 1 lakh.

“After the performance of the payments bank is gauged by the RBI, the maximum balance can be raised,” it added.

While these banks will also be subject to reserve requirements, the RBI proposed that they should also have a minimum cash-in-hand and balances with a scheduled commercial bank or the RBI for operational activities and liquidity management. Further, these banks will have to invest all its monies in government securities/treasury bills with maturity up to one year.

The RBI also announced draft guidelines for setting up small banks that will provide a whole suite of basic banking products such as deposits and supply of credit, but it will operate in a limited area.

Resident individuals/professionals with 10 years of experience in banking and finance, companies and societies will be eligible to become promoters of small banks. Moreover, existing NBFCs, MFIs, and local area banks can also opt for conversion into small banks.

The area of operations of such a bank, it said, 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’’.

However, the RBI will look favourably at proposals involving expansion of the bank’s area of operations beyond contiguous districts in one or more states with reasonable geographical proximity, it indicated.

In the initial five years, the small bank will have to undertake basic banking activities: acceptance of deposits and lending to small farmers, small businesses, micro and small industries and unorganised sector entities.

Significantly, the RBI added that after the initial stabilisation period of five years, and after a review, it might liberalise the scope of activities of the small banks.

In both the cases, the promoters’ minimum initial contribution to the equity capital of the banks has been set at 40 per cent, which will be locked in for a period of five years from the date of commencement of business of the bank.

Shareholding by promoters in the bank in excess of 40 per cent will have to be brought down to 40 per cent within three years from the date of commencement of business of the bank.

 
 
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