Mumbai, Nov. 27: The Reserve Bank of India (RBI) today paved the way for more businesses to set up niche banks offering limited financial services in a country where almost half the population have no access to banking.

Mobile telephone companies, super-market chains and prepaid payment card issuers are among those eligible to set up a payments bank, which can receive deposits and remittances, but cannot lend.

The RBI released the final guidelines for the licensing of new payments banks and small finance banks, inviting applications by January 16. It could consider more applications at a later stage, the central bank said.

Small finance banks will lend to “unserved and underserved sections”, including small business units, small and marginal farmers, and micro and small industries.

Both payments bank and small finance banks will have to maintain minimum reserve requirements, the RBI said.

The central bank has barred large state-run institutions and big businesses from setting up small finance banks to ensure these entities specialise in lending to small businesses and poor people in Asia’s third-largest economy.

Existing non-bank finance companies, local area banks and micro-finance institutions can set up small finance banks, the RBI said, adding that up to 50 per cent of the bank’s loan book should be of loans not above Rs 25 lakh.

Payments banks

Payments banks will initially be restricted to holding a maximum balance of Rs 1 lakh per individual customer.

The banks can issue ATM/debit cards as also other prepaid payment instruments, but not credit cards.

The banks can also distribute non-risk-sharing simple financial products such as mutual funds and insurance products, but non-resident Indians will not be allowed to open accounts. This was not part of the draft norms.

The RBI said it wants the new banks to leverage on technology and have a presence through internet banking, but was quick to clarify that it will not allow any “virtual” bank without a physical presence on the ground.

In a key relaxation, the final guidelines said a promoter interested in setting up a payments bank can have a joint venture with a commercial bank. The banks also can handle cross-border transactions in the nature of personal payments, another norm not mentioned in the draft.

While the draft guidelines said these banks will have to invest all their funds in government securities/treasury bills with a maturity of up to one year, the final norms gave them some room.

Now a minimum 75 per cent of the demand deposit balances have to be put in government securities/treasury bills with maturity up to one year and a maximum of 25 per cent should be held in current and time/fixed deposits with other scheduled commercial banks.

Ownership structure

Promoters keen to set up these entities also got a major relief when the central bank relaxed its earlier suggestion of having a diversified ownership structure, which meant the promoters would have had to bring down their stake.

The draft guidelines had said that promoters’ minimum initial contribution to the paid-up voting equity capital should be at least 40 per cent and that their shareholding should be brought down to 26 per cent in a phased manner that ran up to 12 years.

The final guidelines here said that since a payments bank cannot undertake lending activities, it was not mandatory for it to have a diversified ownership structure even as it added that no maximum shareholding limit for promoters was also necessary.

If the payments bank reaches the net worth of Rs 500 crore and, therefore, becomes systemically important, diversified ownership and listing will be made mandatory.

Small finance banks

For small finance banks, there was a major relaxation when the RBI did away with the restriction that their area of operations will be limited to contiguous districts in a homogenous cluster of states/union territories.

However, as local focus and the ability to serve smaller customers will be the key criteria in licensing such banks, it will, therefore, be a more appropriate vehicle for local players.

“Accordingly, proposals from large PSUs and business houses, including NBFCs promoted by them, will not be entertained,’’ it added.

The eligible promoters for small finance banks include resident individuals or professionals with 10 years of experience in banking and finance.

Besides, companies and societies owned and controlled by residents are eligible to set up the small banks.

Existing NBFCs, micro finance institutions, and local area banks that are owned and controlled by residents can also opt for conversion into small finance banks.

Promoters should have a sound track record of at least five years. The promoter’s minimum initial contribution to the paid-up equity capital of such small finance banks shall at least be 40 per cent and be gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

The operations of the bank should be fully networked and technology driven. The bank should have a customer grievances cell too.

If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but subject to fulfilling minimum paid-up capital or net worth requirement as applicable to universal banks.

The small finance banks will be subject to all prudential norms as applicable to existing commercial banks, including maintenance of cash reserve ratio and statutory liquidity ratio.

Many suitors

A host of potential suitors, including Shriram Capital and Muthoot Finance, today evinced interest in setting up such niche entities. However, they will take a final call after going through the fine print of the guidelines.

Those interested include payment solutions providers Itzcash and Oxigen and business correspondent company Fino, while Muthoot Finance and Shriram Capital may apply for a small finance banking licence.

The department of posts is also believed to have been interested. Among telecom operators, Bharti Airtel’s name has been doing the rounds as a possible contender.