RBI sets stiff terms for niche bank licences

The Reserve Bank of India (RBI) on Thursday paved the way for niche banking by issuing draft guidelines for setting up payment banks and small banks. 

While payment banks will offer remittance services, small banks will offer low-ticket loans and basic banking services within a limited area of operation.

After initial screening to ensure eligibility, the central bank will set up an external committee to vet applications, which will be invited after the final norms are issued. Successful applicants will have to start operations within a year of the date of approval.

Both these categories of banks could set up subsidiaries to undertake non-banking financial company (NBFC) activities, RBI said. This was seen as a hindrance for existing NBFCs to convert themselves into banks.

The minimum paid-up capital required for both categories would be Rs 100 crore, of which the promoter would have to contribute at least 40 per cent initially, with a five-year lock-in period, RBI said. They would also have to maintain a capital adequacy ratio of 15 per cent, though under Basel-I norms.

If promoter shareholding exceeds 40 per cent, it has to be cut to this level within three years of operations, 30 per cent within 10 years and 26 per cent within 13 years.

Promoter groups, RBI said, would be subject to stringent ‘fit & proper’ criteria such as sound credentials and integrity and successful track records of running business for at least five years. The central bank also said it would adopt a cautious approach in granting new licences, as only a few aspirants would be allowed. The cases would be reviewed after these entities gained experience.

For better corporate governance practices, the draft guidelines mandate independent directors should account for the majority of the boards of these banks.

Norms on voting rights have been kept on a par with those applicable to existing private banks--capped at 10 per cent, which can be raised to 26 per cent in a phased manner, with prior RBI approval. Acquisition of more than five per cent stake in the entity will also require prior RBI approval.

Muthoot Finance, which had applied for a banking licence last year, said the NBFC would be keen to apply for a differentiated bank licence, adding it might apply for both types of licences, if regulations allowed this. “A small bank makes more sense, as it covers a wide range of activities and also because of our strong lending portfolio. A final decision will be taken after the final guidelines come,” said Oommen K Mammen, chief financial officer of the company. 

The norms for payment banks are on the lines of the recommendations of the Nachiket Mor committee on financial services for small business and low-income households—prepaid instrument issuers can carry out payment services, but cannot lend. Payment banks, which will have to maintain a particular cash reserve ratio, will deploy funds only in government securities and have access to the uncollateralised call money market. Also, payment banks can accept only demand deposits and savings bank deposits; they cannot offer fixed deposit products. 

The highest balance a bank can hold per customer is Rs 1 lakh, against the Mor panel’s recommendation of Rs 50,000. Apart from existing non-bank PPI issuers, NBFCs, corporate business correspondents, mobile telephone companies, supermarket chains, real estate cooperatives and public sector entities will be considered eligible to set up payment banks. 

In its report, the Mor committee had mentioned the possibility of the postal department becoming a payment bank. India Post had applied for a universal licence last year, but this wasn’t entertained by RBI. 

“Preference will be given to applicants who propose to set up payment banks with access points primarily in under-banked states, districts in Northeast, East and the central region of the country,” RBI said. 

It added for credit and other services it couldn’t offer, a payment bank could become a business correspondent of another bank. However, it cannot set up subsidiaries to undertake NBFC activities. To differentiate them from other banks, such entities have to use the word ‘payment’ in their names. 

While payment banks won’t have to have a quarter of their branches in un-banked rural areas (as applicable for existing banks), they should have at least 25 per cent of their access points in such areas. 

In addition to NBFCs, microfinance institutions and existing local area banks, individual professionals with 10 years of experience in banking and finance will be allowed open small banks.

The operations of such entities will be restricted to contiguous districts in a homogenous cluster of states, though these could be allowed to expand to more states, if necessary. Small banks’ branch expansion plans for the initial three years will require RBI approval, though this norm could be relaxed, based on performance. 

For the first three years, small banks will need RBI approval for branch expansion. The draft regulations said small banks would primarily undertake basic banking activities of accepting deposits and lending to small farmers, small businesses, micro and small industries and unorganised sector entities. “It can also undertake other simple financial services activities with prior approval of RBI,” the guidelines said. 

Small banks will also have to comply with the priority sector lending target of 40 per cent and set up a quarter of their branches in rural un-banked areas; both the norms are applicable to other domestic banks. Also, they have to meet cash reserve ratio and statutory liquidity ratio norms. Besides, all NBFCs, including microfinance institutions, must have net worth of at least Rs 100 crore. 

Applicants who had earlier applied for new bank licences but were denied may apply for differentiated banking licences.