Financials | | 18 July 2014
Sector Update Sector Update
Financials
Draft guidelines for setting up Small Banks and Payments Banks
Positive for MFIs and Telecom companies | Large NBFCs unlikely to participate
The RBI has released draft guidelines for the setting up of Small Banks and Payments Banks. While the objective is to
expedite financial inclusion with the best use of technology, the approach to granting licenses is conservative.
The guidelines confine Small Banks to a limited area of operations. Further, stringent regulatory requirements
pertaining to CRR/SLR and shareholding (promoter shareholding of at least 40% for the next five years; maximum non-
promoter shareholding at 5% or 10% with RBI approval) among others would deter large NBFCs, especially asset
financing NBFCs. NBFCs with significant regional concentration may apply, but their large size could be a hurdle. MFIs
are likely to be the key contenders for setting up Small Banks.
The Payments Bank business model largely revolves around best use of technology to lower cost of operations (key to
profitability due to limited revenue generating avenues). The cost per customer is likely to be high, as the maximum
deposit allowed per customer is INR100k. The constraint of parking the entire float in less than one year G-Secs and
maintaining CRR would keep spreads low. However, fee income from remittances and serving as business
correspondents (BCs) for large banks should aid profitability. The RBI has allowed leverage up to 20x in this business;
despite low RoA, RoE could be respectable.
Beneficiaries: (a) MFIs having a regional presence and meeting the ‘fit and proper’ criteria could be the biggest
beneficiaries, (b) Telecom companies could work towards becoming Payments Banks.
Key guidelines common for both Small Banks and Payments Banks
These banks would be registered under the Public Limited Companies Act, 2013,
and licensed under section 22 of the Banking Regulation Act, 1949.
The minimum capital requirement would be INR1b and the minimum CAR
requirement would be 15%. RWA requirement would be as per Basel-I, with an
additional condition of maximum leverage of 20x for Payments Banks.
Promoters’ contribution should be at least 40% for the first five years.
Shareholding in excess of 40% should be brought down to 40% by the end of the
fifth year, to 30% by the end of the 10th year, and to 26% in 12 years from the
date of commencement of business.
Proposals having diversified shareholding and timeframe for listing would be
preferred by the RBI.
Foreign shareholding in the banks would be as per the extant FDI policy.
Voting rights would be initially capped at 10%, but the RBI could raise the limit
to 26% in a phased manner. This is in line with the existing guideline for private
sector banks.
Any acquisition of 5% or more of voting equity shares would require prior RBI
approval. Entities other than the promoters would not be permitted to have
shareholding in excess of 10% of the voting equity capital. This is, again, in line
with the existing guideline for private sector banks.
Corporate governance: (a) The Board should have a majority of Independent
Directors, (b) The bank should comply with the corporate governance
guidelines, including ‘fit and proper’ criteria for Directors as issued by RBI from
time to time.
The operations of the bank should be fully networked and technology-driven
from the beginning.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai
(Sohail.Halai@MotilalOswal.com); +91 22 39825430
18 July 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
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Financials | Sector Update
The bank should have a high-powered Customer Grievances Cell to handle
customer complaints.
Compliance with the terms and conditions laid down by the RBI is an essential
condition for grant of license. Any non-compliance would attract penal
measures, including cancellation of license.
Specifics relating to licensing of Small Banks
Step towards financial
inclusion, with
opportunities for NBFCs,
MFIs, and LABs opting for
small bank structure
Objective:
Increasing financial inclusion by (a) provision of savings vehicles to
under-served and unserved sections of the population, and (b) supply of credit
to small business units, small farmers, micro and small industries, and other
unorganized sector entities through high technology-low cost operations.
Key eligibility criteria for promoters:
(a) Resident individuals/professionals with
10 years of experience in Banking and Finance, companies, and societies, (b)
Existing NBFCs, MFIs, and LABs can also opt for conversion. Local focus and the
ability to serve smaller customers will be a key criterion in licensing such banks.
Branch expansion:
For the initial three years, prior RBI approval would be
required. Based on experience, the RBI may consider relaxing this condition.
Scope of activities
The area of operations would normally be restricted to contiguous districts
in a homogenous cluster of states or union territories so that the Small Bank
has a “local feel” and culture. However, if necessary, it would be allowed to
expand its area of operations beyond contiguous districts in one or more
states with reasonable geographical proximity.
In the initial five years, the Small Bank shall further the objectives for which
it is set up. It shall primarily undertake basic banking activities of accepting
deposits and lending to small farmers, small businesses, micro and small
industries, and unorganized sector entities. It can also undertake other
simple financial services with prior RBI approval. It cannot set up
subsidiaries to undertake non-banking financial services activities. After the
initial stabilization period of five years, and after a review, the RBI may
liberalize the scope of activities for Small Banks.
The promoters’ other financial and non-financial services activities, if any,
should be distinctly ring-fenced and not co-mingled with banking business.
Prudential norms
Robust risk management framework is required.
Would be subject to all prudential norms and RBI regulations that apply to
existing commercial banks, including maintenance of CRR and SLR.
In view of concentration of area of operations, the Small Bank would need a
diversified portfolio of loans, spread over its area of operations.
The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 15% of capital funds.
Loans and advances of up to INR2.5m, primarily to micro enterprises, should
constitute at least 50% of the loan portfolio.
Other conditions
Small Banks will have to meet PSL targets, including sub-targets.
For the first three years, 25% of branches should be in unbanked rural areas.
18 July 2014
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Financials | Sector Update
Specifics related to licensing of Payments Banks
Opportunity for corporate
BCs, telecom companies,
super market chains, etc, to
become Payments Banks
Objective:
Increase financial inclusion by providing (a) Small savings accounts,
and (ii) Payment / remittance services to migrant labor, low income households,
small businesses, other unorganized sector entities, and other users, by enabling
high volume-low value transactions in deposits and payments / remittance
services in a secured technology-driven environment.
Key eligibility criteria for promoters:
(a) Existing non-bank PPIs, NBFCs,
corporate BCs, mobile telephone companies, super market chains, companies,
real sector cooperatives, and public sector entities, (b) Even banks can take
equity stake in Payments Banks to the extent permitted.
Scope of activities
Acceptance of demand deposits (only CASA), which would be covered by
DICGC. Payments Banks would initially be restricted to holding a maximum
balance of INR100k/customer. Based on performance, the RBI could
enhance this limit.
Payments and remittance services
Issuance of prepaid payment instruments
Internet banking
Functioning as business correspondent (BC) for other banks
Other conditions
The Payments Bank cannot set up subsidiaries to undertake NBFC business.
Other financial and non-financial services activities of the promoters, if any,
should be kept distinctly ring-fenced and not co-mingled with the banking
and financial services business of the Payments Bank.
The Payments Bank would be required to use the word “Payments” in its
name to differentiate it from other banks.
Deployment of funds
No credit lending
Float funds to be parked only in less than one year G-Secs
What the Finance Minister had said in his budget speech
After making suitable changes to the current framework, a structure will be put in
place for continuous authorization of universal banks in the private sector in the
current financial year. RBI will create a framework for licensing small banks and
other differentiated banks. Differentiated banks serving niche interests, local area
banks, payment banks, etc, are contemplated to meet credit and remittance
needs of small businesses, unorganized sector, low-income households, farmers,
and migrant work force.
Mr Arun Jaitley
18 July 2014
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18 July 2014
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NOTES
18 July 2014
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Financials | Sector Update
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