Financials | Sector Update
Sector Update | 27 November 2014
Financials
New business structures in a growing pie
Positive for MFIs and Telecom companies | Large NBFCs unlikely to participate
Please refer to our note on draft
guidelines
RBI released final guidelines on the Small Finance Banks (SFB) and Payment Banks
(PB). Key positive changes from the draft guideline are (a) SFB: No restriction on area
of operation v/s confined to small geographies earlier and (b) PB: Increasing
maximum leverage to 33.3x vs 20x earlier.
Some of the conditions, like (a) Non co-existence of NBFC and Banking business
under group (akin to universal banking license guideline) (b) mention of large PSU
entities, business and industrial houses, including NBFCs promoted by them being
not entertained (c) No relaxation on regulatory requirement like CRR, SLR, PSL
(including sub targets) and (d) higher overall PSL of 75%, would reduce enthusiasm
from large NBFCs like SHTF, MMFS etc.
MFIs, which will get SFB license, are likely to be the biggest beneficiaries as (a) it
reduces the overhang of state level regulations/ordinances in the area of operation
and (b) get access to stable source of funding. Large part of the book is eligible for
PSL thus meeting regulatory requirement would not be an issue. Over a medium
term higher cost of CRR and SLR will be negated by lower cost of funds (access to
CASA and interbank market). Shareholding can be a biggest hurdle in a few cases.
Interested entities will need to apply by January 16, 2015 and their names will be
published on the RBI website.
MFIs likely to be big beneficiaries of SFB guidelines:
In our view, large MFIs are likely to apply for SFB as a)
operating in banking structure (RBI sole regulator) eliminates overhang of state regulations/ordinances on business
model and b) get access to the stable funding source and RBI interbank market (will come handy during liquidity
tightness). Transition to banking business model would not be a big challenge for MFIs as against other asset
financing NBFC considering lower duration of loan book (6-9months vs 30-48months for others). Large portion of
loans (>75% as required by RBI) qualify for PSL which is an added advantage. Minimum promoter holding of 26% and
reduction of the other investor holding to maximum 10% (in three years) can be a hurdle in the listed and non listed
space. For e.g SKSMFI has promoter holding of ~10% as of 1HFY15. Improving visibility on growth, reduction on
overhang on business model will reduce the cost of equity and drive re-rating for MFI if it gets SFB license.
PBs high volume/low margin business model:
Ability to generate better profitability and higher ROE will depend
upon the cost of operation and deposits. Based on regulations, on the assets side funds will only be allowed to be
deployed in the low yielding G-Sec (75% of NDTL) and deposits (less than one year) with banks. Thus, ability to earn
spreads will depend upon the aggression of the PBs on paying for savings deposits. Cost of operation is likely to be
lower than universal bank considering lower brick and mortar presence and best use of technology. Higher customer
acquisition is likely to be a key to extract operating leverage and generate fees (marginal in remittances although
cross sell opportunity remains). Pre-paid payment instrument players (FINO, Oxigen etc) and telecom companies
would apply for the same.
Can these structures be a big threat to existing banking structure?
SFB and PBs are to be set up with the objective
of promoting financial inclusion, supply of credit to small business entities, MSME, micro enterprises and serving the
needs of underserved population for transactions and savings accounts. Significant emphasis is likely to be put on
the use of technology while giving the licenses. Experience of such niche players will also help incumbents in
achieving financial inclusion objectives. Further existing banks are allowed to take stake in the PBs thus; they can
operate as business correspondents for the large banks.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Vallabh Kulkarni
(Vallabh.Kulkarni@MotilalOswal.com); +91 22 3982 5430
27 November 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
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Financials | Sector Update
Procedure for awarding SFB and PB licenses
The applications will be initially screened by RBI to ensure prima facie eligibility
of the applicants. RBI may apply additional criteria to determine the suitability
of applications, in addition to the prescribed ‘fit and proper’ criteria.
After RBI screening, External Advisory Committee (EAC) comprising eminent
professionals like bankers, chartered accountants, finance professionals, etc.
will evaluate the applications. In order to ensure transparency the names of the
professionals in EAC will be placed on RBI’s website.
EAC will submit its recommendations to RBI for consideration. The decision to
issue an in-principle approval for setting up of a bank will be taken by RBI.
The validity of the in-principle approval issued by RBI will be eighteen months
from the date of granting such in-principle approval and would thereafter lapse
automatically.
After issue of the in-principle approval for setting up of a bank, if any adverse
features are noticed subsequently, the RBI may impose additional conditions
and if warranted, it may withdraw the in-principle approval.
The names of applicants for bank licenses will be placed on the RBI website on
receipt of the applications. The names of successful applicants will also be
placed on the RBI website.
Key highlights from guidelines for Licensing of Small Banks
Objective:
Increasing financial inclusion by (a) provision of savings vehicles to
under-served and un-served 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.
Who are not eligible?
Joint ventures by different promoter groups for the
purpose of setting up small finance banks would not be permitted. Proposals
from large public sector entities and industrial and business houses, including
from NBFCs promoted by them, will also not be entertained.
Branch expansion:
For the initial five years, prior RBI approval would be
required. At least 25% of branches would be required to be opened in unbanked
rural centers (population of up to 9,999)
Scope of activities
Small finance bank will primarily undertake basic banking activities of
acceptance of deposits and lending to underserved sections of society.
It can undertake non-risk sharing financial services activities such as
distribution of MF, Insurance and MF products.
The small finance bank can also become a Category II Authorized Dealer in
foreign exchange business for its clients’ requirements.
There will not be any restriction in the area of operations of small finance
banks; however, preference will be given to those applicants who in the
27 November 2014
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Financials | Sector Update
initial phase set up the bank in a cluster of under-banked States / districts,
such as in the North-East, East and Central regions of the country
The other financial and non-financial services activities of the promoters, if
any, should be kept distinctly ring-fenced and not comingled with the
banking business.
Capital requirements
Minimum paid-up equity capital of INR 1b
Minimum CAR – 15%; Tier 1 – 7.5% as per Basel-I computations
Promoter shareholding
Minimum initial shareholding of 40% with lock-in of 5 years
If shareholding above 40%, it should be brought down to 40% within 5
years, to 30% within 10 years and to 26% within 12 years
Mandatory listing once the networth reaches INR5b
If the existing NBFCs / MFIs / LABs have diluted the promoters’ shareholding
to below 40%, but above 26%, due to regulatory requirements or otherwise,
RBI may not insist on the promoters’ minimum initial contribution.
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. No
forbearance would be provided for complying with the statutory provisions.
Small Banks will have to meet PSL targets, including sub-targets.
Minimum 75% of loans should be towards priority sectors
The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 10%/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
Foreign shareholding as per prevailing FDI regulations for private banks
The small finance bank will be required to use the words “Small Finance
Bank” in its name in order to differentiate it from other banks.
If a promoter setting up a SFB and desires to set up a PB, it should set up
both types of banks under a Non-Operative Financial Holding Company
(NOFHC) structure.
Additional conditions for NBFCs/MFIs/LABs converting into a bank
Minimum networth – INR1b
NBFC / MFI will cease to exist; all business which a bank cannot statutorily
undertake needs to be divested / disposed of.
In case of existing NBFCs / MFIs / LABs converting into SFB, where there is
shareholding in excess of 10% by entities other than the promoters, RBI may
consider providing time upto 3 years for bringing it down to 10%.
27 November 2014
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Financials | Sector Update
Guidelines for Licensing of 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) Sound track record of at least 5 years
(b) Existing non-bank PPIs, NBFCs, corporate BCs, mobile telephone companies,
super market chains, companies, real sector cooperatives, and public sector
entities, (c) Even banks can take equity stake in PBs to the extent permitted
Requirements
Minimum paid-up equity capital of INR1b
Minimum CAR – 15%; Tier 1 – 7.5%
Leverage ratio of not less than 3 percent i.e. leverage cannot exceed 33.33x
Promoter equity contribution of at least 40% for first five years
Foreign shareholding as per existing FDI policy for Private Banks
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 through various channels
Issuance of ATM/debit cards; But, cannot issue credit cards
Functioning as business correspondent (BC) for other banks
Distribution services – MF, Insurance etc.
Internet banking activities
Deployment of funds
Cannot undertake lending activities
Apart from CRR, payment banks required to invest minimum 75% of
deposits in SLR eligible Gsec with maturity of upto 1yr.
May keep maximum 25% in deposits with other Scheduled Commercial
Banks for operational purposes and liquidity management
Access to CBLO market for temporary liquidity management
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 Bank” in
its name to differentiate it from other banks.
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Financials | Sector Update
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Financials | Sector Update
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