Payment and Small Finance Banks Full Details

Payment banks
Reserve Bank of India (RBI) released guidelines for Licensing of Payments Banks.  These guidelines will allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses.

The objectives of payments banks will 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.

RBI Guidelines
• Existing non-bank Pre-paid Payment Instrument (PPI) issuers, mobile firms and supermarket chains, among others existing NBFCs and micro finance lenders are promoters who are eligible to set up payment banks.
• Large public sector enterprises and big industrial houses are not allowed to establish Payment banks.
• A promoter or promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank. But they should have a sound track record of five years period of running businesses.
• Payment Banks will initially be restricted to holding a maximum balance of 1 lakh rupees per individual customer. It can issue ATM or debit cards but not credit cards.
• Payment bank cannot undertake lending activities but can distribute the non-risk sharing simple financial products such as mutual fund units and insurance products, etc.
• These banks also should maintain Cash Reserve Ratio (CRR) with the Reserve Bank, it will be required to invest minimum 75 percent of its demand deposit balances in Statutory Liquidity Ratio (SLR) with maturity up to one year and hold maximum 25 per cent in current and time or fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
The minimum capital for payments banks is 100 crore rupees and it should have a leverage ratio of not less than 3 percent that is its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
• The promoter’s minimum initial contribution to the paid-up equity capital for payments bank shall at least be 40 percent for the first five years from the commencement of its business.
• The foreign shareholding in the payments bank should be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
• The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms. It should have a high powered Customer Grievances Cell to handle customer complaints
• Those who are interested can apply before January 16 for first round of such permits however these guidelines are subjected to periodic review and revision.
• External Advisory Committee (EAC) of RBI will evaluate the applications and decision to issue an in-principle approval for setting up of payment bank will be taken by RBI.
• The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.

Small Banks
The Reserve Bank of India  issued Guidelines for Licensing of Small Finance Banks in the Private Sector. As per the issued guidelines, the minimum paid-up equity capital for small finance banks shall be 100 crore rupees.
But the licenses will be granted after the applicants fulfill the necessary ‘fit and proper’ criteria, among other conditions with a sound track record of professional experience or of running their businesses for at least a period of five years. Those interested, would need to apply before 16 January 2015 for first round of such permits.
These norms for payment banks and small finance banks would allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses. The move aims at deepening financial inclusion and boost saving habits.
Key features of the Small Finance Bank guidelines are:
i. Objectives: The objectives of setting up of small finance banks will be beneficial in financial inclusion by
a) Provision of savings vehicles
b) Supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations
ii. Eligible promoters
a) Resident individuals/professionals carrying 10 years of experience in banking and finance and companies and societies owned and controlled by residents will be eligible to set up small finance banks.
b) Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.
iii. Promoter's contribution: The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 percent and gradually brought down to 26 percent within 12 years from the date of commencement of business of the bank.
iv. Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
v. Prudential norms
a) The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
b) The small finance banks will be required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
c) At least 50 percent of its loan portfolio should constitute loans and advances of upto 25 lakh rupees.
The Reserve Bank of India on 27 November 2014 issued Guidelines for Licensing of Small Finance Banks in the Private Sector. As per the issued guidelines, the minimum paid-up equity capital for small finance banks shall be 100 crore rupees.
But the licenses will be granted after the applicants fulfill the necessary ‘fit and proper’ criteria, among other conditions with a sound track record of professional experience or of running their businesses for at least a period of five years. Those interested, would need to apply before 16 January 2015 for first round of such permits.
These norms for payment banks and small finance banks would allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses. The move aims at deepening financial inclusion and boost saving habits.
Background
Union Finance Minister Arun Jaitley in the Union Budget 2014-15 presented on 10 July 2014 announced that a structure will be put in place for continuous authorisation of universal banks in private sector in the current financial year; it will be put forward after making suitable changes in current framework. Framework of licensing small banks and other differentiated banks will be created by RBI.
Note:- 
* Reserve Bank gets 41 applications for payments banks, 72 for small banks
* The deadline to submit applications for setting up niche banks was Monday 2 February 2015
* Reliance Industries, Aditya Birla Group, Bharti Airtel, Tech Mahindra, Videocon, Vodafone m-pesa Limited, Smart Payment Solutions Pvt. Ltd& others seek RBI licence to set up payment  banks.



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