Just over a year after it released the list of licensees for payments banks and small finance banks in India, the Reserve Bank on Thursday issued operating guidelines for these differentiated financial entities which are intended to improve financial inclusion in the country.
In two separate notifications on its website, the RBI said the operating framework for both payments and small finance banks would largely be drawn from Basel standards, but given their focus on financial inclusion, these would be “suitably calibrated”.
For both payments banks and small finance banks, the mandatory capital adequacy ratio has been set at 15 percent, within which, the common equity tier-1 ratio must be maintained at 6 percent.
Payments Banks
The operating guidelines for payments banks are broadly in line with what has so far been discussed but some concerns expressed by the industry regarding know your customer (KYC) norms have been addressed in the final norms.
These entities will be allowed to collect deposits from customers to the extent of Rs 1 lakh and will offer payment and remittance services.
If the deposits exceed the Rs 1 lakh mark, the excess funds can be “swept” into an account opened in one of the payments banks' partner banks, the RBI said.
Payments banks must maintain a statutory liquidity ratio of 75 percent of their total deposits, and this should be in the form of government securities and treasury bills with a maturity of up to one year, the RBI said.
This essentially means that 75 percent of the deposits that the payments bank collects will be invested in government securities. The primary income for payments banks then, will be fee income on transactions.
In line with what the RBI had suggested when the concept of payments banks was introduced, these entities will not be allowed to engage in any lending activity. An exception has been made for loans disbursed by payments banks to their own employees.
For short-term funding requirements, payments banks will be allowed to access the inter-bank call money market and the market for collateralised borrowing and lending obligations, the RBI said.
“The release of these guidelines makes it easy for us to go forward with some of the decisions where we were awaiting clarity before making final decisions,” said Shinjini Kumar, chief executive officer of Paytm's payments bank.
Directionally, most of the calls that have been taken (by the RBI) are fairly encouraging because they show the regulator's willingness to engage with the industry and move in a digital direction.
In particular, the RBI seems to have acknowledged the industry's demand that paper-based KYC should not be mandatory for payment bank customers.
“Among the points that are positive – the regulator has said that banks can take a call on wet signatures, and the flexibility on how to communicate with clients, whether it be paper or digital, because we will be targeting a large number and variety of clients.”
The RBI has stipulated that payments banks can choose whether or not to take a signature from a client as part of the KYC process. Also, they can choose whether or not to issue a physical pass book to its customers.
To facilitate its overarching goal of financial inclusion, the RBI has mandated that 25 percent of the physical access points of payments banks be opened in rural areas. Additionally, the annual plan for opening of physical access points must be vetted by the RBI for a period of five years.
Small Finance Banks
These institutions are envisioned to provide credit to small businesses, small and marginal farmers, and micro and small industries through technology-driven low-cost models.
A large part of the operational guidelines that apply to scheduled commercial banks are also applicable to small finance banks. But the RBI has allowed some exemptions.
For example, small finance banks will have to scale up their liquidity coverage ratio over a period of five years. To start with, till December 31, 2017, these banks can have a liquidity coverage ratio of 60 percent. But on January 1, 2018, the ratio will have to rise to 70 percent. It will then have to be increased by 10 percentage points every year till 2021, when it will become 100 percent.
Borrowings made by small finance banks after they commence operations will be subject to inter-bank borrowing limits, the RBI said. However, “legacy borrowings”, that is existing loans, will be exempt till maturity or for three years, whichever is earlier.
When Will Payments Banks Commence Operations?
In August last year, 11 entities were given an in-principle licence to start a payments bank. Since then, three – Cholamandalam & Investment Finance, Dilip Shanghvi's joint venture with IDFC Bank and Telenor Financial Services, and Tech Mahindra – have dropped out of the race.
In an interaction with BloombergQuint on Thursday, Vijay Shekhar Sharma, the founder of Paytm, said the company had sent its final application to the RBI and was awaiting feedback.
India Post Payments Bank has begun a recruitment drive for top management, it said in a release earlier this week. It is expected to complete the roll out of its branches across the country by September next year, it said.
The other applicants have not disclosed timelines for commencement of operations.
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