Independent Research and Policy Advocacy

Niche banking in India: Draft Guidelines for Payments Banks

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By Deepti George, IFMR Finance Foundation

The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommended developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks. Accepting the Committee’s recommendations, the Reserve Bank has released Draft Guidelines for ‘Licensing of Payments Banks’. The Draft Guidelines state that the “primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology driven environment.

Such Payments Banks would engage in collecting demand deposits (ie, savings bank deposits and current deposits) and provide payments and remittance services, such that the deposits are deployed in Government securities and T-bills (with maturity upto one year) permitted by RBI as eligible for meeting SLR requirements. With access to the Payment and Settlement System, Payments Banks will be permitted to carry out cash-in and cash-out through channels such as own branches and through BCs, and can additionally do cash-out at ATMs as well as POS terminals (subject to instructions under the Payment and Settlement Systems Act). RBI would also be open to entities interested in offering transactions through the internet (similar to the Virtual Bank model in Hong Kong). The deposits will be protected by deposit insurance under DICGC.

Transaction limits while currently set at Rs. 100,000 as maximum balance per customer, can be subject to revision based on performance of this category of banks. Also, if ‘small accounts’ are being offered, these would enjoy the benefit of simplified KYC norms.

Payments Banks are expected to stay away from credit intermediation on own books and thereby not be exposed to credit risk (nor market risk if investments are held to maturity obviating the need to mark-to-market) but be exposed to significant operations risk as well as liquidity risk. The minimum capital requirement set at Rs. 100 cr (one-fifth of that for a full-service bank) is substantiated given that the expectation is that the operations will entail significant investments in technology and fixed assets. Although there will be no credit risk, the Draft Guidelines have envisaged a minimum capital adequacy ratio of 15%, as is the case with NBFCs, the calculation of which will be based on simplified Basel I requirements (perhaps, risk weights for cash in hand and cash in bank would take prominence in the absence of loans and other assets).

Payments Banks will necessarily have to be public limited companies and entities interested in setting up Payments Banks are to have a past successful track record of atleast 5 years in running their business, be it an NBFC, a corporate BC, mobile telephone companies, super-markets or others. Interested banks can also set up Payments Banks subsidiaries subject to shareholding limits.

As has been in the case with the previous round of bank licensing requirements, Promoters of Payments Banks would need to systematically bring down their holdings from atleast 40% (locked in for the period of first 5 years), brought down to 40% within first 3 years, to 30% within 10 years, and to 26% within 12 years of commencement of business.

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  1. The condition of requiring promoters’ to reduce their stake within 3 years seems strange. With the profitability of these new banks to be established, a greater holding from promoters will create the stakes to work towards profitability. Creating the scale to achieve critical mass may take some time, so 3 years seems to be an unreasonably short time. The ownership of the bank and various other rules are subject to disclosure – to protect public interest. In fact, a wider holding even after 12 years would lay bare the bank to decisions governed by matters other than outreach with some minimum viability – the latter being the govt’s objective. Even the 10/12 year horizon could be flexible on this count.

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