All you want to know about Small Banks and Payments Banks

In order to expedite financial inclusion, finance minister Arun Jaitley in his budget speech said “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.”

Within a week of the budget, RBI issued draft guidelines for setting up small banks and payment banks. RBI in its guidelines said that both payment banks and small banks are ‘niche’ or differentiated banks, with the common objective of furthering financial inclusion.

In a report on the regulation, Alpesh Mehta and Sohail Halai of Motilal Oswal have collated the guidelines with the conclusion that the move is positive for micro finance and telecom companies but it is unlikely to attract large NBFCs.

Following are some of the conditions which are common to both the banks as collated by Motilal Oswal.

· The minimum capital requirement would be Rs 100 crore

· Promoter contribution would be at least 40 per cent for the first five years. Excess shareholding should be brought down to 40 per cent by the end of fifth year, to 30 per cent by the end of 10th year and to 26 per cent in 12 years from the date of commencement of business

· Foreign shareholding in these banks will be as per current FDI policy

· Voting rights to be line with the existing guideline for private banks

· Entities other than promoters will not be permitted to have shareholding in excess of 10 per cent.

· The bank should comply with the corporate governance guidelines, including ‘fit and proper’ criteria for Directors as issued by RBI

· Operations of the bank should be fully networked and technology driven from the beginning

Small Banks

· The purpose of the small banks will be to provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation.

· The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles to under-served and unserved sections of the population, supply of credit to small farmers, micro and small industries, and other unorganised sector entities through high technology-low cost operations.

· Resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks. NFBCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can convert their operations into those of a small bank. Local focus and ability to serve smaller customers will be a key criterion in licensing such banks.

· Branch expansion: For the initial three years, prior approval will be required.

· The area of operations would normally be restricted to contiguous districts in a homogenous cluster of states of 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.

· The bank shall primarily undertake basic banking activities of accepting deposits and lending to small farmers, small businesses, micro and small industries, and unorganised sector entities. It cannot set up subsidiaries to undertake non-banking financial services activities. After the initial stabilisation period of five years, and after a review, the RBI may liberalise the scope of activities for Small Banks.