Small banks and payment banks-proposed in uly 2014 by RBI- b.v.raghunandan

Small Banks and Payments Banks: An Inclusive Banking Initiative of RBI

-B.V.Raghunandan

PG Department of Economics,

St.Aloysius College, Mangalore

August 7, 2014

Background

• RBI wanted an alternative to money-lending and NBFCs

• Nationalisation of banks was a part of it• Micro-finance -Bangla Desh Grameena

Bank - Muhammad Yunus winning the Nobel Prize

• SHG was roped in as a part of delivery mechanism of micro-finance

• Bank Correspondent and Business Correspondent Systems

• Post Offices & Core Banking

The Effect of RBI Efforts• Limited Success made possible

by technology particularly through ATMs

• Banking remained an elite concept with Andheri in Bombay not having a branch until Indian Bank opened a branch in 2011 whereas Nariman Point got branches centuries ago

• Established banks were a failure, successful only in rolling out impressive statistical data

Inclusive Banking

• Definition of “inclusivity” by OECD-WB Conference on Challenges and Policies for Promoting Inclusive Growth:

“The degree to which economic opportunities are shaped by individual skill, ideas, and initiative rather than by familial wealth, political influence, and social connections”.

Current Initiative• Presenting the Union budget, 2014-2015

on July 10, 2014, the Finance Minister, Arun Jaitley announced that:

“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”.

Follow-up by RBI• July 17, 2014-RBI wants to promote differentiated

banking and niche banking• In unserved and underserved population• Covering the underprivileged and small and neglected

segment of the society regarding savings, small loans and small remittances• guidelines for setting up Small Banks and Payment Banks

Small Banks• A small bank will be allowed to accept

deposits as well as lend • operations will be restricted to a select

category of customers, such as small farmers and unorganised sector entities.

• operations will be limited to a well-defined area geographically, such as a State or a Union Territory, to give a very “local feel.”

• a small bank can be set up with an initial capital of at least ₹100 crore

• Resident individuals/professionals with 10 years of experience in banking and finance, companies and societies will be eligible to set up small banks.

• existing NBFCs, Micro Finance Institutions (MFIs), and Local Area Banks can also opt for conversion to small banks, the RBI said.

Operations of Small Banks• Full Technology Absorption for cost saving and fast

delivery of services• Aim will be to provide savings instruments to the “un-served and under-served” sections of the population • give loans to small farmers, micro and small

enterprises, and other un-organised sector businesses, the RBI said

• Local focus and the ability to serve smaller customers will be the key criteria in licensing such banks

Regulation of Small Banks• mandatory for small banks to maintain a capital adequacy of

15 per cent of its risk weighted assets on a continuous basis• the small bank will be subject to all regulations of RBI as

applicable to existing commercial banks, including the maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio.

• the promoters’ initial contribution should be at least 40 per cent of the bank’s total

paid-up capital• At least 50 per cent of its loan portfolio should constitute loans and advances of size up to ₹25 lakh to extend loans primarily to micro enterprises,

Payments Banks

• Objective: (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

• enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment

Eligible Promoters

• The existing non-banking PPI issuers and Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a Payments Bank.

• Even banks can take equity stake in a Payments Bank to the extent permitted the Banking Regulation Act, 1949.

Capital of Payments Bank• the minimum paid up voting

equity capital of the Payments Bank isRs. 100 crore

• The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis

• The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years

Scope of Activities

• Acceptance of demand deposits, i.e., current deposits, and savings bank deposits restricted to holding a maximum balance of Rs. 100,000 per customer.

• Payments and remittance services through various channels including branches, BCs and mobile banking • Issuance of Pre-Payment Instruments• Internet banking• Functioning as Business Correspondent (BC) of other banks – A

Payments Bank may choose to become a BC of another bank for credit and other services which it cannot offer.

Operational Details• The Payments Bank will be required to use the word “Payments” in its name • The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under the Banking Regulation Act, 1949• Maintain Cash Reserve Ratio (CRR) • Invest all its monies in Government securities/Treasury Bills with maturity up to one year that are

recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR)

• The operations of the bank should be fully networked and technology driven from the beginning.

THANK YOU