Research and analysis

India: draft guidelines for small banks and payment banks

Published 4 August 2014

This research and analysis was withdrawn on 8 August 2016

This publication was archived on 5 August 2016. This article is no longer current. Please refer to Overseas Business Risk - India.

0.1 This publication was archived on 5 August 2016.

This article is no longer current. Please refer to Overseas Business Risk – India.

0.2 Detail

The entities eligible to set up a Payments Bank would include existing non-bank Pre-paid Instrument Issuers, Non-Banking Finance Companies (NBFCs), corporate business correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities. The primary business of Payments Banks will be to provide small savings accounts and payments/remittance services, by enabling high volume-low value transactions in a secure environment.

Payment banks will be allowed to accept deposits up to a maximum of Rs100,000 (£1,000), in line with the insurance cover provided by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). They will not be allowed to undertake lending activities but may chose to become a business correspondent of other banks to offer credit and other services.

Payments Banks will be required to have at least 25% of access points in rural centres. Apart from amounts maintained to meet Cash Reserve Ratio (CRR) requirements and minimum cash balances required for operational activities and liquidity management, payment banks will be required to invest all its monies in government securities. Outside liabilities of payment banks will also be restricted to 20 times net-worth.

Entities eligible to set up small banks would include resident individuals with ten years of experience in banking and finance, companies and societies, NBFCs, Micro Finance Institutions and Local Area Banks. The primary business of small banks will be to provide savings vehicles to unserved sections of the population and supply credit to small business units, small farmers, micro and small industries and other unorganised sector entities, in their areas of operation.

The area of operations of the small bank will normally be restricted to contiguous districts in a cluster of similar States so that the bank has the “local feel” and culture. At least 50% of the loan portfolio of small banks should constitute loans and advances upto Rs. 2.5mn (£25,000) in order to ensure that loans are extended primarily to micro enterprises. The maximum loan size and investment limit exposure to a single borrower or group of borrowers will be restricted to 15% of capital funds.

Small banks are required to open at least 25% of its branches in unbanked rural centres. They are also be subject to RBI regulations as applicable to existing commercial banks, including meeting the Cash Reserve Ratio requirements to hold 4% of a bank’s liabilities with the RBI, along with the Statutory Liquidity Ratio (investment in government securities) of 22.5% of bank liabilities. Small banks will also have to meet Priority Sector Lending targets.

The minimum paid up capital requirement of both payments banks and small banks will be Rs1bn (£10mn), of which the founders’ initial contribution should be at least 40% , with a lock in of five years. Founders’ shareholding in excess of 40% will, however, have to be brought down to 40% within three years, with a further reduction to 30% in 10 years, and falling to 26% within 12 years from the date of commencement of business. Both payments banks and small banks are also required to have a minimum capital adequacy ratio of 15%.

In line with existing policy, FDI up to 74% will be permitted in Payments Banks and Small Banks. FDI up to 49% is currently permitted without government approval. However, entities other than the founders will not be permitted to have shareholding in excess of 10% of the voting equity capital of the bank.

0.3 Comment

These are only draft guidelines and comments can be sent to the RBI by August 28, 2014. The differentiated licensing regime for payment banks could benefit UK firms that have the technological capability to reach out to India’s vast unbanked populace. The RBI guidelines state that preference will be given to those applicants who propose to set up Payments Banks with access points primarily in the under-banked states/districts in the North-East, East and Central regions of the country.

UK firms will have to partner with local firms, given restrictions on FDI. In addition, though founders are required to hold a minimum of 40% of the paid up voting equity capital at initiation, there is a requirement to bring down their stake to 40% in three years, 30% in ten years and 26% in 12 years.

0.4 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.