India Economy; Final Guidelines for payment banks and small banks
Published 12 December 2014
© Crown copyright 2014
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0.1 This publication was archived on 4 August 2016.
This article is no longer current. Please refer to Overseas Business Risk - India.
0.2 Summary
The Reserve Bank of India (RBI) has issued final guidelines for setting up Small Banks and Payments Banks. This is part of the RBI’s differentiated banking strategy and expected to further financial inclusion. FDI up to 74% is currently allowed and will be amended in line with the rules for private banks. Payment banks are likely to attract interest from UK companies with the appropriate technological capability. Small banks will focus on priority sectors.
0.3 Detail
Payment banks - a potential UK opportunity
Payment banks will be allowed to accept deposits up to Rs100,000 (~£1000) but will not undertake any lending. They will have to invest a minimum of 75% of their liabilities in government securities with maturities of less than one year, while 25% can be held as deposits. They are required to have 25% of their access points (not physical branches) in under banked areas.
Entities eligible to apply for licences include existing non-bank Pre-paid Payment Instrument (PPI) issuers, Non-Banking Finance Companies (NBFCs), mobile telephone companies and super-market chains. Payment banks can be established as a joint venture with existing commercial banks. Applications for licences have to be submitted by January 16 2015.
Founders are required to hold at least 40% of equity for the first five years. Listing is mandatory within three years of reaching a net worth of Rs5bn (£0.5bn). The draft guidelines had mandated dilution of the founders equity to 26% over twelve years, but this has been removed. This makes investment more attractive for founders including foreign companies.
FDI up to 74% is permitted, up to 49% without require prior government approval. However, voting rights for entities other than founders are restricted to 10% in private banks, although the RBI may raise this to 26% in a phased manner. Acquisition of a stake above 5% will also require RBI approval.
Small Finance Banks - focussed on financial inclusion
Small Finance Banks will accept deposits and lend to underserved groups like small businesses and farmers. They are required to open at least 25% of branches in under banked areas and lend 75% of their portfolio to priority sectors.
0.4 Comment
The Payments Bank structure is more suited for UK companies. The RBI guidelines suggest that the Small Banks structure is more suited for local players. The removal of mandatory equity dilution requirements for founders of Payments Banks is encouraging. However restrictions on voting rights will remain
0.5 Disclaimer
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