The Reserve Bank of India (RBI) on 17 July 2014 issued draft guidelines for licensing of payments banks and small banks. Both these banks will be created with a common objective of furthering financial inclusion by adding value through adapting technological solutions to lowers costs.
The Draft Guidelines issued by the RBI
- Small banks will provide a whole suite of basic banking products, such as, deposits and supply of credit, but in a limited area of operation
- Payments banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds, but will have a widespread network of access points particularly to remote areas, either through their own branch network or through Business Correspondents (BCs) or through networks provided by others.
- The entities eligible to set up a Payments Bank include existing non-bank Pre-paid Instrument Issuers (PPIs), Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities.
- The entities eligible to set up a small bank include resident individuals with ten years of experience in banking and finance, companies and societies, NBFCs, Micro Finance Institutions and Local Area Banks.
- The eligible entities should be fit and proper in order to be eligible to promote payments banks and small banks.
- The RBI would assess the fit and proper status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of at least five years in running their businesses.
- The minimum paid up capital requirement of both payments banks and small banks is kept at 100 crore rupees, of which the promoters’ initial minimum contribution will be at least 40 percent, to be locked in for a period of five years.
- Shareholding of the promoters should be brought down to 40 per cent within three years, 30 per cent within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank.
Purpose of setting up local feel small banks and payment banks
- These banks will disburse small-ticket loans to farmers and businesses and suite of basic banking products such as deposits and supply of credit
- It will cater to marginalized sections of the society that includes migrant labourers, for collecting deposits and remitting funds
- It will also offer limited range of products like acceptance of demand deposits and remittances of funds
The final guidelines will be issued after the process of receiving suggestions will be completed. RBI will also start inviting application for setting up the Payment and Small Banks after receiving the feedbacks on the drafted guidelines.
The issuance of guidelines are the follow up the to the set of guidelines issued for licensing of new banks in the private sector in February 2013. On 2 April 2014, RBI gave in-principle approval to Bandhan and IDFC Ltd to set up new banks in the private sector within a period of 18 months.
While giving in-principle approval to Bandhan and IDFC Ltd, the RBI indicated that it would be revising the guidelines based on the learning experience gained so as to grant licences more regularly. Further, it also indicated that, it would work on a policy of having various categories of differentiated bank licence that will allow a wider pool of private entrants into banking.
In the Union Budget 2014-2015 presented on 10 July 2014, the Union Finance Minister Arun Jaitley emphasised on putting in place a structure for continuous authorization of universal banks in the private sector in 2014-15. He further said that RBI will create a framework for licensing small banks and other differentiated banks.
In lieu of above announcements, RBI prepared the draft guidelines on payments banks and small banks as differentiated or restricted banks.
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