Birth of Small Finance Banks & Payment Banks in India

To cover the continuously growing population of India by Banking services, the RBI has finalized two types of new banks – Payment banks (PB) and Small Finance Banks (SFBs) as the way forward.

PBs will provide basic set of functionality – small savings accounts with a maximum amount of INR 0.1mn per account, ATM cards and payment / remittance of funds. Incrementally, basis the final guidelines, payment banks can now act as distributing agents for mutual funds and life insurance products. No form of lending, including credit cards, is allowed however they may lend as a business correspondent of another bank. In terms of prudential norms, payment banks need to invest a minimum of 75% of their funds in SLR securities with maturity up to 1 year and a maximum of 25% of the funds in current or fixed deposits of SCBs. They also need to maintain a leverage ratio of not less than 3% i.e outside liabilities should not exceed 33.33 times their net worth.

The final guidelines for small banks have been fairly diluted. Their initial purpose remains that of being a savings vehicle and supplier of credit to the underserved and unserved sections of the society. However, the nomenclature has changed from ‘Small Banks’ in the draft to ‘Small Finance Banks’ in the final guidelines. SFBs will no longer have any geographic restrictions. The only difference is that they will necessarily have to extend 75% of their adjusted net bank credit to priority sectors in addition to having 50% of the loans in ticket size of less than Rs 2.5mn. Within the 75% PSL lending, 40% has to be diversified and the remaining 35% can be to any one or more sub sectors within priority sectors. They will also have to maintain a minimum capital adequacy ratio of 15% and Tier 1 capital of 7.5%.

RBI has stated in its guidelines that local players and licenses for unbanked areas will be given preference — that makes business models tougher. However, the RBI is open for conversion of SFBs to Universal Banks after a satisfactory performance period, thereby making the entire licensing process ‘on tap’, we opine.