India’s biggest Banking Revolution can open doors to Railways Bank as well

RBI New Guidelines eases norms for niche banks.  Issuing the guidelines for new entities, the Reserve Bank of India on Monday said it will accept applications for both types of new banks up to January 16

मुंबई Mumbai:  Decks have been cleared for telecom companies, corporates, public sector entities (PSUs) and cooperatives to float ‘payment’ banks, which will be like utilities. However, the ‘small finance’ banks, which can convert into full-fledged banks in future, are out of bounds for corporates and PSUs but open for professionals and financial sector entities. Issuing the guidelines for new entities, the Reserve Bank of India on Monday said it will accept applications for both types of new banks up to January 16.  The Reserve Bank of India’s (RBI) new rules for the entry of small finance banks and payments banks, open doors to almost every type of institution to become a bank, ranging from non-banking finance companies (NBFCs), mobile telephone companies, super-market chains, public sector entities and, theoretically, even to individuals.

Going by the norms, one can’t rule out the chances of a supermarket chain like Big Bazaar or Reliance Fresh opening a payments bank, telephone companies like Bharti Airtel and Idea Celluar or an E-retail chains such as Flipkart or Snapdeal wearing the hat of a banker. Banking is a possibility now open to all. That apart, state-run entities with massive network, such as India Post and Indian Railways too can become payments banks.

The objective of the small finance bank appears to be aimed at having more regulated entities in the area of microfinance and furthering financial inclusion while the payments banks are targeted at providing modern transaction services and savings facilities to the unbanked. The biggest gainers from these regulations would be the telecom companies and issuers of pre-paid instruments, who have been straining to have a bigger slice of the financial services pie. Mobile companies like Vodafone and Airtel had already made large investments to provide remittance and banking services but were stymied by RBI restrictions, which forced them to tie up with banks. Public sector entities like IndiaPost and Indian Railways too will have an opportunity to leverage their network.

Indian Railways have a ready infrastructure in terms of Booking Office at all stations spread all over country which can easily transform as a bank counter to serve the general public and passengers. All Railway Co-operative Banks operating in different zones of Indian railways can also be planned for clubbing or merged under Indian Railway Bank so that every railway men can get salaries, loans etc from any where in Indian railway postings.

The Cellular Operators Association of India had earlier represented to the RBI seeking removal of the diversified shareholding norms in its draft guidelines for payment banks.

By definition, payments banks can undertake most operations a normal commercial bank except offering loans and credit cards.

These entities can accept deposits up to Rs 1 lakh per individual, offer ATM/debit cards, offer payments and remittance services through various channels and offer financial products like mutual fund units and insurance products. Payments banks will have to park 75 percent of their deposits in one-year maturity government papers.

On the other hand, small finance banks are nothing but normal full service banks but in a smaller scale.

The eligible parties who can become smaller banks include NBFCs, micro finance companies and local area banks. They can do deposit taking and lending activities to small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

This is a golden opportunity for entities, which didn’t get into the final list for full service banking permits last year, since they can now become a small finance bank and gradually grow to a full service bank at a later stage once prove their efficiency.

Most NBFCs, including gold-loan companies such as Muthoot Finance, Manappuram Finance, microlenders such as SKS Microfinance and Ujjivan Microfinance, may choose to apply for smaller bank licenses, since becoming a small finance bank can be a game changer for them. Thee firms have existing infrastructure and staff in place, making it easier to morph into a bank.

What is more important is that there will not be any restriction for small finance banks in their geographical area of operations, which was initially present in the draft rules. Therefore, small finance banks can operate nationwide without facing concentration risk.

Even though RBI hasn’t prescribed any specific cap on loans and deposits for smaller banks, these banks cannot engage in large value transactions since 75 percent of their loans must be lent to the so-called priority sector. For existing banks, this requirement is 40 percent.

Also, at least 50 percent of their loan portfolio should constitute loans and advances of up to Rs25 lakh. What is means is majority of the loans of smaller banks must be lent to agriculture, micro-credit and other weaker sections.

But these banks, can, however, compete in the home loan market and SME loan market.

The RBI has stipulated Rs 100 crore capital requirement for both the small finance banks and payments banks, which would make it easier for most NBFCs to become small, payments banks.The relaxed guidelines do not mean easy permits for all those to apply since the RBI’s discretion will prevail ultimately on the merit of the applicant.

Payments banks and smaller banks are undoubtedly a bigger revolution for banking for poor in the history of Indian banking.

Small finance banks and payments banks can certainly do much more than full-service banks to push India’s financial inclusion agenda. Half of the Indian population are still unbanked and rely on private money lenders to fulfill their financial needs.

Small finance banks and payments banks, by design, can operate only among the low-income customer. Hence these lenders will logically chase the un-banked, underserved segments, for survival in the business. Presently, most commercial banks lend to the weaker sections mainly to fulfill their priority sector obligation.

Financial inclusion, unlike the existing lot of commercial banks, will thus not be a liability for the new set of banks, but their main area of activity.

According to Rishi Gupta, COO & ED, FINO PayTech, the new guidelines are more favorable than the draft version. The latest norms clarify that a payments bank can distribute third-party products, send and receive remittances from multiple banks and international remittance companies and also function as business correspondents of another bank.

Kudos to Raghuram Rajan and his team at the central bank for ushering in the real banking revolution for India’s yet-to-be-banked poor.