In what is a significant development for the telecom, digital payments and retail industries, and especially businesses like Airtel Money, Itz Cash, OxiCash, Paytm, MobiKwik, and several other semi closed wallet companies, the Reserve Bank of India has released Draft Guidelines for “Licensing of Payments Banks” in India. Suggestions and comments have to be sent in by August 28th 2014, to cgmicdbodco@rbi.org.in.

Once finalized, this might to be a precursor to the winding down of the Prepaid Payment Instruments license, since the Nachiket Mor committee, in January 2014, had pointed towards difficulties being faced by the Pre-paid Payment Instruments Issuers (PPI issuers), “and the underlying prudential concerns associated with this model”. It has recommended that the existing and new PPI issuer applicants should instead be required to apply for a Payments Bank licence or become Business Correspondents (BCs). This means that, in all probability, most PPI licensees will look to apply for a Payment Banks license.

Notes from the draft guidelines:

– Objective: to enable (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

– Eligibility: “The entities eligible to set up a Payments Bank include existing non-bank Pre-paid Instrument Issuers (PPIs), Non-Banking Finance Companies (NBFCs), corporate Business Correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities.” Even banks can take equity stake in a Payments Bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949.

– Minimum paid up capital requirement: Rs 100 crore, “of which the promoters’ initial minimum contribution will be at least 40%, to be locked in for a period of five years”. Shareholding of the promoters should be brought down to 40% within three years, 30% within a period of 10 years, and to 26% within 12 years from the date of commencement of business of the bank.”

– Naming: The Payments Bank will be required to use the word “Payments” in its name in order to differentiate it from other banks.

– Rollout obligations: the Payments Bank will be required to have at least 25% of access points in rural centres.

– Services:

  1. Acceptance of demand deposits (current deposits, and savings bank deposits), to enable it to provide provide payments and remittance services and demand deposit products to small businesses and low-income households. Limitation: A maximum balance of Rs 100,000 per customer. This might be raised later by the RBI, based on performance of the bank.  If the transactions in the accounts conform to the “small accounts” transactions, simplified KYC/AML/CFT norms will be applicable.
  2. Payments and remittance services: accepting deposits via its channels (branches, Business Correspondents, mobile banking), and payments through branches, Business correspondents, Automated Teller Machines (ATMs) and Point-of-Sale terminals.
  3. Issuance of Prepaid Payment Instruments (i.e. their own wallet).
  4. Internet banking.
  5. Functioning as Business Correspondent (BC) of other banks.

Importantly, the Payments Bank cannot set up subsidiaries to undertake non-banking financial services activities. “The other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not co-mingled with the banking and financial services business of the Payments Bank.

– Deployment of funds: 

  1. The Payments Bank cannot undertake lending activities.
  2. It has to maintain a sufficient Cash Reserve Ratio (CRR) with RBI, minimum cash in hand and balances with a scheduled commercial bank/RBI required for operational activities and liquidity management.
  3. It will be required to invest all its monies in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR).
  4. The Payments Bank will participate in the payment and settlement system and will have access to the inter-bank uncollateralised call money market and the collateralised CBLO (Collateralized Borrowing and Lending Obligation) market for purposes of temporary liquidity management.

– Capital requirement: “The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15% of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Base I standards.

As the Payments Bank will have almost zero or negligible risk weighted assets, its compliance with a minimum capital adequacy ratio of 15% would not reflect the true risk. Therefore, as a backstop measure, the Payments Bank should have a leverage ratio of not less than 5%, i.e. its outside liabilities should not exceed 20 times its net-worth / paid-up capital and reserves.”

– Promoter’s contribution: “The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40% which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40% shall be brought down to 40% within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30% of the paid-up voting equity capital of the bank within a period of 10 years, and to 26% within 12 years from the date of commencement of business of the bank. Proposals having diversified shareholding and a time frame for listing will be preferred.”

– Foreign shareholding: The foreign shareholding in the bank would be as per the extant FDI policy.

– Voting rights and transfer/acquisition of shares: “As per Section 12 (2) of the Banking Regulation Act, 1949, the voting rights in private sector banks are capped at 10%, which can be raised to 26% in a phased manner by the RBI. Further, as per Section 12B of the Act ibid, any acquisition of 5% or more of voting equity shares in a private sector bank will require prior approval of RBI. This will also apply to the Payments Banks.”

Entities other than the promoters will not be permitted to have shareholding in excess of 10 per cent of the voting equity capital of the bank.

– Corporate governance

  1. The Board of the Payments Bank should have a majority of independent Directors.
  2. The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.

– Technology backed and fully networked from the beginning: “The operations of the bank should be fully networked and technology driven from the beginning.”

– Customer Grievances Cell: The bank should have a high powered Customer Grievances Cell to handle customer complaints.

Rollout timeline: 

  1. The applications will be initially screened by RBI to ensure prima facie eligibility of the applicants.
  2. An Expert Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc. will evaluate the applications.
  3. The validity of the in-principle approval issued by RBI will be one year from the date of granting such approval and would lapse automatically thereafter. The Payments Bank would therefore have to be set up within one year of grant of in-principle approval.
  4. After issue of in-principle approval for setting up of Payments Bank, if any adverse features are noticed subsequently regarding the promoters or the companies/group entities with which the promoters are associated or have significant interest and control, the RBI may impose additional conditions and if warranted, may withdraw the in-principle approval.
  5. In order to ensure transparency, the names of applicants for Payments Bank licences will be placed on the RBI website on receipt of the applications. The names of successful applicants will also be placed on the RBI website.

Corrigendum: an earlier version of this article misspelt MobiKwik’s name. The error is regretted. Our apologies.