The Reserve Bank of India released its final guidelines for the setting up of payments banks in the country. The move aimed at improving financial inclusion in the country will allow Pre-paid Payment Instrument (PPI) issuers, Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities to apply for a licence as promoters.
The move is significant as it allows virtually any company to set up a payments bank in the country. The Nachiket Mor Committee report said that this will end the PPI license and points out the difficulty existing companies face in providing financial inclusion. ” Given the difficulties being faced by PPIs and the underlying prudential concerns associated with this model, the existing and new PPI applicants should instead be required to apply for a Payments Bank licence or become Business Correspondents. No additional PPI licences should be granted.” the Mor report said.
Notes from the guidelines
Objectives of payment banks: To further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment.
– The minimum paid-up equity capital of the payments bank shall be Rs. 100 crore.
– 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. Tier I capital should be at least 7.5% of RWAs. Tier II capital should be limited to a maximum of 100% of total Tier I capital.
– The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
Scope of activities and services:
– Acceptance of demand deposits, i.e., current deposits, and savings bank deposits from individuals, small businesses and other entities.
– A payments bank cannot undertake lending activities.
– No NRI deposits should be accepted.
– Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer. After the performance of the payments bank is gauged, RBI may consider raising the maximum balance limit.
– However, payments bank can accept a large pool of money to be remitted to a number of accounts provided at the end of the day the balance does not exceed Rs. 100, 000.
– Issuance of ATM / Debit Cards. Payments banks, however, cannot issue credit cards.
– Payments banks will be permitted to handle cross border remittance transactions in the nature of personal payments / remittances on the current account. All facilities / approvals incidental to – undertaking such transactions in foreign exchange will be enabled by RBI on an application made to it.
– Payments banks can undertake other non-risk sharing simple financial services activities, not requiring any commitment of their own funds, such as distribution of mutual fund units, insurance products, pension products, etc.
– Payments and remittance services through various channels including branches, Automated Teller Machines (ATMs), Business Correspondents (BCs) and mobile banking.
– A payments bank may choose to become a BC of another bank, subject to the RBI guidelines on BCs.
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.
Naming: The payments bank will be required to use the words “Payments Bank” in its name in order to differentiate it from other banks.
Deployment of funds: Payments banks will be required to invest minimum 75% of its “demand deposit balances” 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) and hold maximum 25% in current and time / fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. They will also be required to maintain a Cash Reserve Ratio (CRR) with RBI on its outside demand and time liabilities.
Promoter contribution: Promoters of the payments bank should hold at least 40% of its paid-up equity capital for the first five years from the commencement of its business. If the payments bank is set up as a joint venture with equity partnership with a scheduled commercial bank, the scheduled commercial banks can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949.
Listing on bourses: When the payments bank reaches the net worth of Rs.500 crore, and therefore becomes systemically important, diversified ownership and listing will be mandatory within three years of reaching that net worth. However, payments banks having net worth of below Rs.500 crore could also get their shares listed voluntarily, subject to fulfillment of the requirements of the capital markets regulator.
Corporate governance: . The Board of the payments banks should have a majority of independent Directors. The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.
Voting rights and transfer/acquisition of shares: As per Section 12 (2) of the Banking Regulation Act, 1949, any shareholder’s voting rights in private sector banks are capped at 10%. This limit can be raised to 26% in a phased manner by the RBI. Any acquisition of 5% or more of paid-up share capital will require prior approval of RBI.
The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time. As per the current FDI policy, the aggregate foreign investment in a private sector bank from all sources will be allowed upto a maximum of 74%of the paid-up capital of the bank.
Preferences: The RBI says that preference will be given to those applicants who propose to set up payments banks with access points primarily in the under-banked States / districts in the North-East, East and Central regions of the country.
Other requirements: Payments bank will be required to have at least 25% of physical access points including BCs in rural centres. However they will not be required to keep 25% of their branches in rural unbanked areas as scheduled commercial banks.
Procedure for applications and RBI decisions:
Applications shall be submitted in the prescribed form (Form III) to the Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai – 400 001. In addition, the applicants should furnish the business plan and other requisite information as indicated. Applications will be accepted till the close of business as on January 16, 2015. After experience gained in dealing with payments banks, applications will be received on a continuous basis. However, these guidelines are subject to periodic review and revision. An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications. The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank. The Reserve Bank’s decision in this regard will be final. The validity of the in-principle approval issued by the Reserve Bank will be eighteen months. The names of applicants for bank licences will be placed on the Reserve Bank website.
Our take: The final guidelines seem a lot more friendlier for potential applicants. One of the biggest pain points in the draft guidelines were the utilization of funds. The RBI had stated that 100 of deposits will have to be utilized in government securities and the final guidelines eased it to 75% in government securities and 25% in current and fixed deposits in scheduled commercial banks. This will certainly help in managing funds a lot more better. Another significant positive is that the promoter/promoter group will not have to bring down their stake in the payment bank to 26% over 12 years.
Telecom operators will have an edge when they apply for a payments bank licence as the guidelines state that preference will be given to those companies with access points in the unbanked areas of the North-East and Central regions.
The final guidelines also state that payments banks can also partner with existing scheduled commercial banks in a joint venture, new entrants could use the experience of existing banks and commercial banks may also look on this to complement their business.
However, the guidelines also state that payments banks need to maintain a capital adequacy ratio of 15% of its risk weighted assets. This is odd considering that payments banks will not be allowed lending activities and will hardly have any risk-heavy assets.
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