RBI releases Final Guidelines for Payments Banks

Posted on November 28, 2014 by Sumita Kale

On November 27, the RBI released the final guidelines for Payments Banks, opening the banking sector to those entities who can meet basic savings and remittance needs of the unbankedThe scope of activities of Payments Banks are as follows:

  1. Acceptance of demand depositsPayments Banks will initially be restricted to holding a maximum balance of Rs100,000 per individual customer.
  2. Issuance of ATM/debit cardsPayments Banks, however, cannot issue credit cards.
  3. Payments and remittance services through various channels.
  4. BC of another bank, subject to the Reserve Bank guidelines on BCs.
  5. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

The new banks are not allowed any lending activities.

In general the final guidelines are similar to the draft guidelines issued for feedback in July 2014, there are some changes that reflect the responses from the publicThe RBI's consultative approach must be lauded hereFor instance, the minimum paid-up equity capital for these banks has been set at Rs.100 crore, while the promoter contribution has been set at a minimum of 40% at the start, in line with the draft guidelines but promoters are no longer needed to bring down their shareholding from 40% to 24% over 12 years, as suggested in the draft norms When the Payments Bank reaches a net worth of Rs500 crore and therefore becomes systemically important, diversified ownership and listing will be mandatory within three years of reaching that net worth.

Further, while the draft guidelines required Payments Banks to maintain a net worth of Rs100 crore at all times, the RBI has lifted this requirementThe RBI now requires that a Payments Bank’s liabilities should not exceed 33.33 times its net worthThis improves the business case for Payments Banks.

However, the recommendation to relax the maximum balance per customer has not been accepted and Payments Banks will  be restricted to holding a maximum balance of lakh per individual customerThis will constrain these new banks from servicing SMEs or companies that have distribution networks in the hinterland.

Another  important change in the final norms, compared with the draft, is deployment of funds and the leverage ratio allowedAs per final guidelines, apart from amounts maintained as cash with the central bank (defined by the cash reserve ratio, or CRR), payments banks will be required to invest at least 75% of their demand deposits in statutory liquidity ratio (SLR) eligible government securities or treasury bills with maturity up to one yearThe remaining 25% of their fixed deposits can be parked with other scheduled commercial banks for operational purposes and liquidity managementSLR defines the proportion of deposits banks will have to keep in assets specified by RBI, including gold, and government bonds and securitiesThe draft guidelines had said that the banks would be required to invest all their deposits in SLR securities with one year maturityThere were concerns that this retriction would have severely hampered the viability of the new banksNow this has been relaxedFurther, the leverage ratio requirements have also been eased to 3% from the earlier proposed 5%.

While opening up the list of probable applicants to existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities, the final guidelines state that If a Government entity desires to set up a payments bank, it should first obtain necessary approvals from the Government and submit its application ; it remains to be seen how the Finance Ministry will deal with India Post's aim to become a Payments Bank.

It is heartening that the Mor Committee recommendation for existing PPIs to become either Payments Banks or BCs has not been acceptedAs the final guidelines state, It is not mandatory for an existing PPI issuer to apply for a payments bank licence and it may continue as a PPI issuer as per the guidelines issued by RBI from time to time As noted in an article in the Mint (Probir Roy and Sumita Kale) in April, a tiered structure of payment providers and banks can give the best framework to encourage competition and innovationBy allowing PPIs to continue, therefore the RBI has given a positive signal to think differently.

Applications have been invited from a broad specturm of entities by January 16th 2015, and the new banks should start operations next year, thereafter, licenses will be given on tap.

The final guidelines look promising for prospective applicants; these new banks should be able to reach the last mile effectively, and step in where regular banks have failed so far in bringing the unbanked into the formal financial system.

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