JOIN USThe RBI has taken one more step towards inclusive banking with the grant of in-principle licences to 10 applicants to set up small finance banks. In the next 18 months, these selected entities will have their work cut out to fulfill the conditions set by the regulator before they can hope to secure the final approval. Only last month, the RBI had issued in-principle licences to 11 applicants to set up payments banks. The RBI guidelines mandate that both sets of banks would be technology-driven. The minimum capital required to set up both types of banks is Rs 100 crore. Also, both are being visualised as tools to widen financial inclusion. That said, there are clear differences between the two.
Payments banks are barred from lending. They will primarily draw their revenues from fee and commission income from payments and remittance services, and interest income from SLR securities/treasury bills — where they are required to park 75 per cent of their
deposit balances. Consequently, payments banks are likely to be low margin businesses. To keep their costs low, the RBI has spared them from the requirement of opening a quarter of their branches in unbanked rural centres. Instead, it is enough that they provide 25 per cent of physical access points in such centres through either ATMs or tie-ups. Therefore, although the RBI does not visualise them to be virtual banks, the payments banks with their high reliance on technology will be an altogether different beast from our typical banks.
In contrast, small finance banks are scaled down, regular banks which can both collect demand deposits as well as offer loan products. They are required to open a quarter of their physical branches in unbanked rural centres, and observe the CRR and SLR requirements of commercial banks. At least half of the loan portfolio of such banks should be made up of small ticket loans and advances of less than Rs 25 lakh. Also, there are restrictions on the loan exposure of single or group borrowers. Besides these measures to help small borrowers, small finance banks are required to lend 75 per cent of their adjusted net bank credit (ANBC) to the priority sector. This is 40 per cent for regular commercial banks. To distinguish themselves from universal banks, these new entities would have to include the words ‘payments bank’ or ‘small finance bank’, as the case may be, in their names. Surely, more than a rebranding exercise is on cards. When these 21 new players formally launch operations after 18 months, the stage would be set for a transformation in the banking landscape.