19 JULY 2014: RBI releases draft guidelines to set up payment & small banks

Ø  The Reserve Bank of India (RBI) has set a minimum paid-up capital of Rs.100 crore for those who wish to set up payments and small banks. Releasing the draft guidelines for licensing of these banks, the RBI has said that the promoters will have to have an initial minimum capital of at least 40 per cent. It has prescribed a lock-in period of five years for promoters’ holding. In case the promoters’ stake is in excess of 40 per cent, it will have to be brought down to 40 per cent within three years from the date of commencement of business of the bank. This has to be brought down to 30 per cent within 10 years, and further to 26 per cent within 12 years from the date of commencement of business. According to the draft guidelines, existing authorised non-bank pre-paid instrument issuers (PPIs), non-banking finance companies (NBFCs), corporate BCs (business correspondents), mobile telephone companies, super market chains, companies, real sector co-operatives and public sector entities are eligible for setting up a payments bank. The guidelines allow even banks to take equity position in a payments bank as permitted under the Banking Regulation Act, 1949. The activities of a payments bank will be restricted to acceptance of demand deposits, and provision of payments and remittances services. A payments bank, says the RBI, will further the cause of financial inclusion by providing small savings accounts and payments and remittance services to migrant labour workforce, low-income households, small businesses and other unorganised entities. The idea is to facilitate high volume and low value transactions in a secure and technology-driven environment. Resident individuals/professionals with ten years of experience in banking and finance, companies and societies are eligible to set up small banks. Existing non-banking finance companies, micro-finance institutions , and local area banks can also convert themselves into small banks after complying with the requisite legal and regulatory requirements. The area of operations of the small bank will be restricted to contiguous districts in a homogenous cluster of States/Union Territories so that the bank has the ‘local feel’ and culture.