RBI issues draft guidelines for setting up small banks, payment banks

The Reserve Bank of India (RBI) issued draft guidelines for setting up of small banks, which will have a local feel and will provide small-ticket loans to farmers and businesses.
The apex bank also issued draft norms for establishing payment banks, which will provide services to marginalized sections of society, including migrant labourers, for collecting deposits and remitting funds.
The step from the apex bank comes close on the heels of Finance Minister Arun Jaitley announcement in his Budget speech 2014-15 that RBI would create a framework for licensing small banks and other differentiated banks. Differentiated banks like local area banks and payment banks have been considered to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.
As per RBI guidelines:

• The minimum capital requirement for such banks will be Rs 100 crore as against Rs 500 crore required for normal commercial banks.
• Small Banks will provide a whole range of basic banking services such as deposits and supply of credit, but their area of operation will be limited. 
• Payments Banks will provide very basic and limited number of products such as acceptance of demand deposits and remittances of funds.
• Payments banks will have an extensive network of access points mainly in remote areas, either through their own branch network or through Business Correspondents (BCs) or through networks provided by others.
• Foreign investments in these new category banks would be as per the FDI policy. 
• RBI has allowed existing non-bank pre-payment instrument issuers, Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, firms, real sector cooperatives and public sector entities to apply for the license to set up payments bank.
• To set up small banks, resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters.
• Existing NBFCs, Micro Finance Institutions (MFIs), and Local Area Banks (LABs) can also choose for conversion into small banks.

Local focus and the ability to serve smaller customers will be a key criterion in licensing the new category of banks.

Month: Current Affairs - July, 2014