Has RBI Stalled India Post And Paytm Plans To Convert Into Small Finance Banks?

The Reserve Bank of India’s final guidelines for ‘on-tap’ licencing of small finance banks may leave two large hopefuls disappointed. Both India Post Payments Bank and Paytm Payments Bank, which had expressed an interest in pivoting to the small finance bank model, are unlikely to make the cut based on the rules released on Thursday.The guidelines allow non-bank finance companies, microfinance firms and Local Area Banks to apply for a SFB licence. While they say that payments banks are permitted to apply for conversion, the caveats virtually rule out such a conversion.The guidelines specify that only payments banks which have been in business for five years can apply to become small finance banks..“Proposals from Government owned / public sector entities and large industrial house / business groups, including from NBFCs and payments banks promoted by them” will not be entertained, the rules add..India Post Payments BankIndia Post Payments Bank will likely be disqualified on both the above grounds. The entity is fully owned by the government and launched in September 2018.While the payments bank was expected to succeed owing to its large presence across remote locations in India, it has not managed to garner a large deposit base. As on March 31, the payments bank’s total deposit base was nearly Rs 95 crore as compared with Rs 12 crore a year ago, according to its latest annual report.In August, the payments bank’s board had decided to convert it into a small finance bank to provide micro credit to its customer base.Suresh Sethi, managing director and chief executive officer of India Post Payments Bank declined to comment.Paytm Payments BankIn case of Paytm Payments bank, too, the stipulation that the entity should have been in operation for five years will come in the way. The entity began operations only in May 2017.Paytm may also need to face scrutiny of its corporate structure to see whether it fits into the description of a large industrial house if it does apply. The guidelines say that a group with assets of Rs 5,000 crore or more, with the non-financial business of the group accounting for 40 percent or more in terms of total assets / gross income, will be considered a large industrial house. Such entities will then not be allowed to promote a small finance bank.According to a statement by the payments bank released in May, it has built a deposit base of over Rs 500 crore as of March 31 and is therefore the largest payments bank in the country. In a recent interview to The Times Of India, founder Vijay Shekhar Sharma had said that the payments bank would be keen on a small finance bank license, if the regulator permitted it.Sharma did not respond to calls and messages on Thursday..According to Vivek Belgavi, partner at PwC, the way the guidelines have been constructed, the RBI does not intend to bar anyone specifically, but wants to ensure that its tenets of trust and capability are met with.“The spirit of the guidelines seem to be to ensure that people who get an entry to the path to become universal banks eventually are those who have the right kind of aspirations and are serious about the banking business. To that effect, the guidelines show the right kind of maturity and focus on the deserving candidates,” Belgavi said..So Who Can Apply?The RBI, in its guidelines, said that small finance banks should have a local focus, with the ability to serve smaller customers. As such, “this may be a more appropriate vehicle for local players or players who are focused on lending to unserved / underserved sections of the society.”Entities who can apply include:Residents with 10 years experience in banking and financeNBFCs, microfinance companies and local area banks controlled by residentsPrimary urban cooperative banksThe minimum capital base to become a small finance bank has been set at Rs 200 crore. The small finance bank would also be required to maintain a 15 percent capital adequacy ratio at all times, where Tier I capital would need to be at 7.5 percent at least.Promoters of small finance banks are also expected to hold at least 40 percent equity stake in the bank for the first five years. If the promoter shareholding is more than that, it would have to be gradually brought down to 40 percent within the five years. The promoters would also need to bring down their shareholding to 30 percent in 10 years and to 15 percent in 15 years.Along side conducting the basic business of accepting deposits and providing credit to the unserved and underserved population of India, small finance banks can also start simple, no-risk financial services offerings such as insurance products and mutual funds. However, these banks would have to seek prior RBI approval for this during the first three years of operations.Karthik Srinivasan, group head- financial sector ratings at ICRA Ltd said that non-banking finance companies choosing to apply for a small finance bank license, will want to wait to get their house in order first.“...the liquidity tightness since last one year and risk aversion to NBFCs may prompt many NBFCs to explore the small finance bank model to address the liabilities issue and hence we expect good response for seeking a small finance bank license. Given the licensing is on an on-tap basis, we expect NBFCs to finalise their business plans, organization structure, systems and processes before applying for the license to ensure a better success rate,” Srinivasan said.Small finance banks and payments banks were introduced in 2014, as a means to start differentiated banking in India. The aim was to provide banking and financial services to the unserved and underserved locations in India..Watch | RBI issues guidelines for on-tap small finance banks, but...

Has RBI Stalled India Post And Paytm Plans To Convert Into Small Finance Banks?

RBI’s final norms for small finance bank licenses may bring some bad news for payments banks promoted by India Post and Paytm.

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