Payments banks may convert to a small finance bank after 5 years of business

Payment banks like Paytm an IndiaPost and Fino have expressed their interest in converting into SFBs as they found their model unviable.  (Photo: Pradeep Gaur/Mint)

MUMBAI : Payments banks can apply for conversion into small finance banks (SFBs) after five years of operation, provided they meet the eligibility criteria, the Reserve Bank of India (RBI) said on Thursday, as it announced the final guidelines for on-tap licencing of private sector SFBs.

The promoter of a payments bank is eligible to set up an SFB, provided that both banks come under the non-operating financial holding company (NOFHC) structure, according to the guidelines.

Existing rules do not allow payments banks to lend and deposits are capped at 1 lakh per customer. If these entities get the licence of small finance banks, it will give them access to more deposits and boost their profitability, which is at present under pressure.

The central bank also raised the minimum paid-up capital requirement for SFBs from 100 crore to 200 crore. It said the promoter should hold a minimum of 40% of the paid-up voting equity capital for five years. If the initial promoter shareholding is above 40%, it should be brought down to 40% within a period of five years, 30% within 10 years, and 15% in 15 years.

SFBs should be listed within three years of reaching a net worth of 500 crore, said the central bank. They will be given scheduled bank status immediately upon commencement of operations, and will have general permission to open banking outlets from the date of commencement of operations, according to the final guidelines.

The RBI also allowed primary urban cooperative banks to convert into SFBs, provided they comply with the on-tap licencing guidelines. The minimum net worth of such SFBs will be 100 crore and has to be increased to 200 crore within five years from commencement of business.

SFBs offer basic banking services, such as accepting deposits and lending to un-served and underserved sections, including small businesses, small and marginal farmers, micro and small industries, and the unorganized sector.

“Though the RoE is likely to decline during the initial years of the transition to SFB, the liquidity tightness over the last one year and risk aversion to NBFCs may prompt many NBFCs to explore the SFB model to address the liabilities issue. Hence, we expect a good response for SFB licences. Given that licensing is on-tap basis, we expect NBFCs to finalize their business plans, organization structure, systems and processes before applying for the licence to ensure a better success rate,” said Karthik Srinivasan, head, financial sector ratings, ICRA.

“Deposits mobilization will remain the key factor for the SFBs and though the existing SFBs have scaled up their deposits, some of them continue to remain dependent on wholesale deposits,” he said.

In September 2015, RBI had granted in-principle approval to 10 applicants to set up SFBs. In August 2016, it paved the way for on-tap universal bank licences. It released the final guidelines for eligible entities to apply for licences as and when they chose to, keeping the doors closed on large business houses. NBFCs, qualified individuals and some private companies were eligible to apply for licences.

The RBI, under former governor Raghuram Rajan, tried creating a more diverse banking sector.

After September 2013, it gave licences to two universal banks (IDFC Bank and Bandhan Bank), besides issuing permits to several payments banks and SFBs to help the common man have access to financial services. Rajan had also proposed differentiated licences for wholesale banking and custodian banking to make the sector more diverse.

Payment banks like Paytm, IndiaPost and Fino have expressed their interest in converting into SFBs as they found their model unviable. Microfinance lenders like Satin Creditcare Network ltd are also expected to apply for SFB licences.