Differentiated banking licence: Local area banks hopeful on RBI move

Want scheduled bank status, more light on grey areas in draft proposals before applying to convert as small banks

The recent proposals issued by the Reserve Bank of India (RBI) on licensing of small banks has encouraged local area banks (LABs). However, they’re also looking for some additional benefits to enable them to explore the possibility of converting into small banks.

The draft norms had said LABs, along with non-banking finance companies and micro lenders, will be eligible for converting into small banks.

There are four LABs in the country which are functioning satisfactorily, said the banking regulator. However, these are not considered scheduled banks, a hindrance for them in getting certain benefits.

“One of the advantages of getting a scheduled bank status is that smaller loans are covered under the credit guarantee scheme. We, the LABs, are not eligible for this,” said T Eswara Chandra Rao, managing director of Coastal Bank, a LAB licenced by RBI in 1999. The bank operates with 33 branches in five districts of Andhra Pradesh — Krishna, Guntur, West Godavari, East Godavari and Visakhapatnam.

The draft norms were not clear whether small banks will be given the scheduled bank status. “We need to have clarity on few issues before we apply for a licence,” Rao told Business Standard from Vijayawada, where the bank is headquartered. Coastal Bank has been profitable since its inception.

“Since LABs are not considered as scheduled commercial banks, a number of institutions are not allowed to keep their deposits in these. So, LABs are not able to mobilise those,” said Manmath Dalai, managing director & chief executive officer, Krishna Bhima Samruddhi Local Area Bank. It operates in six districts, three each in Karnataka and Andhra Pradesh.

The branch licensing policy of LABs are also restricted, unlike commercial banks. The latter can open any number of branches in a year and also don’t need to take prior RBI permission for doing so. However, they are mandated to open 25 per cent of their total branches in rural unbanked areas.

LABs, on the other hand, are allowed to open only five or six branches in a year. The draft norm says small banks will need RBI approval for opening of branches in the first three years, RBI said this stipulation could be relaxed, based on experience.

“We need to know how many branches a small bank is allowed to open in the first three years,” Rao said.

Unlike scheduled banks, LABs are not eligible for refinance facilities from agencies such as National Bank for Agricultural and Rural Development. Nor are they eligible for farm loan subsidies provided by the Centre and the states, though they predominantly operate in semi-urban and rural areas.

LABs will also face a challenge in terms of initial capital requirement, kept at Rs 100 crore. “Capital is probably the biggest constraint for local area banks. In India’s financial world, big is always beautiful. Since the capital base is small and there are restrictions on ownership, not too many investors are keen to invest their money in LABs,” said Dalai of KBS, which started operations in 2001.

KBS will also consider converting into a small bank and will ask for its board of directors' approval. “KBS Local Area Bank currently operates in six districts which are considered backward. We deliberately decided to operate in these regions because we wanted to offer banking services to the poor. Our business model is different from the rest. We focus on micro lending and financial inclusion. Given the government's focus on financial inclusion, we believe this model will provide us with huge opportunity,” said Dalai.

The other two LABs are Jalandhar-based Capital Local Area Bank, the largest, and Saubhadra Local Area Bank of Kolhapur.

PERFORMANCE OF LOCAL AREA BANKS

• Capital Local Area Bank: This is the largest such bank in the country, which started its operations in January, 2000. The bank has a network of 34 branches across five districts in Punjab. For FY14, it made a net profit of Rs 10.6 crore, had a loan book of Rs 757.6 crore and a deposit base of Rs 1,264.1 crore
   
• Subhadhra Local Area Bank: This bank from Kolhapur has nine branches. It made a net profit of Rs 1.6 crore in FY13. It had a loan book of Rs 45 crore and deposit base of Rs 40.7 crore
   
• Coastal Bank: This was the first local area bank approved by RBI in 1999. The bank has a network of 33 branches across five districts in Andhra Pradesh. For FY14, it made a net profit of Rs 5.6 crore. It had a loan book of Rs 151.5 crore and a deposit base of Rs 186.3 crore
   
• Krishna Bhima Samruddhi Local Area Bank: This bank started operations in 2001. The bank currently has a network of 14 branches across six districts of Andhra Pradesh and Karnataka (three each). It has assets worth Rs 200 crore and a deposit base of Rs 140 crore