Payment Banks can become SFB after five years under new RBI norms

SFBs will at once be identified as scheduled banks and can open branches immediately

The Reserve Bank of India’s (RBI)'s new draft guidelines for on-tap licensing of small finance banks (SFBs) allows payment banks to convert into SFBs after five years of operations. If the promoter of a payments bank desires to set up an SFB separately, both the banks should come under the non-operative financial holding company (NOFHC) structure.

The guidelines have also clarified that SFBs 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.

RBI said, “There will not be any restriction in the area of operations of small finance banks; however, preference will be given to those applicants who, in the initial phase, set up the bank in a cluster of under-banked states/districts, such as in the north-east, east and central regions of the country. It is expected that the small finance bank should primarily be responsive to local needs. After the initial stabilisation period of five years, and after a review, RBI may liberalise the scope of activities of the small finance banks.”

However, “The branches of the NBFC / MFI / PB should be converted into bank branches within a period of three years from the date of commencement of operations or be merged / closed. The small finance bank and the NBFC / MFI cannot co-exist,” it added.  

Commenting on the final draft Sanjay Agarwal, MD & CEO, AU Small Finance Bank, said, “We welcome these guidelines. They are very progressive in nature and approving payment banks to convert is a fantastic development. We are happy to be the part of the initial experiment and we were able to prove that the model was strong. We are happy that we were able to do set correct examples.”

In its final guidelines RBI added Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into SFBs will initially require net worth of Rs 100 crore, which will have to be increased to Rs 200 crore within five years from the date of commencement of business.

However rating agency Icra doesn’t see this move as a constraint. Karthik Srinivasan, Group Head-financial sector ratings, Icra, said, “RBI has increased the net worth criteria to Rs 200 crore for the applicant from Rs 100 crore earlier. However, in our view, this should not be a constraining factor, given most of existing SFBs commenced operations with a larger net worth. Though the RoE is likely to decline during the initial years of transition to SFB, the liquidity tightness during the past one year and risk aversion to NBFCs may prompt many NBFCs to explore the SFB model to address the liabilities issue."

Under the prudential norms, RBI has said, “The maximum loan size and investment limit exposure to a single and group obligor would be restricted to 10 per cent and 15 per cent of its capital funds, respectively.”  An SFB will be required to manage robust risk management framework by ensuring that the bank extends loans primarily to small borrowers. Besides, at least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs.25 lakh on an ongoing basis.

In its September draft guidelines RBI said that the minimum net worth of SFB should be doubled from Rs 100 crore to Rs 200 crore and that the promoters’ stake should be brought down to a maximum of 15 per cent within 15 years from the date of commencement of business of the bank, as against the existing norm of 26 per cent within 12 years.

The promoters of an SFB must hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which shall be locked in for five years from the date of commencement of business of the bank.

If an SFB reaches a net worth of Rs 500 crore, it has to mandatorily go for listing within three years. But SFBs that have a net worth of less than Rs 500 crore may also get their shares listed voluntarily, subject to their meeting the market regulator’s criteria.

According to RBI, among the many objectives of setting up an SFB, the primary one would be to undertake acceptance of deposits from, and extending lending activities to the unserved and underserved sections, including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

RBI's Final Guidelines for SFB

· Payments Banks can apply for conversion into SFB after five years of operations

· UCBs transiting into SFBs will require of net worth of Rs 100 crore, which will have to be increased to Rs 200 crore within five years from the date of commencement of business.

· SFBs will be given scheduled bank status immediately upon commencement of operations.

· SFBs will have general permission to open banking outlets from the date of commencement of operations.