Reliance, Birla join the payment bank rush

Licences for niche banks in six months; close to 100 entities apply; SBI to hold up to 30% stake in venture with RIL

Some of India’s top business houses such as Reliance Industries Ltd (RIL) and Aditya Birla Group are among about 100 entities that have applied for payment and small bank licences, the application deadline for which ended on Monday. Bharti Airtel was the first to announce plans for a payment bank licence, through an association with Kotak Mahindra Bank, on Thursday.

Those who applied to the Reserve Bank of India (RBI) for small bank licences included Nirmal Jain-led IIFL Holdings Ltd, UAE Exchange, Kerala-based ESAF Microfinance, Punjab-based Capital Area Local Bank and Andhra Pradesh-based Coastal local Area Bank.

While the central bank did not come out with a list of applicants, sources familiar with the developments said the licences would be issued in six months, after an external committee considered all the applications. The names of the committee members will be announced on Tuesday.

RIL, India’s largest private sector group, said it had set up a joint venture with State Bank of India (SBI), the country’s largest bank, which would hold up to 30 per cent stake. “The payment bank will leverage SBI’s nationwide distribution network and risk-management capabilities, along with the substantial investments made by RIL in its retail and telecom businesses,” RIL said, adding it would deploy state-of-the-art technology and build scalable infrastructure.

S Sriram, managing director (national banking group), SBI, told Business Standard the crucial element in payment bank operations was a robust technology backbone for remittance business. The proposed bank intends to cover 250,000 villages and 5,000 towns in three years. While it plans to start with a Rs 100-crore capital base, this will be ramped up to Rs 400 crore in three-four years, depending on business volumes.

Aditya Birla Nuvo, the largest shareholder in Idea Cellular, plans to own 51 per cent of its proposed payment bank, while Idea will own the rest. Later, Idea could raise its holding to 60 per cent.

Kishore Biyani’s Future Group said the banking entity, to be called NuFuture Payments Bank, would work towards extending RBI’s mandate of financial inclusion by focusing on the group’s core consumer groups that included women, migrant workers, self-employed people, farmers and local entrepreneurs from the group’s sourcing base. Future Group has joined hands with IDFC, which is to become a universal bank in October 2015, for a payment bank licence. IDFC will pick up stake in the new entity, should it get a payment bank licence.

BANKING ON LICENCES

• Oct 19, 2007: RBI releases paper on differentiated licences, but says prudent to continue with existing universal banking model. It promises a review after some success in financial inclusion
• Aug 27, 2013: RBI releases discussion paper on banking in India. Niche banking, differentiated licensing desirable, it says
• Apr 2, 2014: In-principle approvals for universal banking licences given to Bandhan and IDFC
• Jul 10,  2014: FM Jaitley presents Budget FY15, says RBI will create a set-up to license small banks, other differentiated banks
• Jul 17, 2014: RBI releases draft norms for licensing of small finance & payment banks, invites feedback by Aug 28, 2014
• Nov 27 2014: Norms for licensing of small finance & payment banks released; applications invited till Jan 16, 2015
• Dec 8, 2014: RBI says will clarify on guidelines for licensing of small finance and payment banks on its website
• Jan 1, 2015: Clarifications issued to queries on norms for small finance and payment bank licences; deadline for submission of applications extended to Feb 2, 2015

MAJOR CONTENDERS

RIL, Aditya Birla Group, Bharti Airtel, Future Group, UAE Exchange India, Dewan Housing Finance, Videocon and former SKS Microfinance chief Vikram Akula
Among others, Videocon and the Rs 24,300-crore Murugappa Group’s non-banking financial company arm, Cholamandalam Investment and Finance (CIF), also applied for a payment bank licences. While Videocon said it was exploring tie-ups with public sector banks, CIF Managing Director Vellayan Subbiah told Business Standard the payment bank would initially be a wholly-owned subsidiary with nationwide operations. A partner, which could bring technology or access to customers, would be brought on board at a later stage, he added.

RBI had piloted the idea of payment and small banks to extend basic banking to millions who didn’t have access to banking and financial services. Encouraging alliances for starting payment banks, RBI Deputy Governor H R Khan had last week said partnerships were crucial for the success of differentiated banks. If these entities had cost-effective frameworks and used mobile and telecom networks, they entities could be successful, Khan added.

Manish Khera, former chief executive of Fino Paytech, along with financial sector professionals, has also applied for a small finance bank licence. The entity, to be named 1st Small Finance Bank, would have an initial capital base of Rs  150 crore and will primarily focus on underserved regions in central India, Khera said. Vikram Akula, former chief of SKS Microfinance; Dewan Housing and UAE Exchange India are among the other applicants for small banks.

“Applying for a small bank licence and upgrading our company to a bank is only a natural extension from its present position to serve our customers with much better financial provisions,” said V George Antony, managing director, UAE Exchange India.

Kapil Wadhawan, chairman and managing director of Dewan Housing, said he wasn’t interested in roping in a partner. On the asset side, he said, the company had priority sector lending for home loans, small and medium enterprises and education. If RBI grants the entity a licence, it would help it build the liability side, as it would have access to a large pool of cheaper funds.

According to the guidelines issued by RBI in November, payment banks can accept demand deposits subject to a cap of Rs  1 lakh a customer and provide payment and remittance services through channels such as internet, branches, business correspondents and mobile banking. They, however, cannot offer credit facilities directly but can act as an agent of a commercial bank for credit and other services. PROCEDURE FOR LICENSING OF SMALL FINANCE & PAYMENT BANKS:

• An external advisory committee (EAC) comprising eminent professionals will evaluate the applications
• The EAC will give suggestions, but the final decision of issuing in-principle approvals will be taken by RBI
• The validity of the in-principle approvals will be 18 months

RESTRICTIONS/CHALLENGES FOR SMALL FINANCE AND PAYMENTS BANKS:

Small finance banks:

• Will need to ensure 75 per cent of its loans are in priority sectors
• Will need to focus on small loans; at least 50 per cent of loan portfolio must have advances of up to Rs 25 lakh
• Annual branch expansion plans need prior approval of RBI for initial five years
• Will not be allowed to set up subsidiaries to undertake non-banking financial services

Payment banks:

• Such entities will be allowed to hold up to Rs 1 lakh per individual customer initially
• Will not be allowed to accept deposits from non-resident Indians
• Will not be permitted to issue credit cards and offer loans
• Will not be allowed to set up subsidiaries to undertake non-banking financial services