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|