The Reserve Bank of India on Thursday defined fresh rules that will allow a host of new businesses such as mobile phone companies, super-market chains and pre-payment card issuers to set up specialised banks offering limited financial services.
The move is part of India’s broad strategy to widen banking access in a country where nearly 4 out of 10 adults do not have a bank account.
In August, the government launched the Jan Dhan Yojana, an ambitious initiative to end “financial untouchability” setting a target to opening 75 million accounts by January. Late on Wednesday, this target was raised to 100 million accounts.
Under the rules that RBI has announced, mobile telephone companies, super-market chains and prepaid payment card issuers will be eligible set up a payments bank, which can receive deposits and remittances, but cannot lend.
Existing micro-finance institutions, non-banking finance companies and local area banks will be able to convert to small finance banks, the RBI said in its guidelines, calling in applications by January 16.
It could consider more applications at a later stage.
Small finance banks are aimed at giving loans to “unserved and underserved sections” including small business units, small and marginal farmers, and micro and small industries, the Bank said.
“The financial inclusion agenda has received a significant boost with the issuance of these guidelines,” said Aman Bhargava, director, financial services advisory, Grant Thronton India. “The basic objective is to extend the range of financial services to the hitherto unbanked which were forced to rely on non-regulated means — money lenders, chit funds, cash transfers etc.”
RBI said a small finance bank will be eligible to transit into a universal bank subject to several conditions such as its track record as a small finance bank, minimum paid-up capital norms applicable to universal banks plus RBI due diligence.
Resident individuals or professionals with at least 10 years of experience in banking and finance and societies and companies owned by Indian residents will also be allowed to set up small finance banks, RBI said.
Large state-run institutions and big businesses have been barred from setting up small finance banks to ensure that these specialise in lending to small businesses and the poor.
The minimum paid-up equity capital for these has been set at Rs 100 crore, and promoters’ minimum initial contribution to the paid-up equity capital at 40%.
Payments banks can offer payments and remittance services and distribute products such as mutual funds and insurance. They can also issue ATM and debit cards, but not credit cards.
An external advisory committee, which will include bankers, chartered accountants, finance professionals, among other eminent professionals will evaluate the applications. RBI will take the final decision to issue an in-principle approval, which will be valid for 18 months.
Earlier this year, RBI awarded licences to Bandhan Financial and IDFC to start full-scale banks.