HYDERABAD: The RBI offered a lifeline for payments banks, which have been struggling to stay afloat. Owing to tough market conditions and fierce competition, the number of payments banks have reduced from 11 in August 2015 to just a handful now.
Industry players believe that allowing payments banks to transform into Small Finance Banks (SFB) can accelerate technology adoption into lending and other forms of direct banking, given the tech-focused models the new-age banks have evolved.
“The ask for payments banks to complete five years of operation before seeking an SFB license seems a bit long, given that payments banks were looking forward to expanding their products or services to make their business models more sustainable. RBI reiteration that SFBs shall have a path to a Universal Banking License is reassuring and positive news for the SFBs,” said Mahesh Ramamoorthy, MD (APMEA), Banking Solutions, FIS.
To convert into an SFB, payments banks have to complete five years of operations and meet certain eligibility norms. RBI’s proposed committee will grant in-principle approval valid for 18 months.
According to Rajeev Yadav, MD & CEO, Fincare SFB, the move would lend great stability to Urban Co-operative Banks desirous of voluntarily transiting into SFBs have greater stability and enable protection of depositors.But the move is not without riders. Investors, other than promoters, won’t be allowed to hold more than 10 per cent stake in the SFB. But exceptions are made for non-banking financial companies (NBFC), microfinance institutions and local area banks, where non-promoters hold more than 10 per cent limit. However, they may only have three years to dilute the stake. The listing will be mandatory within three years after the bank’s net worth reaches Rs 500 crore.
Rating firm ICRA noted that deposits mobilisation will be key for SFBs and though the existing SFBs have scaled up their deposits, some of them continue to remain dependent on wholesale deposits.
Currently, it is a double whammy for payments banks as they are not allowed to lend and deposits are also capped at Rs 1 lakh per customer. Of this, 75 per cent needs to be earmarked in government securities, leaving little for payments banks to monetise on, given that most players had less than the desired customer base.
“Though the RoE is likely to decline during the initial years of the transition to SFB, the liquidity tightness over the last one year and risk aversion to NBFCs may prompt many NBFCs to explore the SFB model. Hence, we expect good response for SFB licences. Given that licensing is on-tap basis, we expect NBFCs to finalise their business plans, organisation structure, systems and processes before applying for the licence,” said Karthik Srinivasan of ICRA.
Riders
Investors other than promoters won’t be allowed to hold more than 10% stake in the SFB. NBFCs, MFIs and local area banks, where non-promoters hold more than 10 per cent limit, are exempted from this.