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Last Modied: Wed, Sep 16 2015. 10 50 PM IST

RBI issues 10 small bank licences


Eight of the 10 granted approval by the central bank are micronance institutions; no
publicly traded entity in the list

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Vishwanath Nair

A le photo of the Reserve Bank of India (RBI). The creation of small nance banks and payments
banks are aimed at furthering nancial inclusion in the economy. Photo: Bloomberg

Mumbai: The Reserve Bank of India (RBI) on Wednesday granted 10 entities in-principle
licences to open so-called small nance banksanother move towards expanding access
to nancial services in rural and semi-urban areas.
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Ujjivan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd and Equitas
Holdings Ltd are among the 10 entities. The others are Au Financiers (India) Ltd, Capital
Local Area Bank Ltd, Disha Micron Pvt. Ltd, ESAF Micronance and Investments Pvt. Ltd,
RGVN (North East) Micronance Ltd, Suryoday Micro Finance Pvt. Ltd, and Utkarsh Micro
Finance Pvt. Ltd.

Larger nancial services rms such as Dewan Housing Finance Ltd, IIFL Holdings Ltd,
SKS Micronance Ltd and UAE Exchange and Financial Services Ltd did not qualify for
the licences. No publicly traded entities have been included in the list.

Small nance banks will offer basic banking services, accepting deposits and lending to
unserved and underserved sections including small business units, small and marginal
farmers, micro and small industries, and entities in the unorganized sector, RBI said when
it released guidelines for such banks in November.

Eight out of the 10 entities granted the in-principle approval, which is valid for 18 months,
are micronance institutions. The exceptions are Capital Local Area Bank Ltd, which
operates in ve districts of Punjab, and Au Financiers. Local-area banks are institutions
that lend in contiguous districts, mobilizing rural savings and making them available for
local investments. Au Financiers is a non-banking nancial company.

For micronance rms that give tiny loans to low-income earners, the key incentive for
converting into small nance banks will be the access they gain to deposits; they will also
be able to offer a wider range of loan products to customers.

The licensing of small nance banks follows 11 payment bank licences given out by RBI
last month to provide basic savings, and deposit, payment and remittance services to
people without access to the formal banking system. Payments banks will not be in the
business of lending.

Both initiatives are aimed at furthering nancial inclusion, which the Bharatiya Janata
Party-led National Democratic Alliance government has made one of its top priorities
since it assumed ofce in May 2014.

It has launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) to ensure a bank account
for every household, offering accidental insurance cover of Rs.1 lakh, life insurance cover
of Rs.30,000 and easy transfer of money across India as sweeteners. As of 12 August, 175.7
million bank accounts had been opened under the scheme, according to the PMJDY
website.

In a statement released on Wednesday, RBI said it had selected the 10 candidates to start
small nance banks after three different committees conducted a detailed case study of
each applicant.

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Going forward, the Reserve Bank intends to use the learning from this licensing round to
appropriately revise the guidelines and move to giving licences more regularly, that is,
virtually on tap.

After setting up a bank, it would take nearly two years to merely stabilize the operation,
said Samit Ghosh, founder and managing director, Ujjivan Financial Services. Ujjivans
loan book stands at about Rs.3,300 crore and it plans to continue its focus on smaller
borrowers, he said.

The next 18 months are going to be a lot of hard work. We have to gure out ways to bring
down the 90% foreign shareholding in the company since RBI has strict guidelines for it.
We will be looking at various options including private placements, said Ghosh.

According to the current policy, the aggregate foreign investment in a private sector bank
from all sources is capped at 74% of its paid-up capital.

Ahmedabad-based Disha Micron said its focus will be to expand in the central and
western Indian states where there is a huge base of unbanked customers.

The initial challenge will be to restructure and transform into a bank from a non-banking
nancial institution and offer multiple banking products, said Rajeev Yadav, director of
Disha group, which runs the Ahmedabad-based micronance company.

In total, 72 entities applied for a small nance bank licence. The applications were

reviewed by a committee headed by former RBI deputy governor Usha Thorat.

It is clear from the list (of licensees) that the RBIs bias is towards people who have
proved themselves in the priority lending space. Since larger banks have always felt it to
be a drag on their books, these entities will be able to ll that gap and serve smaller
customers, said Abizer Diwanji, partner and national leader, nancial services, EY.

According to Diwanji, the ability to maintain a full-edged treasury department would be


one of the advantages of turning into a small nance bank, apart from access to deposits
and the opportunity to offer a wider range of loan products.

But these will also be the biggest challenges, since these are players who have not had
much experience in these services, Diwanji said.

To be sure, the transformation will not be easy.

For the initial few years, lives are going to be difcult for the licensees. Some extremely
large challenges include the ability to form a sustainable business model and gaining
trust from the depositors. However, this sector is capable of achieving these things, said
Alok Prasad, industry expert and former chief executive ofcer of Micronance
Institutions Network, an industry body for microlenders.

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One challenge will be the prudential norms they have to adhere to.

Small nance banks will be subject to most of the prudential norms that scheduled
commercial banks have to adhere to. For instance, they need to maintain a cash reserve
ratio (CRR), or portion of deposits to be set aside with the central bank, and statutory
liquidity ratio (SLR), or the portion of deposits to be invested in government securities, as
stipulated for commercial banks.

Seventy-ve percent of the credit advanced by small nance banks will need to go to
sectors that are considered part of the so-called priority sector, which includes
agriculture, small enterprises and low-income earners. Commercial banks have to
mandatorily lend 40% of their net bank credit to such sectors.

Small nance banks will also have to ensure that 50% of their loan portfolio constitutes
advances of up to Rs.25 lakh, said RBI.

Such banks can eventually apply to RBI to transit into universal banks once they have
established a satisfactory track record. Such a transition would be subject to due diligence
by the banking regulator.

The minimum paid-up equity capital for small nance banks was set at Rs.100 crore and
the minimum initial contribution from promoters xed at 40%.

Vishwanath Nair

TOPICS: RBI SMALL BANKS LICENCE PAYMENTS BANK FINANCIAL INCLUSION

First Published: Wed, Sep 16 2015. 07 17 PM IST

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