RBI Guidelines to setup Small Finance Bank for existing Payment Banks- 06.12.2019

Yesterday, RBI has come up with the final guidelines to tap the opportunity available in a small finance banking license. Read the guidelines in detail. 

Objective of setting up Small Finance Bank(SFB):

(i) provision of savings vehicles primarily to unserved and underserved sections of the population.

(ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations.

As the above objectives can’t be served with existing Commercial and PSU banks.

Eligibility Criteria

(i) Resident individuals/professionals (Indian citizens), singly or jointly, each having at least 10 years of experience in banking and finance at a senior level.

(ii) Companies and Societies in the private sector, that are owned and controlled by residents (as defined in FEMA Regulations, as amended from time to time), and having a successful track record of running their businesses for at least a period of five years.

(iii) Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) in the private sector, that are controlled by residents (as defined in FEMA Regulations, as amended from time to time), and having successful track record of running their businesses for at least a period of five years.

(iv) Existing Payments Banks (PBs) which are controlled by residents and have completed five years of operations are also eligible for conversion into small finance banks.

The fourth point above is a very good opportunity for unlisted companies such as Paytm Payments Bank and Fino-Payment Bank to set up Small Finance Banking License.

Paytm Payments Bank has started its operation in 2017. So it will become eligible in 2022.

Fino-Payments Bank Limited has started on June 30, 2017. So it will also eligible in 2022.

Business Model of Payments Banks

1. Payment Bank can’t accept a deposit of more than 1 lakh from customers and moreover, they can’t lend to anyone, as in a case of banks. They can only deposit to Govt securities( 75%) and commercial banks( 25%). From there it earns interest rates of approx 6-7%. This is one way of revenue source.

Paytm Payments Bank has a total deposit of Rs.2142 Crores in FY18-19 up from Rs.1444 Crores last year. In FY18-19, it has earned an interest of Rs.142 Crores which is up from Rs.67 Crores last year. It has made a profit of Rs.19.2 Crores in FY18-19 as compared to a loss of Rs.20 Crores last year. The data is compiled from regulatory filings.

2. Apart from this, they earn revenue from a commission by cross-selling mutual funds, insurance products to their clients. Apart from this, it also makes revenue from wallet utilization.

Paytm Payments Bank in FY18-19 has earned a revenue of Rs.1525 Crores which is up from 654 Crores last year from the commission, exchange, and brokerage income.

UnlistedZone Take

The business model of Payments bank is not as lucrative as the small finance banking license. So tapping SFBs opportunity on time will open gateway into the big size Indian financial market.

Vijay Shekhar, Founder of Paytm, a few months back looking to buying stakes in Yes Bank, which shows his keenness to get into the full-fledged banking industry and this would be a golden chance.