Saturday, November 29, 2014

RBI's payment bank norms to deepen financial inclusion

The Reserve Bank of India (RBI) on Thursday announced the final guidelines for setting up and small banks, to attract serious players and push financial inclusion. It allowed corporate houses, including telecom players and retail chains, to set up payment banks, and also gave them the option of forming joint ventures with commercial banks. But small banks will be a no-go area for companies, including promoters of large non-banking financial companies. Small banks will, however, not have any geographical restriction, as proposed in the draft norms.

Government-owned entities, such as India Post, have been allowed to set up payment banks, subject to their owner’s approval.

has asked interested parties to apply by January 16. The application will be screened by an external committee, which will send its recommendations to the central bank.

The final norms on payment banks, analysts said, were more liberal than the draft guidelines issued in July this year. Rishi Gupta, chief operating officer & executive director of FINO PayTech, said the guidelines had expanded the scope of activities and given clarity on providing third-party products and services, such as mutual funds, insurance and pension. This would open avenues to earn fee income. The guidelines have also allowed sending and receiving remittances from multiple banks & international remittances and permitted payment banks to function as business correspondents of other banks.

The guidelines have also simplified the promoter structure — listing is mandatory within three years of reaching a net worth of Rs 500 crore, unlike the requirement to dilute promoter stake to 40 per cent within three years as stated in the draft.

Besides, payment banks should have a leverage ratio of at least three per cent (its outside liabilities should not exceed 33.33 times its net worth). This was around five per cent earlier.

Payment banks are not allowed to lend and must have a cap of Rs 1 lakh on deposits which can be invested in government securities, but they will have access to the RBI’s liquidity windows. They will be required to invest at least 75 per cent of their ‘demand deposit balances’ in statutory liquidity ratio (SLR)-eligible government securities and treasury bills with maturity of up to one year. They can hold a maximum of 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

Payment banks will be allowed to issue debit cards, but not credit cards, and can offer current and savings account deposits.

  • Have to use the word ‘Payment Bank’ in their name
  • Can accept demand deposits; that is, current deposits and savings bank deposits, from individuals, small businesses and other entities
  • Can hold a maximum balance of Rs 1 lakh per individual customer
  • Will be allowed to set up branches, ATMs, business correspondents
  • Will be allowed to issue debit cards and offer internet banking
  • Can accept a large pool of money to be remitted, but the balance should not exceed Rs 1 lakh at the end of the day
  • Can accept remittances to be sent to, or receive remittances from, multiple banks
  • Permitted to handle cross-border remittances in the nature of personal payments on the current account
  • Allowed to distribute mutual fund, insurance and pension products
  • Can undertake utility bill payments
  • No NRI deposits should be accepted
  • Cannot issue credit card
  • Not allowed to set up arms to undertake NBFC activities
  • Other financial and non-financial services of promoters should not be mingled with the working of payment banks

For payment banks, both cash-in and cash out services are allowed through various channels like branches, automated teller machines (ATMs) and business correspondents (BCs). Cash-in could be made through mobile banking and cash-out via point-of-sale terminals.

Initial capital requirement for payment banks, as well as small banks, have been set at Rs 100 crore. In case of the former, the promoter will have to retain a 40 per cent stake in the first five years.

For small banks, a promoter’s minimum initial contribution will be 40 per cent of the paid-up equity capital. If the initial shareholding is over 40 per cent, it has to be brought down to 40 per cent in five years. Further, the promoter’s stake should be brought down to 30 per cent within 10 years, and to 26 per cent within 12 years.

The cap on foreign shareholding has been kept in line with the existing rules for private-sector banks — at 74 per cent, with a minimum requirement of 26 per cent to be held by residents.

For small banks, the maximum loan size and investment limit exposure to single and group obligors has been restricted at 10 per cent and 15 per cent of its capital funds, respectively. Additionally, at least 50 per cent of their loan portfolio should constitute loans and advances of up to Rs 25 lakh, the RBI has said.

The central bank has also said that small banks can convert themselves into universal banks, though the transition would not be automatic; it will depend on the regulator’s approval.

The RBI has also allowed the promoter of a small bank to set up a payment bank. But banks of both types will have to be set up under a Non-Operative Financial Holding Company (NOFHC) structure.

“However, a promoter will not be granted licences for both universal bank and small bank, even if the proposal is to set those up under the NOFHC structure,” the RBI guidelines say.

Experts said more players would be interested in setting up small banks which liberated the scope of activity.

“Many players will now be interested in small banks as geographical restrictions proposed in the draft have been removed,” said Shinjini Kumar, leader (banking & capital markets), PwC India.

But large non-banking financial companies would still not be interested in setting up small banks, as they have to convert into banks. That would mean meeting reserve requirements, such as cash reserve and statutory liquidity ratios.

The banking regulator has indicated that applications will be invited on a continuous basis, after gaining experience from the present exercise.


India to sign TFA: positives and negatives

is all set to sign the Trade Facilitation Agreement (TFA) at WTO's special General Council (GC) meeting in Geneva today. The TFA aims at easing global customs rules for smoother and easier movement of goods across international borders. India vetoed signing the deal in July this year. However it seems to have agreed now that the government has reached an understanding with the US which has promised to support its demand for a permanent food 'Peace Clause' until a definitive solution to public stockholding schemes is achieved by the WTO. 

Here are the positives and negatives once India signs the TFA
1. Industry will save transaction costs that runs into billions of dollars for exporting their products in the international markets.
2. Indian exporters will be able to achieve greater access in some of the difficult markets like US, Europe, Japan & China that have stringent customs rules and regulations.
3. Indian small and medium enterprises (SMEs) will be the biggest beneficiaries as they will now be able to spend more on marketing their products than spending time and money on tedious paperwork that result in inordinate delays. 
1. India will lose a major bargaining power before it achieves a permanent solution on the food security issue. It is believed that once the developed countries obtain the TFA, they will not expedite talks on public stockholding issue, which is in fact India's main goal.
2. To have a permanent food security 'Peace Clause', India will have to adhere to some stringent riders to avail the provision. Farmers & civil society activists fear these stringent riders will result in disastrous consequences.
3. India's main demand of having a permanent solution to the food security issue might get delayed forever. Achieving a permanent solution to the food stockpile issue entails amendment of the  Agreement on Agriculture.

source :

WTO Trade Facilitation pact, food security signed

After almost 11 months of parleys, the World Trade Organization (WTO) on Thursday signed the trade facilitation agreement (TFA) and agreed to India’s demand for a perpetual ‘peace clause’ till a final solution to the issue of food stockholding is found. The decisions were taken at a ‘special’ meeting of the (GC), the highest decision-making body after ministerial conferences.

Following tense negotiations and last-minute hiccups due to oppositions from Argentina and Pakistan, the GC adopted three main decisions — signing of the TFA protocol, extension of the ‘peace clause’ for an indefinite period and setting a deadline for the remaining Bali package commitments for poorer countries. “With Thursday’s decision, our chances of getting a permanent solution to the food stockholding issue gets a massive boost. Now we do not have to beg for it. We are now in a position to negotiate an optimum solution,” an official involved in the talks told Business Standard.

WTO had not issued an official statement till the time of going to press.

The breakthrough came after India and the US earlier this month reached an understating where the Americans assured support to India’s demand for a permanent ‘peace clause’ and, in turn, India agreed to sign the TFA, which it had vetoed in July.

The TFA, expected to infuse $1 trillion into the global economy and create 21 million jobs, will now be open for ratification by all 160 member countries. After that, it will be implemented by July 2015. “WTO has taken a critical step forward by breaking the impasse that had prevailed since July. I am pleased that the US was able to work with India and other WTO members to find an approach that preserved the letter and spirit of the package of decisions reached at last year’s Bali Ministerial Conference. With this win under WTO’s belt, we can again focus our efforts on revitalising the organisation’s core negotiating function,” said US Trade Representative Michael Froman.

The Bharatiya Janata Party, which came to power at the Centre in May after a landslide victory, had vetoed adoption of the process that would have turned the TFA into a legally binding deal by July 31, the previously set deadline.

Since then, the government had been insisting on having a parallel agreement on public food stocks for its poor and marginal farmers.

  • Dec 7,’13: WTO 9th ministerial concludes in Bali. Members agree to sign TFA. India claims victory for achieving the ‘peace clause’ for a period of four years that will give it the freedom to provide WTO-prohibited subsidies to its poor and marginal farmers
  • February ‘14: July 31 fixed as deadline to sign TFA pact; to fully implement it by July 2015
  • July 31: WTO General Council suspended; India refuses to sign the TFA, demands a parallel agreement on food stockholding
  • Sep 29: Preparatory committee on trade facilitation meets; India stays firm on stand. US denies further meetings on TFA,  demanding a pact on along with TFA will entail collapse of entire Bali Package
  • Sep 30: PM Modi holds first meeting with US President Obama; both agree on achieving "next steps" in WTO talks
  • Oct 16: Trade Negotiations Committee meets; talks inconclusive
  • Nov 13: India claims to garner US’ support on its concern for food stockpiling
  • Nov 27: WTO ‘special’ General Council agrees to TFA implementation and food security ‘peace clause’

A permanent ‘peace clause’ insulates India and other developing countries with public stockholding programmes from challenges by other WTO members, even for violation of global rules on farm subsidies.

The so-called ‘peace clause’ also grants India the freedom to offer subsidies to its farmers without following any limit. The cap, according to WTO rules, is 10 per cent of the total production of the crops that are covered under the food stockholding programme.

At present, India offer subsidies in the form of ‘minimum support price’ for rice, wheat and cereals. However, the ‘peace clause’ does not come for free. India, along with other developing countries, have to adhere to some strict conditions to avail of the interim relief. The most important rider pertains to future food stockholding programmes, which would not be covered under this provision. In other words, any new food stockholding programme will have to follow WTO’s 10 per cent threshold.

Another condition is that countries following food stockholding programmes will have to ensure they do not distort trade and adversely affect similar schemes of other developing countries. Otherwise, the affected country will have to the option of appealing to the WTO dispute-settlement body.

Minister of State (independent charge) for Commerce & Industry Nirmala Sitharaman is expected to make a statement on Friday.

--Nayanima Basu / Source :