BENGALURU: After granting in-principle approval to eleven applicants for payments banks, Reserve Bank of India (RBI) governor Raghuram Rajan today said licences for small finance banks will be announced.
Payments banks and small finance banks will help deepen financial inclusion in the country, he said.
“Payments banks will compliment universal banks. They are not competing with them. Universal bank have edge over the payments banks with wider product and service,” said Rajan at an event held in Mumbai.
RBI had received a total of 113 applications from players keen to set up niche banks like payments banks and small finance banks. There were 72 applications for small finance banks and 41 applications for payments banks
Rajan said that payments banks will help reduce costs for customers.
Payments banks can accept deposits of up to Rs 1 lakh and can offer current and savings account deposits. They can also issue debit cards and offer internet banking. But they are not allowed to lend or issue credit cards.
On the other hand, small finance banks will be similar to existing commercial lenders and will undertake basic banking activities of accepting deposits and lending to unserved and under-served sections. However, the maximum loan size and investment limit exposure to single and group obligors cannot be more than 10% and 15% of its capital funds, respectively. Apart from this, at least 50% of their loan portfolio has to include loans and advances of up to Rs 25 lakh, as per RBI regulations.
After draft guidelines for small finance banks had come out, the enthusiasm for it was limited. However, in the final guidelines, RBI had removed the restrictions on geography for the area of operations thus leading to a greater interest by players.
The credit growth of the banking system has slowed down and a key factor has been high lending rates. India Inc has preferred borrowing from the market where rates have fallen. Though RBI has cut the repo rate or the rate at which banks borrow from the central bank by 75 basis points, banks have been reluctant to pass on the cuts.
“Banks need to frontload transmission of monetary policy. They should reduce lending rates for boosting demand especially in retail,” said Rajan. According to Rajan there is an uptick in demand. “If the rains are good, we may see rural demand coming back in the system,” he said.
He said that the challenge for banks in the medium term is the risk of tremendous amount of churn. When it comes to public sector banks, the middle piece (talent at the mid-level) is missing due to freeze on recruitment in the past.
“RBI faces challenges in attracting talent. The risk is skill them, they are grabbed by the market,” he said.
In recent times, bad loans have been on the rise. According to Rajan, the thing that worries RBI is that how banks recognise distressed assets in the first place.
On China's move to devalue the yuan, Rajan said, “Across the globe there has been low demand. There has been a tendency to weaken the currency. We have seen examples of this. China moved on many fronts. Boosting stock market and then action on the currency front.”
He said yuan devaluation had had an impact on emerging market currencies and the rupee was not an exception.
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