It is expected while announcing the norms for setting up smaller banks in India, the Reserve Bank of India (RBI) will mandate minimum capital requirement of Rs200 crore, against Rs5 crore mandated in 1996, when guidelines to set up local area banks were announced.
According to the central bank’s new guidelines on new bank licences, the minimum capital requirement to set up a full-fledged bank is Rs500 crore.
In the fresh guidelines for small banks, the emphasis will be on providing basic banking facilities to customers. Smaller banks will help improve penetration in un-banked areas and mobilise resources. Also, as these won’t need substantial infrastructure and staff, their operating expenses will be low.
While these entities will have to maintain a particular statutory liquidity ratio and cash reserve ratio, these might face restrictions on wholesale lending and foreign exchange business. To start with, restrictions could be put on the number of branches and the asset size; relaxation could be provided after a review of their performance. Also, the exposure limits for small banks could be lower than those offering full-fledged banking services.
While the previous guidelines on local area banks brought under their jurisdiction two-three contiguous districts, small banks are likely to have restrictions in this regard. For instance, a small bank might not be allowed to expand beyond a large state, though it could be allowed to operate in multiple states in case these states are relatively small, such as those in the Northeast.
Following an announcement in the Budget in 1996, RBI had licensed six local area banks, of which two were shut, primarily due to mismanagement. The overall performance of existing local area banks hasn’t been satisfactory, as these have become high-cost structures. As of March–end, 2012, the cost-income ratios of the four local area banks ranged from 58.24 per cent to 87.2 per cent, according to RBI.
In a discussion paper on banking structures in India released last year, RBI said it was open to allowing cooperative banks to function as local banks. Two urban cooperative banks — Saraswat Bank and Shamrao Vithal Co-operative Bank — have already started groundwork in this regard. As of March-end, 2013, there were 1,606 urban cooperative banks in India.
However, entities applying for such licences will be subject to stringent fit-and-proper criteria. Under the new bank licence norms, RBI has said banking aspirants should have a successful track record of at least 10 years. In the recent round of bank licences, the central bank had ignored entities facing investigations by various agencies. It had granted in-principle licences to only two entities — infrastructure finance company IDFC and mircolender Bandhan.
SPREADING THE BANKING NET
A look at the number of small banks
- 64 regional rural banks (consolidated from 196 RRBs originally set up)
- 1,606 urban cooperative banks
- 31 state cooperative banks
- 371 district central cooperative banks
- 20 state cooperative agriculture and rural development banks
- 697 primary cooperative agriculture and rural development banks
- 4 local area banks
Source: RBI (as on March 31, 2013)