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Reliance, Birla join the payment bank rush

Some of India’s top business houses such as Reliance Industries and the Aditya Birla group are among dozens of names that have applied for payment bank licences, the application deadline for which ended on Monday. They followed Bharti Airtel, which was the first to announce its plan in association with Kotak Bank on Thursday.

Those who applied to the Reserve Bank of India for small finance bank licences include Nirmal Jain-led IIFL Holdings Ltd, UAE Exchange,  Kerala-based ESAF Microfinance, Punjab-based Capital Area Local Bank and Andhra Pradesh-based Coastal local Area Bank

While the central bank did not come out with a list of the applicants, quite a few companies announced their plan to begin payment banks and small banks.

Reliance Industries, India’s largest private sector group, said it had set up a joint venture with State Bank of India, India’s largest bank, which will hold up to 30% stake. “The payment bank will leverage SBI’s nationwide distribution network and risk management capabilities alongwith the substantial investments made by RIL in its retail and telecom businesses, RIL said, adding it would deploy state-of-the art technology and build scalable infrastructure.

S Sriram, managing director (national banking group) SBI, told Business Standard that the crucial element in payment bank operations was a robust IT and technology backbone for remittance business. The proposed bank intends to cover 250,000 villages and 5,000 towns in three years. While the plan is to start with a Rs 100 crore capital base, it would be ramped up to Rs 400 crore in three-four years depending on business volumes.

Aditya Birla Nuvo, which is the biggest shareholder in Idea Cellular, plans to own 51% of the proposed payment bank, while Idea will own the balance. Idea can later raise its holding to 60%.

Kishore Biyani’s Future group said the banking entity would be called NuFuture Payments Bank and would work towards extending the RBI’s mandate of financial inclusion through focusing on the group’s core consumer groups that include women, migrant workers, self-employed people as well as farmers and local entrepreneurs from the group’s sourcing base. Future has joined hands with IDFC, which is to become universal bank in October 2015, for a payment bank permit. IDFC will pick up stake in the new entity should it get payment bank licence.

Among others, the Rs 24,300 crore Murugappa Group’s non-banking financial company arm Cholamandalam Investment and Finance (CIF) also applied for a payments bank.  CIF managing director Vellayan Subbiah told Business Standard that the payments bank would initially be a 100% subsidiary with nationwide operations and a partner, who can bring technology or access to customers, will be brought on board at a later stage.

The banking regulator had piloted the idea for payment and small banks to extend basic banking to millions who still do not have access to banking and financial services.

Encouraging alliances for starting payments bank, RBI Deputy Governor H R Khan had said last week that such partnerships were crucial for the success of differentiated banks. If they had cost-effective framework and used mobile and telecom network, then they could be successful, Khan added.

Manish Khera, former chief executive of Fino Paytech, along with financial sector professionals has also applied for a small finance bank licence. The outfit to be named “1st Small Finance Bank” with an initial capital base of Rs 150 crore will predominantly focus on underserved regions in Central India, Khera said.

UAE Exchange India, which had also applied for a universal bank licence, is a part of the Global UAE Exchange Group. “Applying for a small bank licence and upgrading our company to a bank is only a natural extension from its present position to serve our customers with much better financial provisions,”said V George Antony, MD, India.

According to the guidelines issued by the RBI in November, payments banks can accept demand deposits subject to a cap of Rs 1 lakh per customer and provide payment and remittance services through channels like Internet, branches, business correspondents and mobile banking. They however cannot offer credit facilities directly but can choose to act as an agent of a commercial bank for credit and other services.

Restrictions/Challenges for Small-Finance and Payments Banks:

Small Finance Banks:

* Will need to ensure 75 per cent of its loans are in priority sectors.

* Will need to focus on small loans, at least 50 per cent of loan portfolio must have advances of up to Rs 25 lakh.

* Annual branch expansion plans need prior approval of RBI for initial five years.

* Will not be allowed to set up subsidiaries to undertake non-banking financial services.

Payments Banks:

* Will be allowed to hold maximum of Rs 1 lakh per individual customer initially.

* Will not be allowed to accept NRI deposits.

* Will not be permitted to issue credit cards and offer loans.

* Will not be allowed to set up subsidiaries to undertake non-banking financial services.

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