Breather for niche banks on capital, borrowings

The Reserve Bank of India is believed to have taken note of the concerns of the small finance bank and payments banks players and have relaxed the rules with respect to equity capital and inter-bank borrowings. A year after the in-principle licences were issued the regulator has said that these new niche banks don't need to maintain the counter cyclical capital buffer and capital conservation buffer

unlike the scheduled commercial banks. Apart from this, these banks had to maintain 7.5 per cent of tier-I capital, which now has been changed and they are allowed to have 6 per cent tier-1 till March 31st and 7 per cent post that. "There is leeway for small finance banks maintaining tier I equity capital norms. They have been allowed to issue additional tier I bonds (1.5 per cent). So minimum common equity I capital requirement is six per cent as against 7.5 per cent prescribed earlier. The overall tier I capital requirement has been retained at 7.5 per cent," said Karthik Srinivasan, Senior Vice President, ICRA. However, the minimum capital requirement or these banks have been kept higher at 15 per cent as compared to the SCBs which is at 11 per cent (by 2019). Experts explain that this is because of the small ticket size loan and the fact that they are lending mainly to the financially excluded, the risk is perceived to be higher.

The other relief that the regulator has granted these SFBs will be allowed exemption from the existing regulatory ceiling on inter-bank borrowings till the existing loans mature or up to three years, whichever is earlier. Afterwards, it will be on par with scheduled commercial banks.

"In this context, it is clarified that the borrowings made by the SFB after the commencement of operations will be subject to inter-bank borrowing limits. The above exemption is only applicable to the legacy borrowings that are migrated to the opening balance sheet of the SFB on the day of commencement of operations," said RBI. Players say that this norm will help them in managing the bank liabilities better.

Srinivasan explained that this will relieve SFBs to rush for garnering deposits for retiring old loans contracted before transiting to become SFB, Srinivasan said.

For the payments banks, RBI has allowed them to participate in the call money and CBLO market as both borrowers and lenders which will allow them easy access to funds and will also become an additional income channel. Profitability is one of the key concerns of payments banks as their scope of activity and investment is limited.

Another important clarification that RBI has come up with is that these SFBs can not invest in securitised paper to meet their priority sector lending norms. "SFBs will be permitted to participate in securitisation market only as originators and providers of associated credit enhancements and liquidity supports," said the notification.

For these players, it is mandated that 75 per cent of the loans should be extended to sectors that are classified under priority sector. The regulator had introduced these new banks in the sector with an aim to improve financial inclusion and that is why it has been stated that these banks will not have the option of investing in the secutitised paper to meet the PSL norms.

Last year, RBI had issued in-principal approval to ten players for SFBs and eleven for Payments banks. These SFBs will be similar to existing commercial lenders and will undertake basic banking activities such as accepting deposits and lending to the un-served and under-served sections. Whereas payments banks are can accept deposits and provide small savings account and payments and remittance services but are not allowed to lend.