Small Finance Banks are also high leverage organizations: R Gandhi
Updated: Sep 10, 2015 02:13:01pm
Mumbai, Sept 10 (KNN) Stating that the Small Finance Banks are also high leverage organizations, RBI Deputy Governor R Gandhi said that granting banking licenses is not a tick box exercise; it needs to be based on the high regulatory comfort about the ‘fit and proper’ position of those who will manage the bank.
While addressing on Financial Consumer (Depositor) Protection – Reflections on Some Lingering Questions during M R Pai Memorial Lecture delivered, Gandhi said RBI has received 72 applications and are in the final stages of determining who all can be granted licenses.
“The Small Finance Banks are also high leverage organizations, and we require highest degree of assurance about the entities with whom public moneys can be entrusted. Therefore, licenses shall be issued on a very selective basis only; we will soon announce grant of licenses to the selected applicants,” he noted.
He mentioned that RBI has also announced that it will license Small Finance Banks, another new set of differentiated banks. The objective of setting up of small finance banks, like the payments banks, is also to further financial inclusion; however, it is sought to be achieved through a different set of strategies like - (i) provision of savings vehicles primarily to unserved and underserved sections of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.
The small finance bank, in furtherance of the objectives for which it will be set up, shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.
It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc.
The prudential guidelines for the Small Finance banks have been suitably tweaked, he said adding that it will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL).
The maximum loan size and investment limit exposure to a single and group obligor would be restricted to 10 per cent and 15 per cent of its capital funds, respectively. Further, in order to ensure that the bank extends loans primarily to small borrowers, at least 50 per cent of its loan portfolio should constitute loans and advances of upto ₹ 25 lakh.
“Keeping customer protection requirement in view, we have prescribed that the Small Finance Banks should have high powered Customer Grievances Cell to handle customer complaints and the small finance banks will come under the purview of RBI’s Banking Ombudsman Scheme, 2006,” Gandhi said.
Further, RBI Deputy Governor also said that initiatives were taken to further enhance transparency in pricing of credit, based on the recommendations of Working Group on Pricing of Credit.
“Banks were advised to display on their website inter alia, the interest rate range of contracted loans for the past quarter for different categories of advances granted to individual borrowers along with mean interest rates for such loans; the total fees and charges applicable on various types of loans to individual borrower which should also be disclosed at the time of processing of loan for transparency and comparability and to facilitate informed decision making by customers; Annual Percentage Rate (APR) or such similar other arrangement of representing the total cost of credit on a loan to an individual borrower so as to allow customers to compare the costs associated with borrowing across products and / or lenders.
Apart from displaying such information, banks were also advised to provide a clear, concise, one page key fact statement / fact sheet, to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions, which would also be included as a summary box to be displayed in the credit agreement,” he added.
The objective of setting up of Payments Banks will be to further financial inclusion; the strategies will be by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.
The scope of the activities permitted for the Payment Banks included a. Acceptance of demand deposits. Payments Bank will initially be restricted to holding a maximum balance of ₹ 1 lakh per individual customer, b. Issuance of ATM / debit cards c. Payments and remittance services through various channels and some ancillary activities, he said.
“The deposits collected by them can be only in current or savings account; they cannot accept fixed deposits. The payments banks are prohibited from lending activity. They can deploy the deposits largely in government securities only; a small portion, upto 25 per cent of their deposits, can be held in deposits with other banks,” he added. (KNN Bureau)
While addressing on Financial Consumer (Depositor) Protection – Reflections on Some Lingering Questions during M R Pai Memorial Lecture delivered, Gandhi said RBI has received 72 applications and are in the final stages of determining who all can be granted licenses.
“The Small Finance Banks are also high leverage organizations, and we require highest degree of assurance about the entities with whom public moneys can be entrusted. Therefore, licenses shall be issued on a very selective basis only; we will soon announce grant of licenses to the selected applicants,” he noted.
He mentioned that RBI has also announced that it will license Small Finance Banks, another new set of differentiated banks. The objective of setting up of small finance banks, like the payments banks, is also to further financial inclusion; however, it is sought to be achieved through a different set of strategies like - (i) provision of savings vehicles primarily to unserved and underserved sections of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.
The small finance bank, in furtherance of the objectives for which it will be set up, shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.
It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc.
The prudential guidelines for the Small Finance banks have been suitably tweaked, he said adding that it will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL).
The maximum loan size and investment limit exposure to a single and group obligor would be restricted to 10 per cent and 15 per cent of its capital funds, respectively. Further, in order to ensure that the bank extends loans primarily to small borrowers, at least 50 per cent of its loan portfolio should constitute loans and advances of upto ₹ 25 lakh.
“Keeping customer protection requirement in view, we have prescribed that the Small Finance Banks should have high powered Customer Grievances Cell to handle customer complaints and the small finance banks will come under the purview of RBI’s Banking Ombudsman Scheme, 2006,” Gandhi said.
Further, RBI Deputy Governor also said that initiatives were taken to further enhance transparency in pricing of credit, based on the recommendations of Working Group on Pricing of Credit.
“Banks were advised to display on their website inter alia, the interest rate range of contracted loans for the past quarter for different categories of advances granted to individual borrowers along with mean interest rates for such loans; the total fees and charges applicable on various types of loans to individual borrower which should also be disclosed at the time of processing of loan for transparency and comparability and to facilitate informed decision making by customers; Annual Percentage Rate (APR) or such similar other arrangement of representing the total cost of credit on a loan to an individual borrower so as to allow customers to compare the costs associated with borrowing across products and / or lenders.
Apart from displaying such information, banks were also advised to provide a clear, concise, one page key fact statement / fact sheet, to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions, which would also be included as a summary box to be displayed in the credit agreement,” he added.
The objective of setting up of Payments Banks will be to further financial inclusion; the strategies will be by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.
The scope of the activities permitted for the Payment Banks included a. Acceptance of demand deposits. Payments Bank will initially be restricted to holding a maximum balance of ₹ 1 lakh per individual customer, b. Issuance of ATM / debit cards c. Payments and remittance services through various channels and some ancillary activities, he said.
“The deposits collected by them can be only in current or savings account; they cannot accept fixed deposits. The payments banks are prohibited from lending activity. They can deploy the deposits largely in government securities only; a small portion, upto 25 per cent of their deposits, can be held in deposits with other banks,” he added. (KNN Bureau)
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