Payments banks with 5-year experience can now convert to small finance banks

The Reserve Bank of India (RBI) on Thursday allowed payments banks (PBs), which have been in operation for
at least five years, to convert to small finance banks (SFBs). In guidelines for on-tap licensing of SFBs released today, the central bank raised the net worth requirement for aspiring SFBs to Rs 200 crore from Rs 100 crore.

Further, primary urban cooperative banks (UCBs) who wish to convert to SFBs will be allowed to do so as long as they have a net worth of Rs 100 crore, which will have to be increased to Rs 200 crore within five years from the date of commencement of business. “Incidentally, the net-worth of all SFBs currently in operation is in excess of Rs 200 crore,” the RBI said in the guidelines.

Henceforth, SFBs will be given scheduled bank status immediately upon commencement of operations and they will have general permission to open banking outlets from the date of commencement of operations. India Post Payments Bank (IPPB) and Paytm Payments Bank have both said they would look to migrate to the SFB model.

In August, FE had reported that PBs have requested RBI to allow them to lend money to their customers. Given the limited viability of the PB model in its current form, several players who were given in-principle approval to launch PBs in 2015 pulled out eventually.

While Cholamandalam Investment and Finance Company, Dilip Shanghvi and Tech Mahindra abandoned plans to launch PBs within months of getting approval, Aditya Birla Payments Bank shut shop earlier this year.

Industry executives say the going for payments banks has become especially tough in the last few years as the payments space came to be dominated by fintech players. Payments banks can only accept savings deposits of up to Rs 1 lakh and invest the money in government securities and bank fixed deposits. As a result, their revenues were a sum of the margins they earned on their investments and fees from remittance services. Lending could offer a way to make the model sustainable.

The SFB model was devised with a view to deepen financial inclusion. These banks are mandated to have at least 75% of their adjusted net bank credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) to RBI.