NBFCs keen to become smaller banks but here's what's proving to be a turn-off

There may not be too many takers among non-banking finance companies (NBFCs) to become payments banks, even though the Reserve Bank of India (RBI), in its draft guidelines, has opened the doors for all entities to apply for payments banks and smaller banks.

Some of the NBFCs, especially those engaged in microfinance business and lending against gold, are keen to become smaller banks, if the RBI relaxes the geographic restriction set for such entities, officials at these firms said.

The proposed payment banks are mainly transactional banks, while smaller banks, as the name suggest, will cater to tiny companies and small value customer segment.

“Payment banks are not an option for us. Even for the smaller banks, the restriction to few districts is a spoiler, since we have operations nationwide,” said Samit Ghosh, founder and managing director of Ujjivan Financial Services. Ghosh said the company would give this feedback to the central bank and would take a final call on the application after the final guidelines come.

Going by the RBI guidelines, the area of operations of the small bank will normally be restricted to contiguous districts in a homogeneous cluster of states and Union Territories so that the bank has the “local feel” and “culture.”

“However, if considered necessary, the bank will be allowed to expand its area of operations beyond contiguous districts in one or more States with reasonable geographical proximity,” RBI said.

I Unnikrishnan, executive director and deputy chief executive officer at Manappuram Finance, said his firm is not keen for payments banks but would take a final call on whether to apply for smaller banks, once the final guidelines come.

George Alexander Muthoot, managing director of Muthoot Finance said the option to apply for payments banks and smaller banks, while retaining the current operations is attractive and the company would take a call after the final guidelines. “We may look at both options once the final guidelines come on this,” said Muthoot.

The central bank has given time till 28 August to accept comments on the draft guidelines.

Going by the RBI guidelines, non-bank pre-paid instrument issuers (PPIs), non-banking finance companies (NBFCs), corporate business correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities, are eligible to apply to become payments banks.

The entities eligible to set up a small bank include resident individuals with ten years of experience in banking and finance, companies and societies, NBFCs, Micro Finance Institutions and Local Area Banks.

The maximum loan size and investment limit exposure to single/group borrowers / issuers would be restricted to 15 percent of its capital funds. At least 50 percent of its loan portfolio should constitute loans and advances of size upto Rs 25 lakh in order to extend loans primarily to micro enterprises.

The idea of payments banks was first mooted by a committee headed by Nachiket Mor, a central board member of RBI, in a report released early this year on financial inclusion roadmap in India.