RBI to issue on tap licence guidelines on small finance banks in Aug

The Reserve Bank of India (RBI) said Thursday it will come out with guidelines for issuance of licences to small finance banks 'on tap' basis in August 2019 for promoting banking facility for small borrowers and encourage competition. The RBI had given in-principle approval to 10 entities for entering the small finance banking space in September 2015. On tap licensing will enable entities to approach the central bank for obtaining licences for small finance banks on meeting laid-down criteria. Eligible entities would not have to wait for licences as it would be available on-demand basis. The RBI in its statement on developmental and regulatory policies said it was notified in the Guidelines for Licensing of "Payments Banks" and "Small Finance Banks" in the private sector on November 27, 2014.

After gaining experience in dealing with these banks, the Reserve Bank will consider on tap' licensing of these banks, it said. "In the case of Small Finance Banks, licence was issued to 10 such banks. Further, eight of the ten Small Finance Banks have also been included in the second schedule of the RBI Act, 1934. A review of the performance of Small Finance Banks reveals that they have achieved their priority sector targets and thus attained their mandate for furthering financial inclusion," it said. 

Ujjivan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, ESAF Microfinance and Investments Pvt. Ltd, and Equitas Holdings Ltd are among the 10 entities. The others are Au Financiers (India) Ltd, Capital Local Area Bank Ltd, Disha Microfin Pvt. Ltd, RGVN (North East) Microfinance Ltd, Suryoday Micro Finance Pvt. Ltd, and Utkarsh Micro Finance Pvt. Ltd. Therefore, there is a case for more players to be included to enhance access to banking facilities to small borrowers and to encourage competition, it said. "It is, therefore, proposed to issue the Draft Guidelines for 'on tap' Licensing of Small Finance Banks by the end of August 2019. It has also been decided that more time is needed to review the performance of Payments Banks before considering the licensing of this category of banks to be put 'on tap'," it said.

Small Finance Banks offer basic banking services, accepting deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector. The RBI further noted that over the years corporate group structures have become more complex involving multiple layering and leveraging, which has led to greater inter-connectedness to the financial system through their access to public funds. In light of recent developments, there is a need to strengthen the corporate governance framework of Core Investment Companies (CICs). 

Accordingly, it has been decided to set up a Working Group to review the regulatory guidelines and supervisory framework applicable to CICs. In August 2010, the Reserve Bank introduced a separate framework for the regulation of systemically important CICs recognising the difference in the business model of a holding company relative to other non-banking financial companies. In order to mitigate risks of excessive leverage, it said, the Basel Committee on Banking Supervision (BCBS) designed the Basel III Leverage Ratio (LR) as a simple, transparent, and non-risk-based measure to supplement existing risk-based capital adequacy requirements. 

In terms of the framework on LR put in place by the Reserve Bank, banks have been monitored against an indicative LR of 4.5 per cent. These guidelines have served the purpose of disclosures and also as the basis for parallel run by banks, it said, adding, the final minimum LR requirement was to be stipulated taking into consideration the final rules prescribed by the Basel Committee by end 2017. "BCBS has since finalized that banks must meet a minimum 3% LR requirement at all times (Basel III: Finalising post-crisis reforms, December 2017). Both the capital measure and the exposure measure are to be calculated on a quarter-end basis. However, banks may, subject to supervisory approval, use more frequent calculations (e.g. daily or monthly average) as long as they do so consistently," it said.

Keeping in mind financial stability and with a view to moving further towards harmonisation with Basel III standards, it has been decided that the minimum LR should be 4 per cent for Domestic Systemically Important Banks (DSIBs) and 3.5 per cent for other banks, it said.  The instructions in this regard shall be issued before end of June 2019, it said.