New Set of Rules from RBI for Small Finance and Payment Banks

Reserve Bank of India (RBI) has released the new set of norms and regulations for the ‘small finance’ and ‘payment banks’. In the new rule, the RBI has said that these institutions must have a minimum of 100 crore as capital requirement to start off their savings accounts, provide fixed deposits, payments or remittent services which caters to the migrant labours, lower economic groups or small and medium scale industries etc.

The new rules comes on the back of the union budget in July which aimed at creating specialized banks for providing unique services. The new rule pertains to providing banking services to the local surrounding area, payment banks, and fixed deposit schemes to lend money or serve as a remitter of money for small businesses, unorganized sectors, farmers, migrant labours, and the lower economic groups. Read More..

The promoters who can apply

Any existing non-bank Pre-paid Payment Instrument (PPI) issuers, individuals or professionals, non-banking finance companies, corporate business correspondents, mobile phone companies, super-market chains, companies, real sector cooperatives owned by residents or public sector organizations can open payment banks.

Residents or professionals with 10 years of experience in banking and finance or companies, societies owned and run by residents can open small finance banks. Even resident owned NBFCs, Micro Finance Institutions (MFIs), and Local Area Banks (LABs) can also set up small finance banks.

What can they do?

Payment banks can take deposits of up to 1 lac per person and issue debit cards but not credit cards. Can provide transaction services in partner through networks or join as business correspondent with other banks. They can also sell mutual funds and insurance or other no risk sharing simple finance products.

How can they deploy the funds?

Payment banks cannot lend money apart from the minimum capital amount; they will have to invest 75 percent of demand deposit balance money in government debt instruments for one year and save maximum of up to 25 percent in current and time or fixed deposits.

Capital money required

With a minimum of 100 crore, payment banks should not have more than 33.33 times its net worth as liabilities.

How much can the promoter contribute?

A promoter can have a minimum 40 percent stake for the five years from business commencement for payment banks. For small banks it shall start at 40 percent and gradually reduce to 26 per cent within 12 years from the date of commencement of business.

Foreign ownership

The foreigner ownership can go up to 49 percent of the total paid-up capital by the bank. The NRI individual can go up to 24 percent.

Prudential norms & transition path for small finance banks

With the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) applicable, these banks must lend 50 percent of its loan and advances of up to 25 lakh to priority sectors as named by the RBI.

Small banks can move up the ladder to universal banks by reaching the minimum capital requirements of universal banks and their net worth. The past performance will also be taken into consideration along with due diligence from the RBI.

Different Types of interest rate in Fixed Deposits

One of the most rampant types of investment in India is the Fixed Deposit. It enables one to invest his/her funds for a stipulated period of time with a financial institution at a particular rate of interest. FDs can be of 2 types –

●     Issued by a bank or a NBFC that is regulated by the Reserve Bank of India

●     Issued by a Corporate looking to raise funds from the ‘open’ market

While there are variations in the rates of interests paid against FDs issued by banks and corporates, the latter usually pay a superior rate due to the fact that they carry more risk as compared to bank FDs, and they lack the aspect of easy liquidity generally implied in the former.

Types of interest rates for FDs

At the base level, FD interest rates can either be ‘Fixed’ or ‘Floating’.

Fixed Rate FDs

As understandable, fixed-rate FDs are offered at a fixed rate of interest for a specific deposit period. The investor can hereby look forward to get a definite and assured return as per the contracted rate after the tenure expires, no matter where the base rate in the market stands. The product is safe, guaranteed and built to generate a regular income within the deposit tenure.

Floating Rate FDs

Floating rate FDs are offered at a variable rate of interest for a term. SBI for instance has it on offer. A floating rate deposit, however, comes without a guarantee of sure return as the interest rate is liable to change with a change in the BR or the base rate of the bank. Hence, it is an option which should be picked only if the investor is ready to receive flexible returns. If the base rate increases the investor will gain but if it falls, he/she might wind up losing much more than a fixed-rate investment.

At higher level FD interest rates depend on the following factors –

●     Deposit period

●     Institution type

●     Deposit amount

Most financial institutions offering FDs have an FD interest calculator included in their websites whereby interest to be earned on the deposit money can be calculated easily. Some institutions might refer to the same as ‘Term deposit calculator’ as FDs are also popularly known as Term Deposits.

Depending on the tenure of the FD made, interest rates can be calculated –

●     On quarterly basis (banks in India employ quarterly compounding for calculating interest in Rupees)

●     @ simple interest (mostly seen in FDs that are made for below 6 months)

In instances of premature encashment, the FD interest rate is computed as per the rate that is applicable for actual deposit period, and a penalty may/may not be levied, depending on the institution’s policy.

It’s important to remember that at certain times when the economic scenario of the country reels under high inflation, RBI has the freedom to take up a stringent monetary policy whereby it can enhance its repo rates, that is, its lending rate for banks. In line of that, banks can also hike their loan rates and FD interest rates, both. At these times, FDs are the most lucrative form of investment with high-return and no-risk assured in them.