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Payments Bank: Towards differentiated banking

Sourav Yadav 
on 23 June 2016


Moving Towards Differentiated Banking: Payments Bank

Recently Mr. Dilip Sanghvi (MD of Sun Pharmaceuticals) announced dropping his plan to start a “Payments Bank”, which made to the headlines of most newspapers. Payments bank is a new concept introduced by the RBI. Mr. Dilip Sanghvi has earlier partnered with IDFC and Telenor to start a payments bank in India. Earlier another Micro Finance company Cholamandalam had dropped its plan to enter into this differentiated form of banking. The Reserve Bank of India allotted license to a new set of banks known as Payments Bank to about 11 entities in August 2015.

The idea of Payments Bank was the outcome of a committee on “Comprehensive financial Services for Small businesses and low income households” headed by Mr. Nachiket Mor. The committee came up with the concept of Payments Bank in its report submitted to the RBI. The aim of the committee was to cater to the needs of un-served/under served households & small businesses. The committee therefore thought of coming with a new set of banks/differentiated banks as there was already a lot of pressure on scheduled banks /NBFC’s/RRB’s. The traditional banks had already stretched themselves, therefore the committee came up with the idea of “Payments bank”. Some of the salient features of such banks are:

  • Acceptance of Demand deposits – Current & savings (Maximum deposit upto Rs. 1,00,000 per customer)
  • Can Set up ATM, issue debit cards
  • Can distribute Mutual Funds, insurance products etc. with prior approval of RBI
  • Cannot Lend
  • Cannot accept deposits from Non-resident individuals
  • Minimum paid up capital – Rs. 100 Crores

The requirements of CRR & SLR will also be applicable on such banks. And the major source of income for traditional banks, interest earned on amount lent, is also not available to such banks as they are not authorized to lend.

The question therefore arises that how will these banks be able to make themselves financially viable? How will they cover up the cost of operations, what will be their sources of revenue? The answer to aforementioned question is that they will have to rely upon transaction charges for remittances made. This type of banking aims to gain from low value/high volume transactions. But the important question here is regarding the commercial viability of such business. Such banks can also accept deposits from customers, so in order to garner deposits from people in such a competitive environment where wealthy depositors are already lured by the high interest rate offered by some of the leading private banks, these banks too would have to offer a lucrative rate of interest on deposits. In the absence of a lucrative interest rate, no one would want to park his/her funds with such a bank. Moreover, compliance with CRR and SLR requirement will tie their hands to use such funds for generating high return. But the real question is how it is expected that banking transaction charges alone will be able to keep the bank running? The traditional banking system has always been dependent on the spread between the deposit and lending rates and has been successful. Further, such banks cannot operate solely on the internet or via apps. They will have to open brick and mortar branches and specially in rural areas. The entities which have obtained the license have to keep such payments bank business separate from any other business which they run. Those entities which have been issue the payments bank license are already well established in their own fields and have a very strong customer base. The list includes names like Bharti Airtel, Vodafone, Aditya Birla Nuvo, Paytm & like.

The license to such banks have been granted with an aim to cater to the needs of underserved and un-served population of the country. So they will have to focus more on rural households and low-income populace which includes migrant workers & like. But it is highly unlikely that transaction charges will enable it to run efficiently, especially in the first 5-6 years of business. Such banks will have to investa lot of capital without anticipating any return in those initial years of business. It is less likely to become a sustainable model as transaction charges cannot be levied too high nor too many charges will help it make viable until the volume of transactions is really huge. And huge volume doesn’t seem to be achievable even in the 5-6 years of operations as the companies will have to initially publicize their product i.e. they will have to introduce this differentiated form of banking to the people. E-commerce companies have been selling at a discount just to make people habitual of buying products online and introducing them to online commerce. Likewise payments bank will also have to initially pour in a lot of money as urban customers already enjoy not only the traditional banking facilities available to them but also mobile wallets like paytm, mobikwik etc which even do not charge anything for making payments to merchants, wallet to wallet transfer. So urban customer is really going to cling to such payment wallets. Although such banks are aimed to tap the rural market but they will surely go for the attractive urban market. Then the government’s ambitious plan of financial inclusion has already got Rs 38411.07.Crores of deposit in the Jan Dhan account. The same has been termed as the biggest financial inclusion scheme of the world. So we can say that majority of Indians have now got bank accounts. Though these bank accounts include zero-balance accounts but their proportion is not too much in the total bank accounts opened.

Further the financial space is witnessing the use of new technology such as block chain which is much cheaper when compared with the amount charged by the traditional facilitators of such transfers such as Western Union & like. So in such turbulent times only those which have a very strong customer base are likely to venture in this sector.

Though it is a very encouraging move by the RBI, rather a bold move to try a new type of banking but the industry player are really apprehensive about its success and after 3 awardees backing up, the situation doesn’t seem to be good. The awardees have a time of 18 month (from when they were awarded the license) to commence their operations. Only time will tell how these licensees make their way into this differentiated banking, how they will gain/lure customers and how will they make a financially model. So we will have to wait and watch, though the path doesn’t seems to be that easy, infact in no manner. It will be a tough going for the licensees. The payments bank have a time of 18 months (from the approval) to kickstart their operations. Only time will tell the future of such banks in India.  

The views expressed are personal. Relevant details have been taken from the official site of RBI and other data available in public domain.

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