BS Banking Annual 2018: New kids on the block

Small finance banks (SFBs) and payments banks are yet to take off in a big way. Some of the entities that won licences to start payments banks have surrendered their licences. SFBs were hit hard by demonetisation. In a fireside chat, Jio Payments Bank MD and CEO H Srikrishnan and Jana Small Finance Bank MD and CEO Ajay Kanwal discuss the challenges and opportunities for their new banks

On Jana SFB being hit by demonetisation 

Ajay Kanwal: Jana was one of the largest microfinance companies and was doing exceptionally well. Demonetisation really caused a challenge, which ended up being a good crisis. Just before we turned into a bank, we had the challenge around non-performing assets (NPAs). It gave us a lot of time to introspect and see what went wrong either on the growth side, policy side or process side. When you are in an NPA challenge, you want to make sure that your capital is backing you. Jana was fortunate as investors stood strong. We did go through a transformational period. Things are behind us, demonetisation is two years old, the book looks good, and we have turned into a bank. Customers have favoured us with deposits. Having the largest amount of trouble tells us that we end up being the wisest in the end.

On progress of Jio Payments Bank 

H Srikrishnan: We have been doing live trials for multiple products since April, and this will continue for some more time. One reason is there are lots of regulatory changes and opportunities that existed and have turned different. The second is that contrary to what was initially envisaged there are multiple steps to be crossed in the automatic transfer of e-KYC from the telco to the financial services side. In new institutions what we do is we scale as we grow but here we need to scale up before we start, as the adoption through the mobile route would be unprecedented, which we need to be prepared for. We need live trials to continue testing the systems and making sure that the sturdiness related to the back end and processes is in place. 

On Jio’s strategy and launch 

Srikrishnan: We are collaborating. We have partnered with all the payments aggregators and with every other bank in terms of integration and so on. The idea is to scale up as fast as possible and ride on the success of Jio. I don’t want to put a date to the launch. In our interest and in the interest of 260 million subscribers of Jio, we need to present them with opportunities in the financial service business, and we will be happy to do that as early as possible. 

On insulating the SFB from the vagaries of the external environment 

Kanwal: An SFB is meant to work very closely with the customer and as an entity meets the customer every month. One way to guard your customers is to keep the connectivity high. You have a relationship with the customer, he listens to you, and he understands what is good or bad for him. The SFB and microfinance space are tuned to work on that model. Small finance banks will stand the test of time because customers will value banking relationships which they have not got till date. 

On what payments banks can do that a mainstream bank can’t 

Srikrishnan: When the payments bank guidelines were issued there was a lot of thrust on financial inclusion. They are expected to take financial products to the last mile of India. Contrary to the nomenclature, a payments bank gives access to financial services through your mobile to the last mile customer at the lowest strata in the country. Second, you need to take a lot more financial services products which are not necessarily banking, such as insurance and mutual funds, which are much lower as a percentage of GDP in India than the global average. So there is a huge penetration opportunity possible. The trick here is to create a model for the community you are serving. 

On break-even of payments banks 

Srikrishnan: The beauty of payments banks is its asset-light model. We are allowed to ride on the infrastructure, which is both tech as well as distribution. Whatever penetration commercial banks have not been able to do we might be able to do with 300,000 outlets of a telco. We are converting them into financial services outlets and there is a tremendous opportunity. We are going to be a business correspondent for SBI.

On the SFB tag making customers uncomfortable

Kanwal: We believe that in funding the asset ambition, it is unlikely that the liability answer will come from the same set of customers in the short term. Hence, we set up 192 branches in major metro cities and tier-1 cities, which will go up to 250 by March. And again if we were to engage customers in metros you must see a branch, staff, marketing material, products, services, which you would like to see in a bank. SFBs, which started at the bottom of the pyramid, have to go up, and all banks which began at the top are going down the pyramid. For SFBs with their small ticket size, it will be easier to go 

up, while for commercial banks, it will be challenging to retune their entire organisations to a smaller ticket size.

On Jana’s USP 

Kanwal: A customer will deal with a bank only if there is trust and that needs to be built over time. It will be a path we have to build slowly. Customers will care about service, and in the end, yield does matter. If I am getting 100 basis points extra from a bank I can trust it does make a difference.

On how Jio is different from payments banks of other telcos

Srikrishnan: This is all about delivering your daily needs digitally through your mobile. The telco-driven financial services model has not been tried anywhere in the world perhaps. The physical outlets are here to stay, but the physical outlets will not carry the infrastructure as envisaged by either SFBs or other commercial banks.

On why a good private sector bank customer should open an account at a payments bank 

Srikrishnan: Despite all that commercial banks are offering, cash transactions are prevalent.  We need to cover everyday payments, everyday banking, and everyday financial services needs. These are the three critical areas that payments banks such as ourselves need to work on. If this is what they are doing, their mobile banking penetration by now should be close to 100 per cent of their consumers. Why is everyone still struggling with four and five per cent of the overall consumers adapting to mobile or internet? When you have Jio phone or any other which is giving these facilities as an additional service, there is a good chance that they will adopt.