Finance Minister Arun Jaitley and Reserve Bank of India (RBI) Governor Raghuram Rajan have said the framework for payment banks will be announced soon, paving the way for a differentiated bank licence regime in the country.
So far, India has only had universal banks.
The payment banks framework was mooted by a committee headed by RBI board member Nachiket Mor, in its report on financial services for small business and low-income households. The panel's recommendations that payment banks invest in government securities alone and these entities be barred from lending have raised concern on the viability of the model. A payment bank might not be viable if it offers deposits at competitive rates, bears deposit insurance and earns from investing in government securities alone.
According to the Mor panel's suggestions, a payment bank should not be allowed to keep balances exceeding Rs 50,000 a customer. Also, these banks should only invest in government securities with durations of up to three months. If the bank offers fixed-deposit products, it has to offer nine per cent for deposits with a maturity period of a year, akin to other banks.
Typically, the yield on investments for banks is eight-nine per cent.
Bankers say if the model is to be a success, a payment bank should neither offer fixed-deposit products nor savings bank accounts. "The payment bank model could be viable if technology is used to bring down costs. In different geographies, there are a few examples of the model being a success - Kenya and the Philippines. The payment banks need not offer any fixed-deposit products. They can only offer a current-account and a remittance-service product. The volume of transactions, as these will be in areas where bank branches are yet to penetrate, and effective use of technology could make the business model viable," said Usha Thorat, former deputy governor, RBI.
Pratip Chaudhuri, former chairman of State Bank of India, said, "The revenue model of such an entity will be income from payments."
As competition increases, there will be pressure on these entities to charge less for offering payment services, which will add to the challenges.
Given the ticket size is low in this business model, mainstream commercial banks aren't usually interested in such activities, which puts payment banks in an advantageous position. In addition, it is argued savings customers aren't as sensitive to the interest earned as to conveniences such as the location of the branch, the cap on transactions and minimum balance. Experts say this is an area in which payment banks can use technology to reduce costs, while offering various facilities to customers.
But there is concern lack of fixed-deposit products could lead to asset-liability woes, as the entire deposit could be withdrawn whenever demanded. "Another challenge is the cost of deposits. They will need to pay higher interest to attract deposits and yet, offer almost all-time liquidity for carrying out transactions. While this will not lead to ALM (asset-liability management) issues because of liquid investments on the asset side, lack of fixed deposits will lead to limited product choice for consumer," PwC's Kumar said.
It has also been argued payment banks should offer small-ticket loan products because these products are required in rural areas, as these will discourage borrowers from approaching local moneylenders.
"For a remittance service, one can argue all that is required is a cash dispensation machine, not a bank. The primary objective of a bank is to lend, particularly in rural and un-banked areas where there is hardly any means of formal credit," said a senior RBI official.
If payments banks aren't mandated to have a capital adequacy ratio, it will provide them relief. "Since there is no credit risk, capital adequacy requirements will be much less, only for market operational and residual risks," said Thorat.
Though there are no credit risks, experts feel payment banks need to have a robust system to manage operational risks.
The Mor panel's recommendation that banks be allowed to have payment banks as subsidiaries is seen as a positive. "The suggestion that banks be allowed to have payment banks as subsidiaries is a logical one. So far, RBI hasn't allowed banks to float a subsidiary for an activity that can be carried out departmentally, as among other reasons, this provides an opportunity to banks to get out of CRR (cash reserve ratio), SLR (statutory liquidity ratio) or priority sector obligations. But for payment banks, this is not the case. Payment banks will have CRR; the question of SLR does not arise, as the assets will almost entirely be SLR securities. Also, there is no question of priority sector lending," Thorat said.
STRUCTURE OF PAYMENT BANKS
So far, India has only had universal banks.
The payment banks framework was mooted by a committee headed by RBI board member Nachiket Mor, in its report on financial services for small business and low-income households. The panel's recommendations that payment banks invest in government securities alone and these entities be barred from lending have raised concern on the viability of the model. A payment bank might not be viable if it offers deposits at competitive rates, bears deposit insurance and earns from investing in government securities alone.
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"The success of payment banks will depend on low-cost technology and high volume of transactions so that charges are reasonable and yet, profits are made. Unfortunately, the small-transactions ecosystem continues to be cash-dominated," said Shinjini Kumar, director at PwC India.
According to the Mor panel's suggestions, a payment bank should not be allowed to keep balances exceeding Rs 50,000 a customer. Also, these banks should only invest in government securities with durations of up to three months. If the bank offers fixed-deposit products, it has to offer nine per cent for deposits with a maturity period of a year, akin to other banks.
Typically, the yield on investments for banks is eight-nine per cent.
Bankers say if the model is to be a success, a payment bank should neither offer fixed-deposit products nor savings bank accounts. "The payment bank model could be viable if technology is used to bring down costs. In different geographies, there are a few examples of the model being a success - Kenya and the Philippines. The payment banks need not offer any fixed-deposit products. They can only offer a current-account and a remittance-service product. The volume of transactions, as these will be in areas where bank branches are yet to penetrate, and effective use of technology could make the business model viable," said Usha Thorat, former deputy governor, RBI.
Pratip Chaudhuri, former chairman of State Bank of India, said, "The revenue model of such an entity will be income from payments."
As competition increases, there will be pressure on these entities to charge less for offering payment services, which will add to the challenges.
Given the ticket size is low in this business model, mainstream commercial banks aren't usually interested in such activities, which puts payment banks in an advantageous position. In addition, it is argued savings customers aren't as sensitive to the interest earned as to conveniences such as the location of the branch, the cap on transactions and minimum balance. Experts say this is an area in which payment banks can use technology to reduce costs, while offering various facilities to customers.
But there is concern lack of fixed-deposit products could lead to asset-liability woes, as the entire deposit could be withdrawn whenever demanded. "Another challenge is the cost of deposits. They will need to pay higher interest to attract deposits and yet, offer almost all-time liquidity for carrying out transactions. While this will not lead to ALM (asset-liability management) issues because of liquid investments on the asset side, lack of fixed deposits will lead to limited product choice for consumer," PwC's Kumar said.
It has also been argued payment banks should offer small-ticket loan products because these products are required in rural areas, as these will discourage borrowers from approaching local moneylenders.
"For a remittance service, one can argue all that is required is a cash dispensation machine, not a bank. The primary objective of a bank is to lend, particularly in rural and un-banked areas where there is hardly any means of formal credit," said a senior RBI official.
If payments banks aren't mandated to have a capital adequacy ratio, it will provide them relief. "Since there is no credit risk, capital adequacy requirements will be much less, only for market operational and residual risks," said Thorat.
Though there are no credit risks, experts feel payment banks need to have a robust system to manage operational risks.
The Mor panel's recommendation that banks be allowed to have payment banks as subsidiaries is seen as a positive. "The suggestion that banks be allowed to have payment banks as subsidiaries is a logical one. So far, RBI hasn't allowed banks to float a subsidiary for an activity that can be carried out departmentally, as among other reasons, this provides an opportunity to banks to get out of CRR (cash reserve ratio), SLR (statutory liquidity ratio) or priority sector obligations. But for payment banks, this is not the case. Payment banks will have CRR; the question of SLR does not arise, as the assets will almost entirely be SLR securities. Also, there is no question of priority sector lending," Thorat said.
STRUCTURE OF PAYMENT BANKS
- Bank not to accept deposits more than Rs 50,000 per customer
- No lending activity allowed, can only invest in government securities
- To maintain cash reserve ratio
- Lower entry capital as risk of default is zero
- Commercial banks could have payment bank as subsidiary