RBI should be more liberal in granting payments bank licences

The central bank needs to be flexible if it wants to spread financial inclusion across the country

“In our country, we give more licences to players from outside but we don't give many licences to domestic players,” K C Chakrabarty, former deputy governor of Reserve Bank of India (RBI), once famously said.

The Indian banking sector is highly regulated with stiff entry barriers. Only a handful have been given a banking licence. Prior to 2014, the central bank had issued 12 bank licences in two decades, in two phases: 10 banks were licensed on the basis of guidelines issued in January 1993. The guidelines were revised in January 2001, and two more licences were issued. Then, after a gap of a full 13 years, two more licences were issued last year.

The regulator admits that its approach was ‘conservative’ during the last round of bank licence process. “RBI’s approach in this round of bank licences could well be categorised as conservative,” the central said last year while granting licences to IDFC and Bandhan Financial Services.

The conservative approach adopted by RBI during the last round could be justified on the grounds that at a time when the corporate sector was being hit with one scam after the other over the past 5 years, a cautious approach might have been the need of the hour. Particularly so when banks are highly leveraged entities and deal with public deposits.

But it may be time for the banking regulator to shrug off the conservatism when it comes to licensing of payments banks.

For one, the degree of leverage a payments bank will have is far less than a bank with universal licence. This is because payments banks are not allowed to accept public deposits of more than Rs 1 lakh per customer. (They can only accept current and savings accounts deposit, but not fixed deposits). And deposits of up to Rs one lakh are insured. So, there is no risk for the depositor if a payments bank goes belly up.

Two, a payments bank is not allowed to lend. The norms allow them to invest only in government bonds, which are backed by a sovereign guarantee. A payments bank is only allowed to facilitate remittance services and can act as a distributor for insurance, mutual fund companies.

These stipulations significantly reduce the scope of activity of a payment bank, and thus, leverage.

The RBI has received more than 40 applications from payments bank aspirants including big names such as Reliance Industries, Bharti Airtel, Vodafone, Future Retail, among others. These corporations have been successful in the areas they are operating so far.

“Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record and who are likely to conform to the best standards of customer service and efficiency... RBI will adopt a cautious approach in licensing payments banks in the initial years, and with experience gained, may suitably revise the approach,” RBI had said while releasing the final norms on payments bank last November.

May be the time has come to shed this cautious approach and taking a more liberal approach if spreading banking service to the nook and corner of this vast country is the objective. 


(Manojit Saha is Banking Editor at Business Standard)