Three firms—Tech Mahindra; Sun Pharma promoter Dilip Shanghvi and his partners IDFC Bank Ltd and Telenor Financial Services; and Cholamandalam Investment and Finance Co- have withdrawn their applications to start payment banks. These firms, along with eight other firms, had obtained in-principle approvals from the RBI in August 2015 to start payment banks. They have now started to realize that the business may not be easy to crack.
What are payment banks?
Payment banks are non-full service banks, whose main objective is to accelerate financial inclusion. These banks have to use the word ‘Payment Bank’ in its name which will differentiate it from other banks.
- Capital requirement: The minimum paid-up equity capital for payments banks is Rs. 100 crore.
- The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
- Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
- Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
- Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
What are the scopes of activities of Payment Banks?
- Payments banks will mainly deal in remittance services and accept deposits of up to Rs 1 lakh.
- They will not lend to customers and will have to deploy their funds in government papers and bank deposits.
- The promoter’s minimum initial contribution to equity capital will have to be at least 40% for the first five years.
- They can accept demand deposits.
- Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.
- They can issue ATM/debit cards but not credit cards.
- They can carry out payments and remittance services through various channels.
- Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. is allowed.
Why this is not an easy business?
- First, these entities can’t undertake any lending businesses and the income stream is initially restricted to remittances. Eventually, they can cross-sell banking products through their reach and earn a fee. But neither of these two streams of revenue are high-margin businesses.
- RBI has put in place strict rules on how these banks can deploy the deposits they garner. 75% has to go into government securities. This limits their ability to earn from the deposit base as well. Garnering a strong deposit base in the first place will be a challenge as well. Besides, if these banks want to steal customers away from banks, they may have to offer more than the 4% interest rate that banks do. But to do that, payment banks need to be able to earn enough on deposits as well.
- Over the last few years, large banks, including private lenders, have significantly expanded their networks in rural areas. This means that these markets are no longer wide open for new business with limited competition. Banks are offering most services that payments banks can and hence, for payments banks to offer a new and differentiated proposition will not be easy.
For the regulator, the payments banking model was an experiment. RBI said as much when it first issued the guidelines. The experiment is still underway and it may be too early for the regulator to be “aggrieved” at the decision of three applicants to withdraw their plans.