Bumps Ahead

Payments banks were ideated by the Reserve Bank of India (RBI) as a new category of banking institutions primarily to support financial inclusion. The concept was floated by the Nachiket Mor Committee when the Pradhan Mantri Jan Dhan Yojana (PMJDY) was nowhere on the radar. The Mor Committee envisaged opening bank accounts for every adult person by 1 January 2016 and payments banks were considered as the institutional vehicle. Thanks to PMJDY, this goal has been partly achieved even before any payments bank could begin operations. Therefore, the first challenge is to create a positive perception about the relevance of payments banks.

The good news is that the concept of financial inclusion is evolving. Almost all the 245 million households in the country — urban and rural — have been covered. Now there’s at least one bank account per household; the number of bank accounts have grown to almost a billion including 195 million accounts opened under PMJDY, though it is agreed that a large section of adult population is still out of the banking fold. Also, financial inclusion is not limited to opening of bank accounts. Building the remittance infrastructure — the other objective of payments banks and an essential component of financial inclusion — is a big task and the network of 1.3 lakh bank branches has not been able to meet the requirements so far.

Therefore, the challenge of perception of relevance can be easily met by the payments banks by positioning themselves as provider of full range of transactional services. Considering that four of the 11 proposed banks already have the remittance experience — Airtel Money, Vodafone mPesa, Fino Pay tech, PayTM — and other players also have the experience of transaction processing, they can justify themselves as continuation of their existing business. Acting as business correspondent for mainstream commercial banks, already a permitted activity for them, would further justify their relevance. The payments banks are also likely to play a crucial role in implementation of Bharat Bill Pay System (BBPS).

Since six out of 11 players were acting as pre-paid issuers, the second challenge is their ability to migrate from the world of lightweight regulations to much stricter regulations by RBI. They will have to get familiar with the new world of regulations on liquidity management (cash reserve ratio, statutory liquidity ratio and capital adequacy ratio), grievance redressal, deposit insurance, security of transaction processing, reporting of suspicious transactions, inspection/audit by RBI, etc. Due to these factors, RBI has granted them 18 months from the date of in-principle approval to actually going operational. It is likely that they are struggling with regulatory compliances. Given the dare-devil promoters that many of these players have, arranging Rs 100 crore of capital may not be difficult.

The real difficulty may be in building the right organisation structure to fulfil regulatory compliances. Apart from amounts maintained as cash reserve ratio with RBI on its outside demand and time liabilities, a payments bank is required to maintain 75 per cent of its demand deposit balances in statutory liquidity ratio (SLR) in the form of eligible government securities and or treasury bills. Payments banks are also required to hold maximum 25 per cent in current, time and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. Thus, a pre-paid player creating a wallet and acceptance of deposit for an equivalent amount by a bank are two different sets of regulatory commitments, though it may appear the same to a customer.

The third, and the most important challenge that payments banks would face is operating on a thin margin. Since, they cannot enter the credit market, the key to their survival would be the volume of transactions. Low-cost deposit has already become very difficult. Good number of commercial banks are already offering a savings bank interest rate of 6 per cent. The interest earned on SLR securities may be neutralised against the deposit interest outgo to the depositing customers. There is also a restriction on the account balance of a customer with payments banks. Therefore, the only remunerative revenue may be the fees charged to customers for payment services. Hope lies in a few payments banks with parentage of retail chains such as Reliance that are using this model as their servicing arm. Large banks, joining as promoters of the parent banks, may also support payments banks as their innovation arm in transactional services. Profit alone may not be the driving force for these banks.

The author is managing director and CEO of National Payments Corporation of India (NPCI)

(This story was published in BW | Businessworld Issue Dated 08-02-2016)