The tag-line of Airtel Payments Bank is, “Bank hai, par alag hai.” Airtel Payments Bank (APB), one of the seven payments banks operating today, has three crore customers and a network of five lakh banking points. It recently reported that its losses had widened to Rs 338 crore for FY19. Out of the seven, only four players are active — Fino Payments Bank, PayTm Payments Bank and India Post Payments Bank. With India Post converting into a small finance bank, there are three active payments banks. In late July, Aditya Birla Payments Bank said it would close operations by October due to “unanticipated developments” that made the “economic model unviable.” Welcome to the world of payments banks! Banks that were supposed to be gamechangers; banks that were touted as the next big thing in the financial industry when they first started operations.
The RBI had issued guidelines in November 2014 on payments banks. It had stated then that the objective of setting up payments banks was to “further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses and unorganized sector entities. Payments banks could accept demand deposits up to a maximum of Rs 1 lakh per individual customer but could not accept time deposits; they could issue ATM/debit cards, but not credit cards. Further, they could provide payments and remittance services through various channels, act as ‘business correspondents’ of commercial banks and distribute non-risk sharing simple financial products like mutual fund units, insurance products, etc.
However, payments banks could not undertake lending activities. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the RBI on its outside demand and time liabilities, payment banks have to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR)-eligible government securities/treasury bills with maturity up to one year. Further, they have to hold a maximum of 25% in current and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
In August 2015, RBI gave “in-principle” licences to 11 entities out of the 41 applications it had received based on their financial track record and governance issues. Many entities like Tech Mahindra, Cholamandalam Finance and Sun Pharma backed out citing many reasons. The Aditya Birla Group had two payments bank licences but gave up the permit for the Vodafone m-Pesa platform after the Vodafone-Idea merger. The ones that started operations have not been firing on all cylinders primarily because of the business model itself. Payments banks get 6-7% on their assets, that is, investments in government securities and deposits with banks and pay 4% on the liabilities. The spread of 2-3% is not adequate to recover their operational costs and generate profits.
The issue is that of viability, or rather the lack of it, which is inherent in the business itself. A recent report authored by Soumya Kanti Ghosh, chief economist, SBI, paints a sombre picture of payments banks. Ghosh says that “on the asset side, PBs face a blanket ban on any type of lending. On the liability side, too, they cannot accept deposits higher than Rs 1 lakh. Though the business of PBs is free from credit risk and faces relatively lower market risk, it is subject to operational and liquidity risk. Payments banks emerging as a real competitor to banks is not a near-term possibility. There are various RBI restrictions on the sector. Payments banks were turning out to be working merely as aggregators.”
Ghosh had stated that the steep capital requirement for payments banks at 15% of risk-weighted asset as against 8% according to Basel III norms and 9% mandated by RBI for scheduled commercial banks would no doubt minimize if not eliminate credit risk for payments banks but they would still be exposed to operational risks. Ghosh had suggested that the payments banks can survive only if they cross-sell the products of other banks.
Some of the payment banks have already taken steps to tackle operational risks. PayTm payments bank has tied up with Indusind Bank for deposits. In PayTm Bank, if the balance in a customer’s account crosses Rs 1 lakh, the same is moved to a fixed deposit with their partner bank, Indusind Bank.
Fino Payments Bank has tied up with ICICI Lombard and Exide Life Insurance to distribute their life insurance products.
These banks should also try to increase fee-based income. While funds transfer charges were 1% in Airtel Payments Bank, it was a tad high at 5% in PayTm Bank. They can still keep the operational costs to the minimum if they can get customers through digital banking and minimize the presence of brick-and-mortar branches. The problem is that these payments banks have already incurred huge capital expenditure and unless they take steps on a war-footing, they may be staring down the barrel.
(The writer is with Manipal Academy of Banking, Bengaluru)