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Are India’s payments banks coming under threat from SFBs? 

The Reserve Bank of India has released final guidelines for ‘on-tap’ licensing of small finance banks and opened the window for applicants.

As per the Reserve Bank of India (RBI) guidelines, payments banks have been allowed to apply for conversion to small finance bank (SFB) status. However, they may do so only after five years into existence as a payments bank and by meeting other eligibility norms, including promoters holding no more than 10%. The payments bank model was conceptualized by the RBI in 2014 to bolster financial inclusion in the country with the help of technology. These banks were allowed to take deposits only and not to issue credit cards or loans. Payments banks can issue services such as ATM cards, debit cards, internet banking and mobile banking.

While some 11 players in India applied for a payments bank license, only India Post, Fino Payments Bank, Paytm Payments Bank, Reliance Jio Payments Bank and Airtel Payments Bank are operational at present. The rest either withdrew their license applications or shut up shop as they found the business model unviable. Bharti Airtel set up India’s first live payments bank in March 2017, which means it cannot switch to an SFB license before 2021.

Experts tracking the banking and financial ecosystem have been critical of the payments bank model due to its inability to lend, a major source of income for any bank. At present, the revenue streams include data monetization, cross-selling of financial products, creating credit access platforms and alternate merchant payment models. Further, revenues are earned by investing 75% of their deposits in government securities, and the remaining 25% through fixed deposits in universal banks. However, payments banks struggle to attract deposits. The majority of their customers are from rural areas with average monthly deposits of less than INR10,000 (around $125).

A pivot to becoming an SFB would give a payments bank the ability to expand revenue streams, especially through direct lending, and improve the deposit base. Besides, an SFB license would also increase both presence and thereby trust. SFBs are required to have physical branches. SFBs may also, unlike payments banks, offer microloans and issue credit cards. They may also accept deposits of more than INR100,000, which is the upper limit restriction on deposits accepted by payments banks.

So far, three players – Fino PB, Alibaba-backed Paytm and the Government’s India Post – have shown interest in applying for an SFB license. Fino Payment Bank’s MD and CEO, Rishi Gupta told IBS Intelligence in an interview that the bank was waiting for the final guidelines and it is doing its own due diligence as to when and how to apply for the license.

Gupta does not believe that the payments bank is a flawed business model and said that entities who understand the business, with a large distribution base, secured and scalable technology and simple offerings to work out innovative customer-centric solutions have a higher chance of succeeding.

He also added that Fino Payment Bank is likely to turn profitable in 2020. Its competitor Paytm, which started operations in late 2017, is already profitable, according to financial filings with the Registrar of Companies.

However, Gupta also feels that the SFB is a better model offering the prospect of a more profitable banking business with the potential to expand more quickly with the help of technology. Indeed, most of the current crop of SFBs, such as Ujjivan Small Finance Bank, Suryodaya and Fincare among others, are already profitable. Experts feel that the stipulation in the RBI guidelines that payments banks have to have been in business for five years before being allowed to apply for an SFB license is too long, and that they will find it difficult to survive without being allowed to lend.

Mahesh Ramamoorthy, managing director, APMEA, banking solutions, FIS, said: “Allowing payments banks to apply for small finance banks licenses has the potential for accelerating technology adoption into lending and other forms of direct banking (given the tech-focused models that payments banks have evolved).

“The ask for payments banks to complete five years of operation before seeking a small finance bank license seems a bit long given that payments banks were looking forward to expanding their product or services to make their business models more sustainable.”

Article by:-
Priyanka Pani
Senior Regional Correspondent –  Middle East and Asia, IBS Intelligence

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