The Reserve Bank of India (RBI) on August 19, 2015 granted “in principle” approval to 11 applicants (out of 41) to set up Payments Banks. Given that Payments Banks will not undertake lending activities and will thus not face the same business risks as a full-service bank, the RBI has selected entities with experience in different sectors and with different capabilities so that different service models can be tried out. Of the 11 entities selected, five are telecom companies (or telecom joint ventures/tie up), one a mobile wallet company, one an IT company, one the Indian postal department, one a non-banking finance company (NBFC), and the rest two entities with good delivery channels.
Most of the selected players have the financial strength to ride out the start-up phase and have strong technology platforms to support their reach. The “in-principle” approval granted will be valid for 18 months, during which time the entities will have to comply with the licensing and other conditions as laid down by the RBI.
As Chart 1 brings out, banks have already opened a large number of savings deposit accounts (the number has even outpaced the addition to mobile subscribers over the last few years) during the last few years, and especially since the launch of Pradhan Mantri Jan Dhan Yojna (PMJDY) in August 2014. Given this fact, the potential for the Payments Banks to get new accounts has declined. However, while PMJDY scheme has achieved opening of massive number of saving deposit accounts, Payments Banks are expected to increase the usage of banking accounts by reaching out to the transactors/depositors. Therefore, their ability to keep transaction costs extremely low and get adequate deposit balances would be critical for their sustainability.
While payment banks are likely to complement full-service banks by increasing the number of transactions and saving footprint to a bigger population, they may end up competing with small banks, as there would be some depositor overlap between the two.
· Payments Banks are expected to deepen last mile connectivity (penetration/availability of payments points/ service outlets) in a significant way
In ICRA’s opinion, relatively moderate level of financial penetration, specifically in rural & sub-urban areas, and limited number of payment points (~1.2 lac branches & ~1.8 lacs ATMs of commercial banks as on March 2015) in relation to large number of saving deposit accounts and population, expected to provide adequate growth opportunities to Payments Banks.
Table 1: Payment Points vs. Saving Deposit Accounts vs. Mobile Subscribers
Source: RBI, TRAI, ICRA Research
While large number of accounts opened under PMJDY scheme have lowered the potential for Payments Banks, these banks are expected to improve last mile connectivity, penetration of payments points/ service outlets in a significant way (through business correspondent structure and through use of technology). Several of these applicants (specifically telcos, Indian Post, NBFCs, mobile wallet companies) have very strong franchise (in rural and semi urban areas as well) as well as large number of customers which supports their ability to grow in a significant way. Such last mile connectivity will provide Payments Banks edge in payments/remittance services as well as attracting new customers/depositors. Additionally, Payments Banks could also serve existing depositors of full fledge commercial banks, if these banks can offer transactions at more competitive rates.
Table 2: Status of Accounts opened under PMJDY as on August 12, 2015
Source: PMJDY Website, ICRA Research; In crore
As seen from the table above, large number of accounts opened under PMJDY remains zero balance account and overall average balance per account remains low at ~Rs 1,244 per account. Although, PMJDY accounts are relatively new and significant cash transfers from Govt are yet to be routed through these accounts, there is potential for an efficient low cost service provider to service low income deposit customers. Excluding PMJDY accounts, average balance in saving deposit accounts was ~Rs 21,500 as on March 2014.
ICRA’s estimates, on a longer run, Payment Banks’ interest spreads are not expected to be more than 3-4%. Payments Banks’ ability to serve customers through a low operating cost structure (through BC centric model of Payments Bank and through use of technology) and to build adequate infrastructure (number of BCs as well as technology to provide convenient & safe transactions) would be a key for achieving profitability. This apart, Payments Banks ability to grow balance sheet in a significant way would have critical bearing on their profitability levels.
The profitability of the Payments Bank would be highly sensitive to short term interest rate as the Payment Bank would need to deploy minimum 75% of its deposits in Government Securities/Treasury Bills of up to one year and balance maximum 25% in time/fixed deposits with other scheduled commercial banks.
Payments Banks are also allowed to become a Business Correspondents (BC) of another bank as well as could undertake distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. These activities could support earnings profile of Payments Banks.
As Payments Banks are not allowed to undertake lending activities, they are allowed to maintain higher leverage (maximum 33.33 times). This may help Payments Banks achieve reasonable return on equity.
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