Surrenders on payment bank licenses begin

With Tech Mahindra also announcing its intent to surrender the payment bank license, the total count of no-gos has reached 3 amongst the 11 who were issued a license in the first round of payment banks. The other two who have decided not to go ahead with the launch of a payment bank includes Cholamandalam and IDFC/Sanghvi combine.

It seems there are multiple factors which have made these players rethink the value in a Payment bank model. The fact that the deposits will largely need to be invested in government securities means a wafer thin margins in the model. Some expect it to be around 3-4%. Add to this that the distribution network needed for building scale will be immense and if you dont already have a core business which can absorb some of these distribution costs, the economic viability of the overall model comes into question.

This current tone of re-evaluating the payment bank model is in extreme contrast to the initial euphoria expressed by the industry. The one category of players everyone is still gungho about are the telecom companies.  The telcos already have a committed distribution and this adds a neat clearly incremental opportunity over the telecom business.

Payment Banks India – RBI definition, guidelines, inclusion

Payment banks have been announced by RBI as a possible digital transaction only kind of an entity. Many believe that the agenda of financial inclusion has been unnecessarily added to these category of players.

Updates on Payment Banks in India

Payment Bank Meaning – What are Payment Banks

The Reserve bank of India had asked the Nachiket Mor Committee to explore and recommend options for creating special category of banks which would positively impact financial inclusion within India.As part of the recommendations of the Nachiket Mor Committee, a special category called Payment Banks has been proposed.

Payment bank guidelines

Payment Bank Definition Guidelines MeaningRBI has spelled out clear guidelines for Payment Banks. While it is expected that these guidelines would evolve over the coming years, the following is what has been laid out as the initial set of guidelines.

  • Minimum entry capital for Payment banks is fixed at Rs 100 Crores. The committee had recommended an amount of Rs 50 Crores but it seems that RBI has chosen to play safe and doubled the amount. This high amount of initial capital would mean that innovation would be slow because the risk to the payment bank model is very limited.
  • Payment banks can accept demand deposits. The restriction therein is that the maximum balance per customer can only be Rs 100,000/-. This can be for both current and savings accounts. All desposits have to be invested in government bills and securities, thereby indicating that fee income for transactions is what would probably be the biggest revenue driver for Payment banks. Also, it has not been made clear whether payment banks would need to pay interest on deposits collected.
  • Payment banks would primarily provide remittance and payment services. The boundary condition here is that the total credits into an account should not exceed Rs 100,000/-. This means that the payment banks would only make sense to the lower economic strata of the Indian banked and unbanked population.Industry experts are saying that this cap would make good sense for the migrant workers whose average ticket size of remittance is about Rs 4000/-.
  • Payment banks must be a banking correspondent of a commercial bank wherein they can offer services like marketing of bank’s loan products etc.
  • Commercial banks can also leverage this model by launching a payments bank subsidiary.
  • Currently RBI has not talked about the pricing for the services of the Payment banks. Industry is looking at it as a positive sign where the new players would have some room to experiment and discover the right price in the market. Given the tough regulatory framework for payment banks, a pricing flexibility would be essential.
  • Payment banks can be “Internet only“. It is a very interesting proposition and it remains to be seen if this is the path that India’s first digital bank would take. Globally internet only banks have already been launched and they have shown the possible value that could be unlocked by such a proposition. With the increased usage of mobile, social media and internet, that value has only increased in the last few years.

Payment Bank Discussions

  • Is ICICI Bank’s Pocket app a smart pre-emptive move in the context of Payment banks
  • How will mobile operators benefit from a Payment Bank licence : It is assumed by most watching the telecom and the payments industry closely that the single biggest benefit to a mobile operators existing business would be the reduction in subscriber churn. Read More.

Banks will now face Rs 1 Crore fine for each violation

RBI has just announced that it would fine a bank Rs 1 Crore for every single violation of norms. This is a substantial increase from the previous rate of Rs 5 Lakhs. The new slab comes into effect after the Section 46 of the Banking Regulation Act was amended in the winter session of Parliament.

If a bank is found to have violated multiple norms the fine would now be multiples of Crores. Typically RBI issues a showcause notice to banks if it suspects banks of violations of its defined norms. Usually the violations refer to know-your-customer (KYC), anti money-laundering and on foreign exchange derivatives norms.

RBI issues guidelines for new banking licenses

RBI has just issued its guidelines for issuing the new set of banking licenses. This is interesting as the licenses would now be issued after almost 10 years since the last set were issued.

  • Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years.
  • Minimum paid-up capital of Rs 500 crore.
  • Foreign investment, including FDI/FII and NRI, capped  at 49 per cent
  • On receipt of licence, operations have to commence within one year and should be listed in next 3 years
  • Promoters would need to set up a wholly-owned Non-Operative Financial Holding Company (NOFHC).
  • At least 25 per cent of branches to be in unbanked rural centres. This will be challenging as even existing banks have not been able to come good on this clause.
  • Detailed feedback would be sought about the applicants from other regulators, enforcement, investigative agencies like I-T Department, CBI, ED etc.

Keep track of all action on new banking license front.