Despite Exits, Payments Banks Are Not A Lost Cause: Here’s What Needs Doing

The Reserve Bank Governor, Raghuram Rajan, in his post-policy interviews to the media yesterday (7 June) spoke about the prospects for payments banks. He was right not to be “overly perturbed” by the exits of promoters who were earlier given licences to set up such banks.

In recent months, there has been excessive pessimism over the viability of payment banks as three of the 11 licensees dropped out. Payments banks have to invest 75 percent of their deposits in government paper with less than one year’s maturity. Promoters need Rs 100 crore of capital, and payments banks can accept deposits only upto Rs 1 lakh. The net result: margins can be wafer-thin, and many banks may not be viable in the short run.

Rajan himself said he was not too worried about the dropouts, and told The Times of India that only some categories of promoters would be logical investors in such banks. He said: “The archetypical payments bank, I think, is a mobile company which has outlets already available, so (that) the incremental cost of access point is low and the mobile can work as a transmission device with the kiosks as cash-in and cash-out points. Building on an existing business seems the way to go. Others - like Postbank and Paytm - may find a way to do it. We have been agnostic about which direction payments banks will take and have allowed a 1,000 flowers to bloom.”

He is surely right on this. However, one can have issues with the way payments banks were licensed, and also gripe about some excessively restrictive norms that may make it tough to survive.

Also, for someone who wants a thousand flowers to bloom, one wonders why payments banking licences are not available on tap, and why applicants who were already in the e-wallets and business correspondents business were denied licences in the first place. There were 41 applicants in the queue, but the RBI gave licences only to 11. The screening committee which decided the award of licences chose the wrong guys, and they are the ones exiting.

For example, the committee chose to give licences to Dilip Shanghvi of Sun Pharma, but ignored many growing e-wallet companies – Oxigen, Mobikwik, and Citrus, among others – who are already in the business and were sorely in need of the licence. If you choose promoters on the basis of their existing net worth rather than those who would benefit from becoming payments banks, you will get dropouts.

The ones who left were really people attracted by the idea of getting a banking licence. This is a hangover from the licence-permit raj, and the result of the RBI handing out too few banking licences in the past. The exiting would-be promoters – Shangvi, Cholamandalam, and Tech Mahindra – are in highly profitable businesses and a low-margin, high-volume business like payments banking makes no sense for them. It’s like Vijay Mallya using money from a high-margin liquor business (20-30 percent margins) to enter the low-margin, high-volume aviation business (1-3 percent margins) without a clue on how to run the latter. You need an Indigo mindset on costs to succeed in aviation, not an expansive showman like Mallya.

So, point 1: net worth should not be the main criteria for deciding payments banks licensing. Apart from mobile companies, payments banking makes sense for those already in the money business with large customer bases and touchpoints. This means e-wallet, e-commerce, and business correspondent companies, who already are proto-banks.

As Ajay Shah and Shubho Roy pointed out in a blog last year, the RBI adopted a non-transparent approach to selecting payments banks. The right way to approach licensing would have been to “establish a regulatory strategy for payments which is not deferential to the business interests of banks, i.e. which has a level playing field between banks and non-banks.” The criteria and procedure to be followed for giving out licences should have been open and transparent so that everyone got a fair chance.

Secondly, it is also clear that the RBI – as is always the case – has been excessively cautious with its prudential norms. If almost all the deposits are to be parked in ultra-safe government paper, what is the logic of restricting deposits to Rs 1 lakh, or being unduly choosy on who you give a licence to? Only crooks needed to be kept out. While one should not rap the RBI for being cautious in the beginning, it is equally clear that the deposit cap is meaningless. Few people are anyway going to breach the cap, given that returns will be lower than in bank fixed deposits. This cap is actually the result of the RBI trying to protect regular banks’ low-cost savings deposits from slipping out to payments banks. Clearly, Shah and Roy are right to assume that the RBI has been “deferential” to the business interests of banks.

Third, the RBI would do well to announce that it will keep relaxing the norms once it understands what kind of promoters are attracted to payments banking, and also how the business risks are being handled. At some point, it may make sense to allow payments banks to offer overdrafts to good customers, thus ending the ban on lending without making payments banks the same as normal banks or small banks in terms of credit risks. It may also make sense for the RBI to allow payments banks to offer simple financial products by third parties – to earn fee incomes – but with caveats to prevent mis-selling. Plain vanilla term insurance, accident insurance, and debt funds with high ratings could be obvious products for sale through payments banks, especially when investment sizes are small, and from the rural sector. The fact that payments banks may earn only 0.5-0.75 percent margins does not mean they should not be allowed to earn profits elsewhere.

To make payments banks work, the RBI needs to make these licences available on tap, and adopt a more flexible approach to regulation in future. The idea should be to provide for greater inclusion and competition to universal banks, not kill the idea of payments banks by excessive rule-making.