Heavy set-up costs hurt payments banks' profitability: RBI

Payments banks were created to improve access to formal financial channels or services for small depositors, businesses, low-income households and others, who typically reside and/or work in the rural

Payments banks (PBs), which began operations last year, ended the calendar year with a tepid performance owing to large set-up (infrastructure) costs, the Reserve Bank of India (RBI) said.

Rishi Gupta, chief executive officer of Fino Payments Bank, said it was still early days and no one can be expected to make profit. “We have a very low-cost structure, with low-cost branches and a large distribution network that is accounted for variable pay,” he told Business Standard.

PBs were created to improve access to formal financial channels or services for small depositors, businesses, low-income households and others, who typically reside and/or work in the rural or informal economy. So far Airtel Payments Bank and India Post Payments Bank  have commenced operations, while operations of Paytm and Fino payments banks began by the quarter ended June. Payments bank operations of Aditya Birla Idea, National Securities Depository Limited and Reliance Jio —  all received licences from the RBI early last year —  are expected to launch sometime this year.

PBs, according to the RBI’s report on trend and progress of banking in India in 2016-17, have not done well. These are loss-making entities, given the large capital expenditures incurred over the year in setting up the infrastructure required for smooth operations.

Gupta said a democratisation of the financial system is underway and Fino Payment Bank’s performance so far had beat the company’s own expectations and it was on track.

Profit after tax and earnings before provisions and taxes for select PBs were negative at the end of March 2017. The apex banks’ report states the starting-up expenditure incurred during the initial stages of operations impacted the return on assets (-25.2) and return on equity (-36.4) for select PBs. 

Business Standard contacted a spokesperson from Paytm Payments Bank, but did not receive a comment when going to press.

At the end of March 2017, capital requirements as well as reserve requirements of payments banks were major liabilities, the RBI report said. PBs are not allowed to undertake lending activities, hence their balance sheets do not look as robust as that of a non-banking financial company.

Two-thirds of PBs’ assets (specifically two PBs’) constituted balance with banks and money at call/short notice, while the remaining third constituted investments.

The RBI said only when the operational performance of PBs are scaled up, and only when more data is available regarding financial and operational aspects of PBs, can a more ‘realistic assessment’ be made.