Rajan allays bankers' fear of competition from payments banks

Says such banks will play a complimentary role in the existing banking system

Reserve Bank of India (RBI) Governor Raghuram Rajan on Thursday allayed bankers’ concern about competition from payments banks, especially in deposit mobilisation, saying these banks would play a complimentary role to the existing banking system. Most banks offer four per cent on savings bank deposits and commercial banks are concerned payments banks could offer more to lure customers.

Rajan’s statement comes a day after the central bank gave 11 entities licences to start payments banks. These banks will primarily provide remittance services. Though they can accept deposits of up to Rs 1 lakh from an individual, they cannot offer loans.

“I don’t think these 11 new banks are threats to existing banks,” Rajan said at the State Bank of India (SBI) Banking & Economic Conclave, when asked by SBI Chairman Arundhati Bhattacharya on how new banks would shape up competition in the banking sector. SBI and Reliance Industries have formed a joint venture for a payments bank; the lender will hold 30 per cent stake in the venture.

“After a long discussion, the board (the RBI board) concluded these new banks will be additional; they will complement the existing system by traversing the last mile. The reason for that is there is nothing universal banks cannot do that payments banks can. But there are some things payments banks can’t do that universal banks can,” Rajan said.

“Payments banks will be useful, as they could bring new players into the system. Those with existing businesses can reduce the cost of access and, therefore, payments banks will serve as feeder to universal banks,” he added. “The board took the view that ‘let’s give the licence to a telecom company, a business correspondent, and an IT company and let’s see how the space develops’.”



Bankers are concerned that with the advent of new players, competition for retail deposits could hot up. “We have opened so many accounts under Jan Dhan Yojana, which are essentially savings accounts; these are just about getting active. At SBI, 56 per cent of these are still inactive. Now, we are pushing to make them active; we are getting 11 new players in the payments bank space. With so much competition, there will be poaching and we do not know the methodology of it, how that will happen. It might cannibalise the existing business,” said Bhattacharya

Last year, IDFC Bank and Bandhan Financial Services received licences to start full-service banks. Bandhan, which will start operations from next week, has announced it will offer 4.25 per cent for savings bank deposits of up to Rs 1 lakh, and five per cent for higher amounts.

“The large number of licences dispensed shows RBI’s determination to make deposit-financing competitive by introducing targeted competition in the form of differentiated banks. The probability of RBI announcing a large number of small finance bank licences has also risen,” said brokerage house Ambit.

RBI is planning to issue licences for small finance banks next month. While 41 candidates had applied for payments banks, 72 had applied for small finance banks.

"This (more licences) will lead to rising competitive intensity (higher savings interest rates and service standards) in the banking system, particularly for PSU banks in non-urban centres," the report said.

Apart from Reliance Industries, the other payments bank players thathas a tie-up with banks are operator Airtel M Commerce and Dilip Shanghvi who has tied up with both IDFC and Telenor.