Inclusion by exclusion

New norms for payment banks need a rethink

The Reserve Bank of India (RBI) released its guidelines for payment banks and small banks last week. While the latter are apparently seen to be essentially scaled-down versions of regular commercial banks, the former represent an entirely new model in banking. Payment banks are, in effect, semi-banks, which can take deposits from their customers, but cannot lend this money. All funds mobilised through deposits must be invested in risk-free assets, mainly government securities. By preventing them from assuming any credit risk, they are rendered completely safe, barring some element of operational risk. Their earnings and profit opportunities would come from the spread between the returns on risk-free assets and deposit rates, supplemented by fees that they might earn from providing additional services such as remittances and commissions from selling other financial products, such as insurance policies and pension schemes.

The conditions to be fulfilled in order to qualify for a licence are quite stringent. Promoters have to put in equity capital of Rs 100 crore, out of which 40 per cent must be their own funds. Beyond this, there are some restrictions on specific groups of potential entrants. Telecom companies, for example, are required to ring-fence their payment banking business from their telecom business, which could mean that they would not be able to use their extensive dealer networks to expand into this activity. And so on. This raises a fundamental question: will there be any takers for payment bank licences at all? A first-cut answer to this is: probably not. Simple calculations suggest that the asset restrictions coupled with possible scales of operations will compress profit margins to the point of making them unattractive. The fee and commission opportunities may help to increase profitability, but could take a while and, of course, there are no guarantees that these revenue streams will emerge. However, one potential source of interest is from business entities, such as retail chains and consumer goods companies with well-established distribution networks, which have the funds and the patience to set up these entities. These might eventually synergise with their main lines of business.

But is this really the point of payment banks? Over the past few years, a whole range of enterprises that provide last-mile financial access has emerged. Microfinance institutions, organised business correspondents, pre-paid financial instruments and wallet services provided by telecom companies - all these and more are at the cutting edge of financial inclusion. Active experimentation is going on in product design, delivery mechanisms, risk management and awareness. A forward-looking inclusion strategy must be built on the successes of these experiments, by giving them opportunities to consolidate and expand. Many of these entities would presumably be interested in either evolving into or setting up payment banks, but, given their typical scales of operation, the capital requirements will prove to be a deterrent. From the prudential perspective, it is not at all clear that such requirements are consistent with the risk profile of the balance sheets. In effect, the guidelines as they currently stand, are, paradoxically, attempting to achieve further inclusion by excluding entities that are already in the thick of the activity. The guidelines need to be re-thought so as to encourage a wide range of entrants into this space, rather than to reduce it to virtually a null set.