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Increased competition, profitability remain key concerns for Payment Banks

With them not being allowed to lend, these banks will be mostly dependent on fees and income earned from Treasury operations

Nupur Anand  |  Mumbai 

With Monday as the deadline for applications for niche banking licence, several are queuing to apply. Airtel, Oxigen, ItzCash, MobiKwik and FINO PayTech and private sector lenders ICICI Bank and Kotak Mahindra Bank, among others, have evinced interest to apply or partner for one. However, concerns around increased competition and profitability remain.

The Reserve Bank of India (RBI) had released the final guidelines for payment in November last year, allowing telecom companies, retail chains, and corporate houses to apply. Even government-owned entities such as India Post.

Non-resident individuals (NRIs) have also been allowed to apply for the niche banking licence, provided they plan to return to India. The central bank has allowed interested parties to form an alliance with a lender for setting up a payment bank.

Considering payment are not allowed to lend, the concern on profitability is key. The major source of revenue would be from fees and income from treasury operations. As a result, it is unlikely they will be able to offer above a four per cent interest rate on savings bank accounts, similar to what is offered by most existing lenders. Therefore, attracting deposits might not be easy.

However, players believe the ease and convenience offered to customers could help them tide over the similarity in interest rates offered by other lenders.

In the final guidelines, the regulator has expanded the scope of services of these players, providing for additional revenue streams. For instance, they can now provide third-party products such as mutual funds and insurance. have also been allowed to function as a business correspondent (BC) of another bank and do international remittance.

Despite this, financial viability is a pressing issue. “We will have to focus on technology and volume. This business is that of high-volume and low individual value and, therefore, one will have to achieve cost efficiency and economy of scale in order to be profitable,” said Dipak Gupta, joint managing director, Kotak Mahindra Bank.

Airtel M Commerce Services, a wholly-owned subsidiary of Bharti Airtel, is applying for a licence and Kotak Mahindra Bank will acquire 19.9 per cent stake in it.

Aman Bhargava, director (financial services advisory) at Grant Thornton India, said the focus for every player will have to be leveraging on technology to control cost for breaking even faster.

Experts believe payment banks might take at least three years for break-even. RBI’s idea behind having these niche banks is to deepen financial inclusion. As a result, payment banks need to have at least 25 per cent of physical access points, including BCs, in rural centres.

“Initially, players will have to incur higher costs in setting up the infrastructure in rural areas and this will require large investments. Though one can tie up with some existing players like retailers for cash-out, the majority of investments needs to be done by the banks,” said Sunil Kulkarni, deputy managing director, Oxigen. However, since the area of operations will not be limited to the hinterland applicants see an opportunity in tapping even the urban unbanked population.

“Even after having 25 per cent in rural areas, there is still a significant opportunity in the urban areas,” added Kulkarni.

Another challenge is from the large number of potential customers already covered under the Jan Dhan Yojana. However, those applying for a licence are trying to see a silver lining in the cloud.

“People in urban areas also have more than two accounts and the same can happen here, too. Individuals who have already opened an account under Jan Dhan can keep that for direct benefits transfer and the other account for personal use. It is a possibility, as a lot will depend on the services and the convenience that payment banks might be able to offer,” said Rishi Gupta, chief operating officer and executive director at FINO PayTech, which has also applied for a licence.

Gupta explains another initial challenge is in brand building and educating of consumers. Since niche bank operations will be different from the existing lenders, acceptance by consumers might be another hurdle.

Payment banks can accept deposits up to Rs 1 lakh and can offer current and savings account deposits. They can also issue debit cards and internet banking.

Both cash-in and cash-out services are allowed through various channels such as branches, automated teller machines and BCs. Cash-in could be made through mobile banking and cash-out via point-of-sale terminals. Payment banks have been allowed to serve as BCs for other lenders as well.

However, payment banks are barred from taking deposits from NRIs.

In-bound remittances into accounts maintained by residents with a payment bank will be treated as deposits.

The minimum capital requirement for setting up a payment bank has been pegged at Rs 100 crore.

The final deadline for applications was earlier January 16, now revised to February 2.

According to the NSSO 59th Round Survey results

• 51.4% of farmer households are financially excluded from both formal and informal sources

• Of the total farmer households, only 27% access formal sources of credit; one-third of this group also borrowed from non-formal sources

• Overall, 73% of farmer households have no access to formal sources of credit



* Has to use the word ‘Payments Bank’ in its name to differentiate from other banks

* Accept demand deposits, i.e., current deposits, and savings bank deposits from individuals, small businesses and other entities

* To hold a maximum balance of Rs 1 lakh per individual customer

* Will be allowed to set up branches, ATMs, business correspondents

* Allowed to issue debit cards also offer internet banking

* Can accept a large pool of money to be remitted but at the end of the day the balance should not exceed Rs 1 lakh

* Can accept remittances to be sent to or receive remittances from multiple banks

* Permitted to handle cross-border remittance transactions in the nature of personal payments / remittances on the current account

* Allowed to distribute mutual fund products, insurance products and pension products

* Bank can also undertake utility bill payments


* No NRI deposits should be accepted

* Cannot issue credit cards

* Not allowed to set up subsidiaries to undertake non-banking financial services activities

* Other financial and non-financial services activities of the promoters should not be mingled with the working of payment banks

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First Published: Mon, February 02 2015. 00:25 IST