)
Payment service providers have cautiously welcomed the draft norms on licencing of payment banks, which was released by the Reserve Bank of India (RBI) on Thursday, as viability of the business will depend on volumes as spreads are likely to be wafer-thin.
The banking regulator has allowed telecom companies, retailers, pre-paid instruments (PPI) issuers, non-banking financial companies (NBFCs), real estate cooperatives and public sector entities to apply for payment banks.
While several PPI issuers are enthused by the opportunity of converting into a payment bank, they have taken a cautious approach due to profitability issues, along with initial capital requirement and net worth stipulations.
The revenue model depends on fees for remittances and return on investment in government papers. The initial capital is pegged at Rs 100 core and these entities have to maintain capital adequacy ratio of 15 per cent, albeit under the simplified Basel-I framework.
M B Mahesh, analyst at Kotak Institutional Equities, explains that there are two key parameters to make this business a viable proposition, that is, either interest on deposits or controlling the cost of operations. "We think the offerings of these banks are unlikely to provide four per cent on savings accounts and see it a lot lower as the spreads of the business are too thin. If possible, they need to link the cost of savings to the underlying interest rate on yields to reduce the volatility of returns, though it comes at the cost of the borrower. Cost of operations depends on the business model (tech heavy initially or a cost/transaction platform) and the pace of expansion." Moreover, in order to be profitable, these payment banks will also have to focus on volumes, explains Monish Shah, senior director, Deloitte in India. "The payment bank model will need to be cost-effective and technology-enabled as it will be volume-centric."
Payment banks are expected to offer only demand deposits - current account and savings deposit products and not fixed deposits. Currently, the cost one-year fixed deposit is typically in the range of nine per cent.
Keeping a tab on operational cost is also seen as a challenge. For instance, deposits being covered by the deposit insurance scheme would also hike the running cost for them due to higher premiums.
FINO PayTech Limited, a payments technology solutions firm interested in converting into a payment bank, said though the company is keen to explore the options, they will require some clarification before taking a final decision.
"Currently, the draft guidelines suggest that the minimum paid-up equity capital needs to be Rs 100 crore. Now, several private equity firms put in the money in preferential capital. So, if that is not counted even initially then meeting the Rs 100 crore minimum paid-up capital requirement can be a challenge," said Rishi Gupta, COO & ED, FINO PayTech.
Some other players also believe that even though they will be able to meet the Rs 100-crore minimum paid-up capital criteria but maintaining the net worth of minimum Rs 100 crore at all times could be a challenge.
"In the initial stages we will have to incur costs in terms of setting up the business, technology cost and so on and this will obviously have an effect on the net worth. Under the current requirement, we will have to keep in pumping money very often, which may be challenging for us," said Pramod Saxena, founder, chairman and managing director, Oxigen, a payment solutions provider. Oxigen is also keen to convert into a payment bank. Currently, the pre-paid instrument issuers have a minimum paid-up capital requirement of only Rs 5 crore. Therefore, to begin with, meeting the Rs 100-crore requirement might not be easy for a few players.
