Indicus Centre for Financial Inclusion

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Whither Payments Banks!

In August 2015, the RBI gave in-principle licenses to 11 of the 41 applicants for Payments Banks, they were to begin operations within 18 months. Of these 11, three have recently dropped out of the space – Cholamandalam Distribution Services, Dilip Shanghvi and Tech Mahindra. The media is abuzz.

In this piece,  Payments banks aren’t looking that lucrative anymore, (Livemint, 25th May 2016), Ira Dugal puts down three reasons why the economics does not make sense to many applicants – a) the low-margin, high volume business model is not everyone’s cup of tea, b) restrictions on deploying deposits curtails income options and c) competition from existing banks even in rural areas has heated up considerably over the past year. She concludes that the telcos would be the most natural fit for the Payments Banks business model and most likely to last the long race.

The Indian Express notes RBI Deputy Governor Mr. S S Mundra‘s reaction :

We would certainly feel little aggrieved because lot of efforts from the part of RBI goes in processing these applications,” Mundra told reporters here. …When asked whether RBI may levy processing fee on the entities which have pulled out, Mundra said the current regulation does not give scope of charging a processing fee. “Unfortunately, that kind of enabling mechanism is not there today. But if we learn by experience, probably this is something which can help in augmenting our revenue to some extent,” the deputy governor said in a lighter note.” 

R Jagannathan brings out the strengths in the firms remaining in the field in SwarajyaMag (May 25, 2016):

“In short, each of the players now left in the arena has a long-term and sound reason to get into payment banking. While payments banking may be a tough business, there is a strong likelihood that the licensing conditions for them will be liberalised once they establish a track record. The RBI is being over-cautious right now. The exit of three players is thus good, for the last thing a bold experiment needs is players unwilling to stay the course.”

Even as three have dropped out, firm dates for operations have already come from India Post for March 2017 (Livemint, May 22, 2016); Paytm is still gung-ho for August 2016 (Moneycontrol, May 24, 2016); Airtel is pushing for opening services sometime between July and September 2016 (Business Standard, May 2, 2016).

While it is true that those dropping out find the economics of Payments Banks difficult to stomach, there are some new factors that may have queered the pitch recently. For one, the Unified Payments Interface from NPCI will make it much easier and cheaper to remit money – see Latha Venkatesh on this (CNBCTV 18, May 24, 2016).

Further, given that the RBI recently released draft guidelines for on-tap banking licenses, it is possible that some players exiting now will repitch for a full bank license when the time comes!

Looking back, the announcement of Payments Banks approvals spurred existing full service banks to pull up their socks, especially when it came to mobile banking and digital services. Now with the stronger licensees like India Post and telcos with wide networks remaining in the field, India’s financial inclusion mission will definitely get a firmer foundation.

 

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