Regulations made payments banks business unviable: SBI report

There seems to be no respite for the payments banks in India with rigid regulations, constant bureaucracy roadblocks and competition from commercial banks. With the closure of Aditya Birla Payments Bank and Vodafone m-Pesa, fundamental problems regarding the business viability under the existing framework are becoming more apparent.

Manifesting from several reasons which make payments bank business unviable, State Bank of India (SBI) released a report titled 'Payments Banks - A Case of Near Yet Too Far'. The report highlights how the future of payments banks stands on shaky ground.

Payments banks’ business model has been rendered unfeasible due to the developments in the market and failure to implement the theoretical framework to support existing banking services across the Indian economy.

SBI runs its own payments bank through a joint venture with Reliance Industry Limited (RIL). The bank owns 30% while remaining stakes controlled by RIL.

For a quick context, we will take you through the brief history of payments banks. 

The idea of payments bank (PB) was recommended to RBI by the Nachiket Mor committee to provide financial inclusion to the underserved population of low-income households, small businesses, and migrant workers by providing them with small savings accounts, ATM cards, and payment services. 

Packaged as a gamechanger for financial inclusion, RBI had awarded the license to 11 entities to run payments banks. Amidst all the fanfare around the launch, four license holders - Cholamandalam, Dilip Shanghvi (Sun Pharma), IDFC Bank and Telenor Financial Services had surrendered their licenses within 5 months.

Their decision to stay away from running payments banks was prudent. This can be gauged from the recent shutdowns of Aditya Birla Payments Bank and Vodafone's m-Pesa.

The concept of PBs was similar on the lines of RBI’s tryst Local Area Banks (LABs) which were floated in the late 1990s by the apex bank. LABs were launched to provide efficient and competitive financial intermediation services in a limited area of operation.

But as fate had it, the LABs have struggled ever since their inception. They are engulfed in a cluster of grave issues ranging from limitations to competition for funds with scheduled commercial banks, customer acquisition et al.

Likewise for PBs, having strict regulations such as a blanket ban on any type of lending, inability to accept deposits higher than Rs 1 lakh and the huge capital requirement of maintaining the capital to risk-weighted assets ratio of 15%, posed as major challenges for them.

The restrictions on lending and accepting deposits have destroyed the possibility of PBs ever competing with traditional banks. Deposits up to Rs 1 lakh comprise only 9% of total deposits of the banking system in terms of value and not having the revenue channel of money lending business creates further problems for PBs, added the report.

Besides, the payment banks required to pay at least 4% interest on their savings deposits on which they earn an average of 6.5% on government securities. It left them only a 2.5% spread for their own expenditure and  for somehow making profits as well. 

Since the scope of making money out of payments bank’s operations is minimal, it also kept reflecting on financial results. Collectively, all of them posted a loss of Rs 516.5 crores in FY18.

Other regulatory burdens include having a majority of independent directors, operating a minimum of 25% of physical access points in rural areas, blockage of subsidiary structure like non-banking financial companies, and restrictions on accepting deposits from non-resident Indians made the model more unviable.                

Hammering hard with his view John BaRoss, Founder-Director of Finnclude said, “the economic viability of Payment Banks has been in doubt since the RBI released its suffocating restrictions. As over four years of Payment Banks underperforming and quitting continued, the RBI did nothing to adjust its overly restrictive, failing experimental guidelines to help the advance of financial inclusion in India. (In parallel PMJDY statistics show that about ~50% of PMJDY accounts are unused.).”

He also emphasized that there are serious problems on the two key fronts of India's supposed commitment to advancing financial inclusion in these past 4-5 years. BaRoss runs a non-profit global mobile financial service which works with national banks and financial regulatory institutions to help advance financial inclusion in economies across the globe.

Meanwhile, the SBI report also listed suggestions to alleviate the problems faced by payments banks. Some of the possible solutions include having the arrangements to automatically transfer funds in accounts exceeding Rs 1 lakh, and access to Aadhaar based KYC.

The biometric KYC reduces the cost of verification by about three folds as compared to the manual one. Further, it expedites the entire process.

According to the report, the initial costs of investments are steep and with the imposition of strict regulations, profits are not viable in the near future. It also suggests RBI allow PBs to cross-sell third-party services including financial products.

While the choking RBI regulations and the stagnant state of innovation in payments banks are not very confidence-inspiring, there can be a possible turnaround if the Government backs the sector with much-required reforms.

In case that happens, PBs will have a level playing field with established traditional banking service providers.