(with inputs from Nikhil Pahwa)
The RBI announced on Thursday that it would not issue licenses to payments banks ‘on-tap’ until those companies that were granted licences in the past 3-4 years had stabilised. In its guidelines for the licensing of payments banks and small finance banks, issued in November 2014, the central bank had said then that “after gaining experience in dealing with these banks”, it would consider granting licences ‘on tap’ – meaning that it would accept applications and grant licences throughout the year.
“It has also been decided that more time is needed to review the performance of Payments Banks before considering the licensing of this category of banks to be put ‘on tap’.”
The RBI issued payments bank licenses to 11 entities in August 2015, and there are 7 payments banks currently operating in India. They are:
- Aditya Birla Payments Bank
- Airtel Payments Bank
- India Post Payments Bank
- Fino Payments Bank
- Jio Payments Bank
- Paytm Payments Bank
- NSDL Payments Bank
Why did the RBI postpone on-tap licenses for payments banks?
One likely reason is that payments banks have been recording losses for some time now. In January, the RBI said in a report that payments banks had recorded losses for two successive years. The consolidated balance sheets of payments banks showed net losses of Rs 516.5 crore in FY17-18, almost double from the previous year, when they lost Rs 242.2 crore, according to RBI’s trends and progress report. The operating profits of these banks also remained negative, with losses of Rs 522.1 crore in FY17-18, up from Rs 240.7 crore the previous year, the RBI report said.
What are payments banks and why are they making losses?
Conceptualised by the RBI in 2014 to extend banking services to those untouched by traditional banks, payments banks are a new model of banks in which deposits are restricted to Rs 1 lakh. They also offer remittance services, mobile payments, ATM/debit card facilities and third-party fund transfers, but cannot issue loans or credit cards.
1. What about Mobikwik? At the time that licenses were issued by the RBI, there was no clear and transparent criteria for awarding a license. The question on out mind then was: why did Paytm get a license and Mobikwik didnt? Think about it: among the remaining independent wallets, the largest of players is Mobikwik, and it then deserved a license as much as a Paytm did. Mobikwik’s performance is improving:
Mobikwik’s performance in FY19 (more here):
- Gross revenue of Rs 1,846 million in FY2019, from Rs 856 million in FY2018 and Rs 446 million in FY2017
- Positive Contribution Margin* for the financial year 2019. The company was also Contribution Margin-positive for each month in the 2nd half of FY19 (see graph below)
- Halved its EBITDA** burn in FY19 over FY18 and expects EBITDA break-even by the end of 2019
This move effectively closes the door on Mobikwik, and every other wallet company that aspires to get the Payments Bank license.
2. RBI needs to be more specific: It needs to define a specific criteria for what metrics the Payments Banks ecosystem will need to achieve, in order for the RBI to deem that the players are stable enough. In addition, who is to say that new players can’t learn from mistakes made by others and fine a better way to run operations. RBI’s decisions can’t be, or even appear to be, whimsical. Additionally, if in almost five years since the licenses were still issued, it needs more time to review the performance, how much time does it need? Is there a timeframe that has been defined? Effectively, it is putting this process on hold. In the meantime, has a committee been constituted to look into the performance of Payments Banks, like it did for digital payments? Is a roadmap going to be prepared?
3. The RBI needs to course-correct and form a committee: the question about the viability of Payments Banks isn’t new. Many players who had been given a license initially (again, based on what criteria?) had dropped out almost immediately. If there are questions about viability, then the RBI needs to form a committee to look into what changes need to be made to enable business models that were earlier closed for Payments Bank. For example, will allowing Paytm’s PostPaid service make it more viable?