The RBI announced on Wednesday that India Post Payments Bank (IPPB) has been included in the Second Schedule to the Reserve Bank of India Act, 1934, and thus made a scheduled bank (see RBI’s notification below). Scheduled banks are those the meet certain conditions set by the RBI and enjoy certain privileges over non-scheduled banks, such as the ability to borrow money from the RBI for banking, and to become a member of a clearing house. The inclusion of IPPB in the Second Schedule means that it will be able to borrow money from the central bank even though, as a payments bank, it can’t lend money or issue credit cards to its customers. This could skew the playing field as its competitors, such as Airtel Payments Bank and Paytm Payments Bank don’t enjoy the same privileges.

Conditions for and benefits of being a scheduled bank

Section 42 of The Reserve Bank of India Act, 1934 says that for a bank to be included in the Second Schedule, it must have a paid-up capital and reserve of an aggregate value of not less than Rs 5 lakh; and satisfy the RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors. Scheduled banks enjoy the following benefits:

  • Eligible for obtaining debts/loans on bank rate from the RBI
  • Automatically acquires membership of a clearing house
  • Rediscount of first class exchange bills from the RBI

RBI stopped issuing licences ‘on-tap’ last month, closing the door on Mobikwik and others

The RBI had announced last month 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. The move effectively closed the door on Mobikwik, and every other wallet company that aspires to get a payments bank license.

One likely reason the RBI did so 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.

IPPB’s launch, competition and tie-ups

After several delays, IPPB finally formally commenced operations in 650 branches and 3,250 access points across the country last September. A week before launch, the payments bank got a boost last week when the Union Cabinet increased its budget by 80% or Rs 635 crore to Rs 1,435 crore. Of this, while Rs 400 crore was allocated for technology related costs and Rs 235 crore for human resources.

IPPB competes with Jio Payments Bank, Airtel Payments Bank Ltd, Paytm Payments Bank Ltd, Aditya Birla Idea Payments Bank Ltd and Fino Payments Bank Ltd. Others like Vodafone m-Pesa Ltd and National Securities Depository Ltd have payments bank licenses but are yet to start operations. Last August, the RBI barred Paytm Payments Bank from enrolling new customers for not adhering to KYC norms, and Fino Payments Bank for allowing customers to deposit more than Rs 1 lakh in their accounts. However, IPPB has a provision through which any amount over Rs 1 lakh in a customer’s account is automatically transferred to a Post Office Savings Bank (POSB) account. IPPB also has tie-ups with Punjab National Bank and Bajaj Allianz Life Insurance to offer loans and insurances products. Such tie-ups are necessary for payments banks because they’re not allowed to offer loans, take NRI deposits, set up non-banking-financial businesses or issue credit cards.