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RBI working group recommends relaxing norms for payment banks

Photo showing an Airtel board atop a shop

A Reserve Bank of India (RBI) internal working group recommended that payments banks (PB) be allowed to convert to small finance banks (SFBs) after a period of three years of operations, the regulator said in a statement on November 20. This is a relaxation of norms set by the RBI in its on-tap licensing guidelines for SFBs, which stated that PBs could convert after completing five years of operations.

The idea for PBs stems from an RBI discussion paper which stated that a differentiated licensing regime could brought in to develop and nurture specialised banks in niche areas. Thereafter, in 2014 the Nachiket Mor committee recommended that PBs be set up primarily to provide payment services and deposit products to small businesses and low-income households across the country. In 2015, the RBI gave in-principle approval to 11 entities to set up a PB. However, five years later only six of these entities continue to operate as PBs, including Paytm Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank and NSDL Payments Bank.

While the minimum paid-up equity capital for PBs was fixed at ₹100 crore, the working group says that for converting to an SFB the PB must reach the ₹200 crore net-worth requirement “within 18 months of ‘in principle’ approval or date of commencement of operations, whichever is earlier.”

Further, the working group also recommended that SFBs and PBs should list equity shares on the stock exchanges within six years from the date of reaching net worth of ₹500 crore or ten years of commencing operations, whichever is earlier’. However, in its licensing guidelines for PBs, the RBI said that upon attaining a net-worth of ₹500 crore listing would be mandatory within three years, while PBs with a net-worth below ₹500 crore can get their shares listed voluntarily.

Since payments banks are restricted from lending and can only provide deposit services, restricted up to ₹1 lakh per customer, they rely on investing the funds in government debt securities or certificate of deposits and cross-selling other financial services like payments, insurance and investments for revenue. If the working group’s recommendations are accepted by the RBI, some of the leading PBs like Airtel PB, Paytm PB, Jio PB, Fino PB and India Post PB can convert to an SFB in the coming year and begin lending on their own-balance sheet, thereby, generating interest income.

Poor financial performance

Despite several years of operations and a multiple partnerships between financial services companies, like insurers, credit card companies and mutual fund houses, PBs were loss making entities due to the high cost of operations, the RBI said in its Report on Trend and Progress of Banking in India 2018-19. PBs made a net-loss of ₹626.8 crore in FY2019 compared to a net-loss of ₹515.6 crore in FY2018. The seven operational PBs, at the time, had garnered around ₹883 crore in deposits in FY2019 compared to ₹438 crore in the previous year.

Deposits mobilised by Payments Banks

As PBs are not listed entities, data on their deposits and financial performance is not publicly disclosed. Data on deposits mobilised by Jio PB and NSDL PB were not available, respectively.

  • As of March 2020, Airtel PB had mobilised ₹345.25 crore in deposits compared to ₹270.5 crore in the previous year, according to its financial statements
  • Paytm PB has over ₹600 crore in fixed-deposits and ₹1,000 crore in savings deposits as of mid-2020, it said in press releases
  • India Post PB has garnered over ₹1,558 crore in deposits from ₹303 crore in the previous year, as of September 2020, it said in a press release
  • As of March 2020, Fino PB had mobilsed over ₹222 crore in savings deposits, it said in a press release

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