Reliance, Birla, Bharti seek payments bank licences

Mumbai: India’s largest private sector conglomerates such as Reliance Industries Ltd (RIL), the Aditya Birla Group and Bharti Enterprises led the rush for payments bank licences, applications for which closed on Monday—an indication of the blurring of boundaries between banking and businesses such as retail and telecom.

Vodafone Group Plc.’s Indian arm, and the Future Group also applied for licences.

The scramble could also be a precursor to coming disruption in the banking business—which some banks sought to pre-empt by allying with the companies bidding for payments bank licences. India’s largest bank, the state-owned State Bank of India (SBI), has partnered with RIL and Kotak Mahindra Bank Ltd with Bharti.

Non-banking finance companies and microfinance companies applied to open small banks, applications for which also closed on Monday.

Mint couldn’t immediately ascertain the number of applicants in each category. The Reserve Bank of India (RBI) is yet to release the list of applicants.

Shinjini Kumar, executive director and leader, banking and capital markets, at audit and consultancy firm PricewaterhouseCoopers (PwC), estimates that there could be 100 applications across the two categories.

RBI has not said how many licences it will issue in each category but participants at Mint’s Annual Banking Conclave in Mumbai last week, a group that included CEOs of large banks, heads of microfinance companies and industry experts, said the numbers across both categories could be in double digits.

Payments banks will provide basic savings, deposit, payment, and remittance services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked. Such banks will not lend money.

Small banks will provide savings products and credit to small businesses and small and marginal farmers.

RBI granted two new banking licences (for full fledged banks) last year and said at the time that it could eventually consider issuing the licences on tap.

There is a school of thought that based on the performance of payments banks over a few years, they could be allowed to become full-fledged banks, and this could explain the interest in these licences. To be sure, RBI has not said anything about this.

Payments banks

Payments banks can offer payments and remittance services and issue ATM and debit cards, but not credit cards. They can also distribute simple financial products such as mutual fund units and insurance products, according to RBI. Account balances in such banks will be limited to a maximum of ₹ 1 lakh.

Aditya Birla Nuvo Ltd (ABNL) was among the 26 applicants that had sought a full-fledged banking licence in July 2013, but did not make the cut.

ABNL said in a statement that it has submitted an application in association with Idea Cellular Ltd. The company said it will hold 51% stake in the proposed payments bank, with the remaining 49% being held by Idea Cellular.

The new bank will be called Idea Payments Bank and the company is in talks with some banks for a partnership, the group said.

Mukesh Ambani led RIL announced a joint venture with SBI for a payments bank. SBI could eventually hold up to 30% in the venture, the company said in a statement. “The payments bank will leverage SBI’s nationwide distribution network and risk management capabilities along with the substantial investments made by RIL in its retail and telecom businesses.”

Future Group, promoted by Kishore Biyani, proposes to name the entity NuFuture Payments Bank. The proposed payments bank will leverage Future Group’s nationwide presence to reach depositors through its real and virtual store chains Big Bazaar, KB’s, Nilgiris, Big Bazaar Direct and Aadhaar.

Future may partner with IDFC Ltd, one of the two companies that received a banking licence last year. In a filing to BSE, IDFC said it has neither made any investment nor made any firm commitment to invest in the proposed payments bank of the Future Group.

“However, we would like to mention that IDFC and Biyani are coming together to build an alliance, to facilitate which, IDFC may acquire a small equity stake in Future’s payments bank, subject to its receiving a licence from the RBI and subject to IDFC’s own internal board approvals,” IDFC said.

Vodafone declined to comment on the subject although a senior official said on condition of anonymity that the company had indeed applied for a payments bank licence.

“Large groups have applied for payment banks that’s why it has created a flutter. Comparatively small companies have applied for the small bank licences but there are many applications there as well,” said Saurabh Tripathi, partner and director at Boston Consulting Group (BCG).

Those that receive the licences will have to evolve a new way of working, said another consultant. “This calls for a new banking paradigm. The basic tenets for a successful payment bank call for high quality low cost of delivery, regular education and incentivization of customers to make cash-less transactions a part of their daily spending habits, and a robust technological framework. Essentially the cost of transactions, for a payment bank, needs to be significantly lower (1/10th) of a traditional branch-based banking model paradigm,” said Aman Bhargava, director (financial services advisory) at Grant Thornton India Llp.

Small banks

Two of the applicants that did not win an RBI licence for a full fledged banking licence have applied for a small banking licence. IIFL Holdings Ltd and UAE Exchange and Financial Services Ltd have both applied for a small bank licence, the companies said in a emailed statements.

They will join Vikram Akula’s Vaya Finserv Pvt. Ltd and Kolkata-based microfinance company Village Financial Services Pvt. Ltd, Ujjivan Financial Services, SKS Microfinance Ltd and Dewan Housing Finance Corp. Ltd, among others, in the race for small banking licences.

Of the loans issued by such banks, 75% should be to the so-called priority sector which includes agriculture and small businesses. And half the loan portfolio of the banks should be loans and advances of up to ₹ 25 lakh, which suits the micro finance business model.

Promoters of small banks must own 40% equity in the new venture initially, but will need to bring this down to 26% within 12 years from the date of commencement of business. Foreign shareholding in these banks has been capped at 74% just like in existing private banks.

There is no such restriction on payments banks, one factor that might have made this route attractive to large companies, BCG’s Tripathi said.

PwC’s Kumar added that the number of applicants for payments bank licences is likely to be lower than those who applied for small bank licences because the number of telecom companies, retailers and prepaid payment instrument issuers are “limited in number”.