Jayachandran/Mint
Jayachandran/Mint

Payments, small banks to ring in innovation

Various companies plan to apply for licences. Tie-ups and low-cost products expected to come forth

The Reserve Bank of India (RBI) on Thursday released the final guidelines for licensing of payments and small banks. These banks are intended to cover the unbanked and underbanked areas and increase banking penetration in the country, stated the circular. Let’s take a look at the changes that these banks are likely to bring in financial services.

What’s on offer?

According to the guidelines, payments banks can open small savings accounts and accept deposits of up to 1 lakh per individual customer, and provide remittance services. These banks are allowed to issue automated teller machines (ATM) or debit cards but are not allowed to issue credit cards or lend in any form. Payments banks can also distribute “non-risk sharing simple financial products like mutual fund units and insurance products", stated the circular.

Small finance banks, on the other hand, will be allowed to take deposits as well as lend money, the way other commercial banks do, but the focus will be on small lending. They can finance small business units, small and marginal farmers, micro and small industries and unorganized sector entities. These no longer face geographical restrictions on operations.

Companies that are already present in the payments or finance space—such as prepaid payment issuers and non-banking finance companies (NBFC)—are considering applying for the new licences. For instance, ItzCash Card Ltd, FINO PayTech Ltd, Oxigen Services India Pvt. Ltd and Citrus Payment Solutions Pvt. Ltd are planning to apply for payments bank licence.

NBFCs such as Shriram Group, Muthoot Finance Ltd and Manappuram Finance Ltd want to enter the banking space and are studying the new guidelines to take a decision. “We’re interested and our board members are studying the new directives of RBI. We will undertake a decision soon," said George Alexander Muthoot, managing director, Muthoot Finance.

The RBI has also allowed mobile telephone companies, supermarket chains, and other companies and cooperatives to set up payments banks. Also, a company can form a joint venture with an existing scheduled commercial bank.

New formats expected

Small finance banks and payments banks are expected to further the government’s aim of financial inclusion. With small savings and remittance services targeted at low-income households and the unorganized sector, this will help increase financial penetration and financial savings, and help bring the currently largely unorganised remittances and payment systems in India into the organised sector, Nomura stated in a report.

According to World Bank estimates, only 35% of India’s adult population has accounts with financial institutions. “The differential banking will be able to provide more people access to formal financial products. For instance, the payments bank will have to give the standard interest rate, if not more, on deposits," said Vishal Narnolia, banking analyst at SMC Global Securities Ltd.

Will payments banks be able to launch low-cost and innovative products? “They will be able to generate revenue broadly in 3 ways—interest from deposit on SLR (statutory liquidity ratio), fee from distributing third-party products such as mutual funds or insurance, and from transaction fees on any payments. This ability to earn income should push the companies to provide low-cost products to the end consumers," said Narnolia.

Innovation, however, will be the key to their success. “With the launch of these niche banks, the one-size-fits-all approach will come to an end in banking. Once the small finance banks are launched, you will see simple and basic products that work for the lowest strata of the income pyramid. The community lending approach of NBFCs will be extended in a banking setup," said G.S. Sundararajan, group director, Shriram Group.

Competition in this space will work in favor of consumers. “Competition to get and retain customers in financial services business will go up. Hence, there will be focus on technology to provide innovative products," said Pramod Saxena, founder, chairman and managing director, Oxigen Services. The company is planning to apply for a payments bank licence.

Jitendra Gupta, founder and managing director, Citrus Payment Solutions, agrees that there will be innovation. “The existing commercial banks are not doing justice in terms of technology in the payment space. With dedicated payments banks, there will be significant change in the payment space. If we have a banking licence, we don’t have to depend on another bank’s settlement cycle for our customers. Also, we will have access to the full ATM network," said Gupta.

Joint ventures likely

While more banks with innovative services and products is good news, these may not be in direct competition with the existing commercial banks. A Kotak Institutional Equities report stated: “...these banks may not emerge as a serious threat to the banking sector in the medium term as they continue to work in a very tight regulatory environment. Private banks may look to act as promoters of payments banks rather than competitors given restrictions on credit. However, we would need to watch developments in small finance banks. Most private banks use the services of NBFCs to meet priority sector lending (PSL) requirements. Any conversion of a large NBFC can impact the meeting of their (private banks’) PSL requirements."

Interested parties have to submit their applications for licences by 16 January 2015. Once the licences are given, companies have a gestation period of 18 months. While the guidelines are out, it will take some time for the dust to settle, and for prospective participants to decide if being a payments bank or a small finance bank makes sense. Also it is too early to say how accessible their services will be. Hopefully, these new formats will be able to work in letter and spirit.

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