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Payment and Small Banks
Payment and Small Banks
Allowing payments banks to offer lockers and set up ATMs is a good move. However, payments banks cant
be compared with a commercial bank and, hence, keeping the number of free ATM transactions at par with a
large bank is not the best thing to do. It will be difficult for the payments bank to recover costs and can
discourage setting up ATMs. Also, it may not be possible for a payments bank to offer many lockers since it
works on an access point model, whereas banks have branches where they can offer lockers, said Pramod
Saxena, chairman and managing director, Oxigen Services (India) Pvt. Ltd. The company plans to apply for a
payments bank licence, and is ready with its application, added Saxena.
One of the concerns raised was that since the new banks will have to use the words small finance banks in its
name, it will be a major challenge with regards to brand awareness and brand equity compared with existing
banks. It is a worry that it will take a long time for these banks to build a good level of retail deposits and
depositors would assume that since these are small banks, they might not be not as safe as larger banks.
RBI, however, reiterated that the words small finance bank has to be in the banks name.
RBI releases Guidelines for Licensing of Small Finance Banks in the Private Sector
The Reserve Bank of India released on its website today, the Guidelines for Licensing of Small Finance
Banks in the Private Sector.
Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai
400 001. In addition, the applicants should furnish the business plan and other requisite information as
indicated. Applications will be accepted till the close of business as on January 16, 2015. After
experience gained in dealing with small finance banks, applications will be received on a continuous
basis. However, these guidelines are subject to periodic review and revision.
x) Procedure for RBI decisions :
a. An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered
accountants, finance professionals, etc., will evaluate the applications.
b. The decision to issue an in-principle approval for setting up of a bank will be taken by the
Reserve Bank. The Reserve Banks decision in this regard will be final.
c. The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.
d. The names of applicants for bank licences will be placed on the Reserve Banks website.
Background
It may be recalled that in the Union Budget 2014-2015 presented on July 10, 2014, the Honble Finance
Minister announced that:
After making suitable changes to current framework, a structure will be put in place for continuous
authorization of universal banks in the private sector in the current financial year. RBI will create a
framework for licensing small banks and other differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of
small businesses, unorganized sector, low income households, farmers and migrant work force.
Accordingly, the draft guidelines for licensing of small banks in the private sector were formulated and
released for public comments by RBI on July 17, 2014.
Several comments and suggestions were received from interested parties and public on the draft
guidelines. Considering the feedback received, the guidelines have been finalised.
from Uttar Pradesh, three from Andhra Pradesh and two each from Assam and Gujarat. More than half of the
applicants are non-banking finance companies, many of whom operate as microfinance institutions giving tiny
loans to poor people. For them, turning into a small bank is a logical progression to the next stage of growth.
Its difficult to scale up operations of a microfinance company beyond a point. Besides, by being a bank and
embracing regulations, they can also insulate themselves from political pressures.
The challenge before most microfinance companies will be pushing up the promoters stake and, in some
cases, finding new promoters. For instance, three promoters of SKS Microfinance Ltd, Indias sole listed
microlender and one of the applicants, collectively hold a 9.27% stake. The promoters need to hold at least a
40% stake in a small bank which will be brought down to 26% within 12 years of operation.
The small banks will be subject to all prudential norms like any other commercial bank and, on top of that, they
would need to give 75% of their loans to the so-called priority sector and 50% of the loan portfolio should
constitute smaller loans of not more than Rs.25 lakh. Despite such restrictions, the response has been
overwhelmingsimply because if they do well, the small banks can graduate to universal banks in coming
years.
The payments bank is a different story. Teaming up with the State Bank of India (SBI), the countrys largest
private sector conglomerate Reliance Industries Ltd (RIL) has applied for it. Others in the fray include a
Bharti group company (with Kotak Mahindra Bank Ltd), Aditya Birla Nuvo Ltd, Vodafone Group Plcs Indian
arm, Tech Mahindra Ltd, Department of Posts, and individuals such as Kishore Biyani of the Future Group,
Dilip Shanghvi of Sun Pharmaceuticals Industries Ltd and M.G. George Muthoot of the Muthoot group.
A payments bank is not allowed to give any loans; it will take deposits (maximum Rs.1 lakh) and 75% of such
deposits will have to be invested in government securities while the rest can be placed as deposits with other
commercial banks.
In the past, residuary non-banking companies of Sahara and Peerless groups were subjected to such
stipulations. This gives the impression that it will be extremely difficult for a payments bank to make money
and the industrial houses are simply following a foot in the door policythey are taking a calculated gamble
on securing licence for a commercial bank in future. However, there are ways to make money and it will be a
volume game.
The $7.69 billion Indian e-commerce industry is expected to grow to $17.52 billion by 2017 and around 70% of
the business is based on the cash-on-delivery model. The payments banks can change this. In a market of
833 million active mobile phone users, such banks can revolutionize banking services. Currently, around 8%
of mobile connections are linked to bank accounts and not all of them are active users.
Globally, money transfers through the mobile networks are being done at most geographies where mobile
penetration is higher than banking penetration. Kenya is a success story; even in Bangladesh, 22% of the
adult population use mobile banking services. This explains the rush by mobile operators to set up payments
banks.
Besides, through banking, the cellular operators will also be able to create stickiness for their customers. Not
every prepaid mobile customer is committed to their service provider but once they gets the banking services
from the same operator, they may stick around.
There are ways to make money. For instance, payments banks can mobilize low-cost deposits and keep part
of that with other banks, making a good spread even as they earn from investments in government papers. As
a business correspondent, they will earn transaction fees from banks; they will also sell insurance, mutual
funds and other financial products. Finally, they can play the role of a business facilitator and earn fees by
referring their customers to banks for loan products.
How many licences should the RBI give to small finance banks and payments banks? In 1993, when it opened
the banking sector for private entities, there were an identical number of applications 113and the RBI
gave licences to 10 of them, including one cooperative bank. This time around, it should welcome more banks.
We need creative disruptions in Indian banking to shake the incumbents of their complacency and infuse
competition. Its more than a month since the RBI cut its policy rate but no bank is willing to bring down their
loan rates even though the yields of both government paper and corporate bonds have come down and many
of the banks have pared their deposit rates.
Unless we create disruptions and intensify competition, banks will not care for their customers. Besides,
through new alliances, the new banks will also pull down the boundaries between banking and telecom and
retail businesses.
The RBI should allow as many small finance and payments banks as it finds fit and proper. Let some of them
fail; its worth taking the risk. Many urban cooperative banks have failed in the past. Failure of a few small and
payments banks will not create any systemic risk.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Financial Services Pvt. Ltd, Indias
newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck.
The Reserve Bank of India's (RBI) newest bet to expand banking to the
unbanked is to rope in the telecom companies and create payment banks
and small banks.
Payment bank licenses seem primarily intended for mobile companies and
prepaid card issuers. They can't give loans and can only collect
deposits, with a maximum balance of Rs 1 lakh. They must aid small
savings and help remittances.
Small banks must primarily be in geographically contiguous districts
and give loans below Rs 25 lakhs.
Also read: RBI releases draft guidelines on payments, small banks
Will these ploys finally work to bring banking to the un-banked? Can
it have some other unintended benefits or problems? To discuss this,
CNBC-TV18's Latha Venkatesh talked to telecom industry veteran and
chief of Micromax Sanjay Kapoor; father of microfinance in India Vijay
Mahajan who is now Chairman at Basix; Former RBI Deputy Governor Usha
Thorat and Former SBI MD Diwakar Gupta.
"There is opportunity now to convert many of these retail outlets all
across the country, which reach the deepest pockets of the country and
facilitate payments and transfers everywhere," Kapoor said, adding
that telecom companies will benefit from the launching payment banks
both directly (profit from transactions) as well as by increasing
customer stickiness.
"If you look at why our banks have not grown to scale, the basic
underlying problem is that where you do not have a critical mass. You
cannot afford the costs of a mainstream regular bank [in remote
districts]," Gupta said, talking about the proposed small banks model.
"So you have to get MFIs, you have to get SHGs, you have to get all
kinds of institutions which have a network but not the fixed costs of
a bank, that is the only way you can succeed."
Latha: Let me start first with the payment banks since that is a new
concept. What has been the experience in Africa? Your former employer
continues to lead a very good payment bank system over there. Are the
Indian rules similar to what it is in Africa?
Kapoor: Let me begin by saying that I think it may not be a fair
comparison because the banking system in India is very
highly-developed compared to Africa when the payments market opened up
to cell phone operators in that part of the world. It is India where
my former company Airtel began the Airtel Money experience. And I must
say that we have been able to impress upon the public at large and the
financial regulators that the role that telecom companies can play in
expanding and taking financial inclusion down to the deepest part of
the country because of the reach of the services that we provide.
Latha: Just tell me at the moment you can plug into the payment system
like a Visa or a MasterCard. You are with the payment system if you
become a payment bank. If any telecom company becomes a payment bank,
does that considerably help you to scale up services and provide a
bank account to every prepaid card holder who is already registered
with you?
Kapoor: So technically what you are saying is right. What happens
today is about 45-50 percent of the prepaid card customers do not have
a bank account and there is enough empirical evidence to prove that.
However, the initiative that the telecom companies started a little
while back enabled them to work with banks and help transfer funds in
small denominations but cash-out was not possible at the retail
outlets, which are in millions all across the country. The
know-your-client (KYC) responsibility was with the bank up to now.
In the new scenario, I think there is opportunity now to convert many
of these retail outlets all across the country, which reach the
deepest pockets of the country and facilitate payments and transfers
everywhere. One of five people work outside their domiciles, don't
forget that.
Latha: Will you be able to deliver cash because it is actually
physical cash that you have to take to the remote corners? You could
put your telecom towers and deliver SIM cards to distant corners but
in those places, can you deliver cash itself?
Kapoor: You may not be able to deliver cash to somebody's house but
relatives of the customer can come across to these points that will be
ratified and appointed by telecom companies once they have the
licence. They could come there and collect their cash and deposit
their cash as well.
Latha: So it looks to you eminently workable, do you see any pitfalls?
Kapoor: Like any business you have to keep in mind that the economics
of the business have to work. Over here the dependence on the money
that you will get out of transactions is going to be significantly
high because to make money out of deposits may not be very
remunerative and may have longer gestation periods. I am sure my
banker friends here will throw a better light on that but the
economics for the operators will come through two different means, one
is direct and one is indirect.
Direct will come through what will make out of the transactions and
indirect will come out of stickiness of the customers because with
these sort of services globally it has been seen that stickiness
increases and churn declines. And churn has very high returns for
telecom operators. So if the churn of the industry goes down for the
Gupta: But that is available to every player. The basic thing is that
mainstream players just don't have the bandwidth to devote themselves
to a small sub segment like the payments backbone which is not a big
revenue opportunity and that is where the biggest hook for the current
guidelines lies.
Q: But Mr Kapoor says that a telecom company maybe interested in this,
even if it is per se giving him money because it gives other benefits
to the telecom group. So do you think this is a better chance to
succeed than a bank which could not use the mobile network?
Gupta: Certainly. At the end of the day you have 100,000 bank branches
[in the country] at about 40,000 locations. You need to reach 600,000
[villages] and critical mass is simply not there for a
brick-and-mortar bank branch to reach there. You have to have
alternative technology delivering over there, and this is very good
alternative.
Q: Do you see as a banker you taking a stake in any of the telecom companies?
Gupta: It is interesting you ask that question because way back in
January 2011, Bharti Airtel and State Bank of India had announced a
joint venture (JV) with a lot of fanfare. It is a different matter
that it didn't get going for whatever reason but there is a great fit.
I personally believe that it will have to be a JV.
Let's assume that there is a telecom company which goes in for a
payment bank. Why should it be doing the backend of core banking and
settlement and all that, they will be spreading there, and at the same
time a bank will not have the same kind of connect with the last
distribution network of hundred thousand villages.
Q: Do the rules allow that much; I thought they only allow a financial
stake. Will they allow the kind of JV that Mr Gupta is talking about?
Gupta: No. The bank could be at 30 percent or less.
Thorat: You can have arrangements with the stake of 30 percent you
could have arrangements which are mutually beneficial. But the point
that probably he is making the bank correspondent (BC), the payments
bank also act as a BC. So some revenue can also come out acting as an
agent for the products which the payment banks is not able to offer.
Q: Therefore the last word for you on this issue, as a businessman
would you getting to it under current rules, would you want any of the
current rules changed and would a JV with a bank be one of the ways to
get in?
Kapoor: I don't know whether the collaboration will happen in form of
a JV, but I clearly see a new ecosystem of many operators
participating together coming up and for the first time you will see
years and done its job successfully, there is no reason why just
because it is in other districts in Rajasthan or in Chhattisgarh that
they should be excluded from working at all om those places. So the
contiguity principle needs to be dropped.
Latha: Would you agree primarily with Mr Mahajan, do you think this
has a chance to succeed, if the geographic clause is dropped?
Thorat: The guidelines itself suggests that it will be a bank serving
local communities. Now, if you look at banking in India -- we are
talking about unbanked and under-banked areas -- the commercial banks'
spread has not been significant or has been under-banked in the
north-eastern, eastern and central region. Now if you look at the
cooperative banking spread, similarly these are the regions where they
have not been very successful: they have been more successful in
Gujarat, Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu so on. If
you look at the regional rural banks (RRBs), even they were better off
in the southern regions and so on.
Similarly, the MFIs and the non-banking finance companies (NBFCs) were
more successful in the areas, which were already fairly well
penetrated by the mainstream bank. So in some senses when we are
asking the whole idea of a small bank, it is that you get more
penetration into the underpenetrated. That concept and that
expectation to my mind will not take off unless you have the ability
to work in an area where the absorption of banking and absorption of
credit is significant as also in another areas. I think that is the
point.
Latha: I take that point, but since you raise the issue of
cooperatives does the regulator have the bandwidth to regulate a
number of small banks or simply because of the co-operative experience
so many banks will not be licensed in the first place?
Thorat: Actually I am glad you asked that question because urban
cooperative banks actually fit in the description of the small bank
definition; it is locally-promoted, it is serving a local community.
The biggest problem with urban cooperative banks we had was the
governance issue and also the dual control.
Now the dual control obviously will not arise in the case of small
banks plus it will be driven under the banking regulation act plus the
governance issue will still be quite important but they need to be
tackled. Also as far as the capability to supervise obviously today
the urban cooperative banking sector has become vastly improved and
the supervision is what has actually eliminated the weak and the
unviable units from the system and this has taken a fairly long time
but it has happened.
So I don't think there would be any limitation on the capability to
supervise small banks. In fact the model of supervision would also be
slightly different than from the other banks. So I don't think that is
an issue.
Latha: Are these the entities MFIs existing urban cooperative banks
which will convert and therefore small banks might work better than
local area banks?
Gupta: If you look at the genesis of the number of banks that we have
had and why they have not grown to scale, the basic underlying problem
is that where you do not have a critical mass. You cannot afford the
costs of a mainstream regular bank as we know it today.
So the point that Mrs Thorat has just made is very relevant. If you
give too large a geographical area then again the effort will
gravitate to where the larger business opportunity is. So you need to
restrict the area, how much restriction; two districts, two states,
four states, two clusters of states but the crux of success for these
will depend on whether there is an alternate delivery model. 80
percent of the problem is in the execution in the model.
So the point that you raised you have to get MFIs, you have to get
SHGs, you have to get all kinds of institutions which have a network
but not the fixed costs of a bank, that is the only way you can
succeed.
Latha: If the geographical condition is not removed does this one succeed?
Mahajan: It certainly would be better than the current restrictions on
local area banks which are very restricted. Three districts for all
these years are now five districts. So it will certainly be better
than that and by the way a higher starting capital of Rs 100 crore
actually makes it easier to raise capital because of the fact that the
five percent limit also used to apply. So five percent of Rs 25 crore
is just Rs 1.25 crore which was too small for an institution and too
large for a high net worth individual.
So small banks is a good idea and indeed what Mrs Thorat said is a
point in our favour because if somebody has to work in Chattisgarh
they need to cross subsidise the cost by working in say western
Maharashtra and so they can get the benefit of being working in non
critical districts it will also reduce the risk concentration due to
weather.
Latha: I expected you to say that and my big fear and which will be
the fear of Reserve Bank is that more people will open banks in
western Maharashtra and not at all in Chattisgarh.
Mahajan: I have a suggestion for that which is that the first 50
licenses should only be given in the financially excluded regions.
Latha: There is a condition that 25 percent of the branches should be