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Competition, profitability key

concerns for payment banks

Mumbai, 1 February

With Monday as the deadline for

applications for niche banking
licence, several are queuing to apply.
Airtel, Oxigen, ItzCash, MobiKwik
and FINO PayTech and private sector
lenders ICICI Bank and Kotak
Mahindra Bank, among others, have
evinced interest to apply or partner
for one. However, concerns around
increased competition and profitability remain.
The Reserve Bank of India (RBI)
had released the final guidelines for
payment banks in November last
year, allowing telecom companies,
retail chains, and corporate houses
to apply. Even government-owned
entities such as India Post.
Non-resident individuals (NRIs)
have also been allowed to apply for
the niche banking licence, provided
they plan to return to India. The central bank has allowed interested parties to form an alliance with a lender
for setting up a payment bank.
Considering payment banks are
not allowed to lend, the concern on
profitability is key. The major source
of revenue would be from fees and
income from treasury operations. As
a result, it is unlikely they will be able
to offer above a four per cent interest
rate on savings bank accounts, similar to what is offered by most existing
deposits might not be easy.
However, players believe the ease
and convenience offered to customers could help them tide over the
similarity in interest rates offered by
other lenders.
In the final guidelines, the regulator has expanded the scope of services of these players, providing for
additional revenue streams. For
instance, they can now provide thirdparty products such as mutual funds
and insurance. Banks have also been
allowed to function as a business correspondent (BC) of another bank and
do international remittance.
Despite this, financial viability is a
pressing issue. We will have to focus
on technology and volume. This business is that of high-volume and low
individual value and, therefore, one
will have to achieve cost efficiency
and economy of scale in order to be
profitable, said Dipak Gupta, joint
managing director, Kotak Mahindra
Airtel M Commerce Services, a
wholly-owned subsidiary of Bharti
Airtel, is applying for a licence and
Kotak Mahindra Bank will acquire
19.9 per cent stake in it.
Aman Bhargava, director (financial services advisory) at Grant
Thornton India, said the focus for
every player will have to be leveraging on technology to control cost for
breaking even faster.
Experts believe payment banks
might take at least three years for
break-even. RBIs idea behind having these niche banks is to deepen
financial inclusion. As a result, payment banks need to have at least 25
per cent of physical access points,
including BCs, in rural centres.
Initially, players will have to
incur higher costs in setting up the
infrastructure in rural areas and this
will require large investments.



According to the NSSO 59th Round

Survey results
51.4% of farmer households
are financially excluded from
both formal and informal
Of the total farmer
households, only 27% access
formal sources of credit; onethird of this group also
borrowed from non-formal

Overall, 73% of farmer

households have no access to
formal sources of credit

According to census 2011, only 58.7% of the total households are availing banking
services in the country

Source: Deloitte


| Has to use the word
Dos money to be remitted but at
Payments Bank in its
the end of the day the balance
name to differentiate from
should not exceed
other banks
~1 lakh
| Accept demand deposits, i.e.,
| Can accept remittances to be
current deposits, and savings
sent to or receive remittances
bank deposits from individuals,
from multiple banks
small businesses and other
| Permitted to handle crossentities
border remittance transactions
| To hold a maximum balance of
in the nature of personal
~1 lakh per individual customer
payments / remittances on the
current account
| Will be allowed to set up
branches, ATMs, business
| Allowed to distribute mutual
fund products, insurance
products and pension products
| Allowed to issue debit cards also
offer internet banking
| Bank can also undertake utility
bill payments
| Can accept a large pool of
| No NRI deposits should be Donts activities
| Other financial and nonfinancial services activities of
| Cannot issue credit cards
the promoters should not be
| Not allowed to set up
mingled with the working of
subsidiaries to undertake nonpayment banks
banking financial services
Though one can tie up with some
existing players like retailers for cashout, the majority of investments
needs to be done by the banks, said
Sunil Kulkarni, deputy managing
director, Oxigen. However, since the
area of operations will not be limited
to the hinterland applicants see an
opportunity in tapping even the
urban unbanked population.
Even after having 25 per cent in
rural areas, there is still a significant
opportunity in the urban areas,
added Kulkarni.
Another challenge is from the
large number of potential customers
already covered under the Jan Dhan
Yojana. However, those applying for
a licence are trying to see a silver lining in the cloud.
People in urban areas also have
more than two accounts and the
same can happen here, too.
Individuals who have already opened
an account under Jan Dhan can keep
that for direct benefits transfer and
the other account for personal use.
It is a possibility, as a lot will depend
on the services and the convenience
that payment banks might be able to
offer, said Rishi Gupta, chief operating officer and executive director at
FINO PayTech, which has also
applied for a licence.

Gupta explains another initial

challenge is in brand building and
educating of consumers. Since niche
bank operations will be different
from the existing lenders, acceptance
by consumers might be another hu
Payment banks can accept
deposits up to ~1 lakh and can offer
current and savings account deposits.
They can also issue debit cards and
internet banking.
Both cash-in and cash-out services are allowed through various channels such as branches, automated
teller machines and BCs. Cash-in
could be made through mobile banking and cash-out via point-of-sale terminals. Payment banks have been
allowed to serve as BCs for other
lenders as well.
However, payment banks are
barred from taking deposits from
accounts maintained by residents
with a payment bank will be treated
as deposits.
The minimum capital requirement for setting up a payment bank
has been pegged at ~100 crore.
The final deadline for applications was earlier January 16, now
revised to February 2.