Have money, have bank

New RBI guidelines might bring in a much-needed banking approach that finally focuses on serving rural India.

By: ENS Economic Bureau | Published: July 28, 2014 3:52:29 am

In Kenya, over two-thirds of the population currently uses M-Pesa, a payment bank launched by mobile phone operator Safaricom and about 25 per cent of the Kenyan GDP (Gross Domestic Product) flows through it. A number of other products have started to be offered through the M-Pesa platform, including bank deposits, loans, pre-paid electricity vouchers. You can even pay for a taxi ride through the platform — a function which may not be possible even in the US.

Will India also witness such a system? There is enough scope as half of our population is yet to get even basic banking services. The NDA government is getting ready for an ambitious action plan envisaging two bank accounts for every household in two phases which will lead to the opening of 12 crore accounts in rural areas and 3 crore in urban areas. The proposed payment banks and small banks are set to play a major role in this gargantuan exercise.

The Reserve Bank of India’s draft guidelines for payments and small banks — or “differentiated” banks — have created considerable buzz across the sector as the RBI wants to open doors to mobile phone companies, super-market chains, companies, real sector cooperatives, public sector entities, non-bank pre-paid instrument issuers (PPIs), non-banking finance companies (NBFCs) and microfinance institutions and local area banks to set up such banks.

Rishi Gupta, COO & ED, Fino PayTech said, “The RBI’s draft payment bank guidelines are a welcome step in the journey of financial inclusion. Payments bank will help de-clutter commercial banks from financial inclusion activities and bring in more focussed approach in serving the rural masses.”

While the final guidelines are expected to be out in the next two months, hundreds of aspirants are getting ready to approach the RBI for a licence. “We believe this is an interesting phase in the Indian banking industry and we look forward to be a part of this eco-system. We will need to further analyse the guidelines and subsequent business models, before taking any call,” Gupta said.

“The opening up of the eligibility criteria is welcome so as to have a larger number of applicants meeting with the ‘fit and proper’ criteria as defined in SEBI regulation 2009. It is hoped that the threshold of capital requirement of Rs 100 crore and further requirement of maintaining operational guidelines such as maintaining capital adequacy ratios and leverage ratio of not less than 5 per cent do not deter applicants,” said Milind Kothari, Managing Partner, BDO India LLP.

Although top retail chains, NBFCs and phone companies are yet to spell out their plans, RBI sources expect many such entities to queue up for the licence once the RBI finalises the norms and invite applications. Many of the companies which applied for a private banking licence are expected to be in the forefront of the line.

In India, pre-paid instrument issuers (PPIs) like Airtel Money and Oxigen are effectively nested payment banks. “They acquire the customer, issue a pre-paid wallet and facilitate transfer of value within their network (closed or semi-closed loops) or to a bank account outside their network (open loop). All balances in the wallets are held in escrow with a bank and no interest is paid on such balances to the customer currently,” said the Nachiket Mor committee which mooted the idea of payment banks earlier this year.

While small banks will provide a bevy of basic banking products, such as deposit taking and lending, but in a limited area of operation, payments banks will provide acceptance of demand deposits and remittances of funds but will not be allowed to undertake lending activities, the RBI’s draft norms say.

“While the initiative of the RBI to come up with multiple models of banking is laudable, one hopes that this round of broad-basing banking system will and push the dream of financial inclusion deeper inside India. Needless to add, previous attempts to increase banking penetration in the last 5 years to achieve this objective has been dismal,” Kothari said.


The latest RBI initiative is largely focussed on reaching out to the customer through a strong technological platform. “It does appear that RBI is disappointed with the banking sector as financial inclusion is yet to reach the entire country. Hence, it believes that the objective can be achieved by companies that are currently working in these specific areas,” said MB Mahesh, analyst, Kotak Securities.

“However, we would have been a lot more comfortable if the RBI were to give a definite roadmap on the cooperative banks landscape. Currently, we have 95,000 credit cooperatives in India, of which 1,606 pertain to urban cooperatives that have a large share of credit. As of FY13, these banks (consolidated) delivered RoAs (Return on Assets) of 1.1 per cent, RoEs (Return on Equity) of 9.7 per cent and gross non-performing loans of 6 per cent,” he said.

As compared to conventional banks, experts are not too sure if they can understand the profitability of these banks. The severe restriction on lending makes the business model extremely challenging. Further, Nachiket Mor panel had originally proposed a minimum capital of Rs 50 crore, but the RBI wants Rs 100 crore capital.

“15 per cent of capital funds would be the maximum that can be lent to individuals or groups. At least 50 per cent of the loans have to be below Rs 25 lakh. We are not sure if a single promoter would be allowed to open multiple small banks to address the scalability of the business model and concentration risk as lending could be due to the progress of a particular local industry and would be impacted by the vagaries of economic growth,” Mahesh said.

There are two key parameters to make this business a viable proposition: interest on deposits and cost of operations. The offerings of these banks are unlikely to provide 4 per cent on savings accounts and see it a lot lower as the spreads of the business are too thin. If possible, they need to link the cost of savings to the underlying interest rate on yields to reduce the volatility of returns, though it comes at the cost of the borrower.

“The cost of operations depends on the business model (tech-heavy initially or a cost/transaction platform) and the pace of expansion,” Mahesh added.

A section of bankers is of the view that the concept of payment banks won’t make any difference.

“Payment banks would not necessarily promote financial inclusion as they would not be providing credit and these banks may find it tough to compete with regular banks in future,” said a former RBI official.

Another view is that even today there are many layers in India’s banking structure. There are 157 commercial banks, including RRBs (Regional Rural Banks) and LABs (Local Area Banks). There are also lenders like cooperative banks, infrastructure lenders such as IIFCL, specialised lenders like Exim Bank, SIDBI and NABARD, NBFCs and microfinance institutions in the system. So, in a way, the ‘differentiated banks’ concept is not new to India.

However, financial sector players are excited about the new opportunity. Aspirants like George Alexander Muthoot, MD, Muthoot Finance, says “this is the right opportunity for us to make a difference”.

They believe there is a need for niche, differentiated banking in the country. What rural India needs today are the basic banking services which are virtually absent now.

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