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Monday, August 24, 2015

Payments banks: Not corporate biggies but India Post will emerge the dark horse in race for market

             The Reserve Bank of India (RBI) has chosen just 11 out of 41 applicants to set up payments banks in the country. Payments banks are institutions that will offer most of the banking services except loans and credit card products to retail customers. Customers can deposit money up to Rs 1 lakh in these banks, transfer money, make payments and buy financial products such as insurance and mutual funds.

The 11 names include India’s postal department, two telecom players (Airtel and Vodafone), three large corporate houses (Reliance Industries Ltd (RIL), Aditya Birla Nuvo and Tech Mahindra), two financial services firms (Fino Paytech and Cholamandalam), two individual entrepreneurs (Dilip Sahnghvi and Vijay Sharma) and National Securities Depository Ltd, a surprise winner.

The names that are absent in the list are equally notable. These include Kishore Biyani of Big Bazaar, George Muthoot of Muthoot Financial Services, prepaid payment instrument issuers (PPIs) such as Oxigen and Itz cash and few other mobile payment services such as My mobile payments, Pay Point and One MobiKwik Systems.

The exclusion of several PPIs from the list is a bit surprising since these entities were originally projected as the deserving candidates to become payments banks from the very beginning - when the idea of payments banks was conceived by an RBI panel headed by Nachiket Mor in early 2014. PPIs are firms that provide cards, which customers can use to make payments with the money that’s stored in them. There are around 24 PPIs in India. “This will be a gradual conversion for them,” Mor had said then.

The reason why the RBI chose not to admit majority of these firms in the list could be the regulator’s apprehensions on their past record, financial strength and apprehensions on the security of transactions once these entities are allowed to become banks and begin collecting deposits from public. Similarly, the exclusion of large hypermarket chain like Big Bazaar indicates that the RBI isn’t yet comfortable with permitting retail chains to do banking.

Having said this, one must note that the central bank has indicated its willingness to issue more licences in the future, when the licensing process will be made based on a continuous (on tap) basis. Companies that failed to get into the current list can apply again then. As the RBI has indicated, it has currently chosen firms from different segments and would want to learn from the experience of their operations.

Most of the companies selected to set up payments banks will hit the ground running since they already have systems in place.

For instance, both Airtel and Vodafone have fund transfer services. Airtel already partly undertakes the functions of a payments bank by offering fund transfer services under Airtel money that has over 1.7 million users. Vodafone too has a similar offering. RIL has a tie-up with State Bank of India (SBI) for the payments bank roll-out. The partnership between India’s largest commercial bank and largest corporate entity comes with huge promises and will be keenly watched.

But as Firstpost has mentioned before, the biggest revolution in the offing is the entry of India Post to the banking sector.

The postal department, which failed to get into the list of full service banks when the RBI gave permits to IDFC and Bandhan in April 2014, has been trying for long to get into the banking business. The department has begun to set up ATMs and connect its offices through core banking solution network. The post expects to connect about 25,000 branches under CBS in next one year.

The India Post has already been active in the deposit-taking activity through its various savings schemes.

As of 31 March 2014 the outstanding balances under the post office savings scheme stood at Rs 6.05 lakh crore, which is nearly equivalent to half the deposits of government-owned State Bank of India, the country's largest commercial bank, and double that of the largest private lender, ICICI Bank Ltd. The department has a network of about 1,55,000 branches across the country, of which about 1,39,040 are in rural areas.

Going by a 2011 estimate of the postal department, about 6,000 people are covered on average by post-offices in rural areas and about 24,000 in urban areas. It also already offers insurance products. Backed by its existing outlets across the country and a gigantic depositor base already in various post bank schemes, Post Bank can offer a stiff competition to State Bank of India and other public sector banks in the deposit market.

Given the fact that India Post is present in many far-flung areas of the country, where even nationalised banks do not have branches, a Post Bank can change the way people save in these parts. Post is a trusted brand name in India’s households and hence, would find it relatively easy to convince customers keep their savings with the new entity.

The only area, where the Post needs to improve is technology. But a lot of work has already gone into this part as well. A senior department official told this writer that the India Post will have to formally approach the government for its permission to set up payments banks.

Since payments banks do not require huge amount of capital (the initial capital requirement set by the RBI for these banks is Rs 100 crore as against Rs 500 crore for full-service banks), India Post will not have to struggle much to seek the capital assistance from the finance ministry, which, in the past, had opposed India Post’s plan to become a full-service banks citing higher capital requirement and lack of experience in offering credit. But, this time, capital shouldn’t be an issue.

Once the whole network of post offices is connected with adequate technology, the biggest bank of India for the poor is ready.

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