Why are entities pulling out of Payments Bank race?

Sun Pharmaceutical's Dilip Sanghavi who was in the race to set up a Payments Bank in partnership with IDFC Bank and Telenor, has now withdrawn his application. This is the second entity after Cholamandalam Finance to reconsider its decision of setting up a payments bank. What led them to change their mind about payments banks? 

These two companies are among 11 others who were given an in-principle nod by the Reserve Bank of India (RBI) when it was doling out licences to set up payments banks. 

Payments banks are a part of Prime Minister Narendra Modi's agenda of taking banking to the under-banked and the unbanked population of India. With these banks, the aim is also to make it easier for contract workers to remit money home and even take digital payments to rural India.

However, in only nine months since the approvals were given, it seems like the eurphoria around the "game-changer" payments banks is already waning, and fast.

Most companies that lined up for the payments bank licence did not realise what they were getting into, an Economic Times report has said.

The initial applicants (nearly 40 entities) only signed up for a licence to rake up their company's valuations, the report added. Factors like high-end technology, large capex, and even the prospects of delayed break-even weren't even considered, it said.

Why Cholamandalam and Dilip Sanghavi may have pulled out

 

While both the entities did not disclose the reasons for opting out, the ET report says that, in the case of Cholamandalam, the firm may have pulled out because it doesn't have the pan-India presence required or enough technological muscle to set up a payments bank.

Even in the case of Dilip Sanghvi's Payments bank, a Times of India report has said that for someone without a distribution network, setting up a profitable business would be a challenge. Telenor is the only partner with a retail base but its distribution is not as strong as rivals such as Airtel or Vodafone, which have also won licences, the report added.

Payments bank concept under question

 

While payments banks are being set up with the aim of financial inclusion, the income gap between the haves and the have-nots will pose a huge challenge to provide the best solutions for the customers, a VC Circle report said.

The very concept of Payments banks has even been questioned by State Bank of India's chief Arundhati Bhattacharya on atleast three occasions. Bhattacharya says she doesn't see a future for payment banks because they haven't devised a viable business model yet, a PTI report said.

This is despite the fact that SBI has tied up with Reliance Industries to set up a payments bank.

She opined that, now, with deep-pocket corporates entering payments banking, it is going to become a "dog eat dog" scenario in the sector.

Rs 1 lakh lending capacity

 

One of the fundamental concerns about the success of payments bank arises from the fact that they are only allowed to accept deposits of up to Rs 1 lakh and are not allowed to indulge in lending activities. 

This low-risk profile will keep profit at bay, this Reuters report says.

They may even have to invest a huge chunk of its float funds (nearly 75%) into government securities to keep up the required 4% minimum interest on deposits promised. This may also come under pressure with new banks coming into the fray, offering interest rates in the range of 4.5% to 7%, the ET report said.

Revenue and profits

 

Payment Banks will, at best, have revenue in the range of Rs 10,000 crore to 12,000 crore, which is only 1-2% of the total revenue of schedule commercial banks, a Business World report said. 

Going by this, only the "deep pockets" may survive. "Only a handful of Bona fide players with deep pockets, higher risk appetite and expertise in B2C small value transactions may find the need to try out innovative or off-beat revenue models, the report said.

Profitability will also be a task in the first few years for payments banks, PwC Associate Director Mihir Sharma has been quoted as saying in the VC Circle report.

Even partnering with other banks in a bid to push earnings, will be limited as the players will try to keep the money in the same ecosystem, he says.

With the initial nod in place, these entities were given 18 months in August last year to set up new banks in the private sector. Only time will tell if payments banks will be successful in aiding the PM's financial inclusion agenda.