SBI suggests how Modi 2.0 Government can revive payment banks in India

SBI or State Bank of India has suggested that the Modi 2.0 Government must focus on payment banks in India as the sector requires an urgent solution in terms of regulations, operations and level playing field. The largest public sector bank in India is of the opinion that payment banks cannot accept deposits higher than Rs 1 lakh besides capital requirement is quite steep at 15 per cent capital to risk-weighted assets ratio, which is a hurdle in its success. SBI believes that payment bank model could still be a success but only with the universal banks and telecom companies working together having strong infrastructure, deep pockets and network in place.

Speaking on the matter Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said, "PBs currently face stringent regulations on both asset and liability side. On the asset side, PBs face a blanket ban on any type of lending. On the liability side too, they cannot accept deposits higher than Rs 1 lakh. Besides, the capital requirement is quite steep at 15 per cent capital to risk-weighted assets ratio. Though the business of PBs is free from credit risk and faces relatively lower market risk, it is subject to operational and liquidity risk." Ghosh of SBI went on to add that PBs are turning out to be working merely as an aggregator - a disintermediation vehicle for depositors to invest in G-secs. PBs emerging as a real competitor to banks is not a near-term possibility with deposits up to Rs 1 lakh comprising only 9 per cent of total deposits of the banking system in terms of value (70 per cent in terms of a number of accounts)."

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Asked about the alternatives that can make payment banks in India a successful venture Dr Ghosh said, "Alternatively, the PB model could still be a success - but only with the universal banks and telecom companies working together having strong infrastructure, deep pockets and network in place. Some of the suggestions to revive the banks could be: (i) Arrangement with Universal bank to automatically transfer funds in accounts exceeding Rs 1 lakh. (ii) Access to Aadhaar based KYC, as manual KYC is at least three times in terms of cost to e-KYC. (iii) RBI should allow PBs to tie up with third-party services to cross-sell products, as margins are small, so scale is very important. The future is uncertain, but in time we hope PB business will expand and evolve, with the help of regulatory and Government support. Then they will able to achieve their objectives. 

Recently, Aditya Birla Payments Bank (ABPB) announced shutting down its operations from 18 Oct’19 citing unanticipated developments in the business landscape that have made the economic model unviable. This is not the first such development related to payment banks (PBs) . On July 15, Vodafone m-Pesa had also shut shop. In 2014, RBI conceptualised the PB model on the recommendation of Nachiket Mor committee for furthering financial inclusion by providing small savings accounts and payments/remittance services to unorganised sector entities. However, it seems to have failed to achieve the stated objectives, as only 4-PBs are operational out of the 11 licensed players. In 1990s also, RBI had made an attempt to create Local Area Banks (LABs) that are currently facing a host of issues.