Wednesday, 19 August 2015

New 'Payment Banks' on the way

The Reserve Bank of India (RBI) on Wednesday allowed 11 business houses, including Reliance Industries, the Aditya Birla group and leading telecom companies Airtel and Vodafone to commence payments banks.
Bharti Airtel and Reliance Industries had earlier tied up with Kotak Mahindra Bank and State Bank of India, respectively, for payments bank operations.

The Reliance-SBI payments bank has a determined plan to cover 250,000 villages and 5,000 towns in three years. While it plans to begin with a Rs 100-crore capital base, this will be pumped up to Rs 400 crore in three-four years, depending on trade volumes.

  • Reliance Industries
  • Aditya Birla Nuvo
  • Vodafone
  • Bharti Airtel
  • Department of Posts
  • Vijay Shekhar Sharma (CEO of One Communications, which runs PayTM)
  • Cholamandalam Distribution Services
  • Tech Mahindra
  • National Securities Depository Ltd
  • Fino PayTech
  • Dilip Shanghvi (Sun Pharma promoter)

“This partnership brings together the combined strengths of two of India’s Fortune 500 corporations committed to making a transformative impact on India's financial inclusion landscape. We see this licence as an opportunity to promote financial inclusion,” said SBI Chairman Arundhati Bhattacharya.

The Department of Posts and Aditya Birla Nuvo, both ineffective in competition for universal bank licences last year, succeeded this time. Content with RBI's decision to announce payment banks, Finance Minister Arun Jaitley called the move an important one. He said it will fetch more money into the system and extend the contact of banking to rural areas. “RBI giving payments bank licences is a significant and important step. Payments banks will reach out to people in rural areas.”

Vijay Shekhar Sharma, chief executive of One Communications (which operates mobile wallet company Paytm), and telecom major Vodafone were also among the successful candidates. The other applicants that received RBI's approval for starting out payments banks were Sun Pharma promoter Dilip Shanghvi (who had applied in his own name, and not as Sun Pharmaceutical Industries), information technology (IT) firm Tech Mahindra, payments technology provider Fino PayTech, financial services provider Cholamandalam Distribution Services, and National Securities Depository Ltd (NSDL).

Tech Mahindra said it would partner with Mahindra Finance for payments bank. “This will allow both the digital and physical aspects of business to come together. Technology is breaking barriers and creating opportunities for new business models to emerge,” said Tech Mahindra Chief Executive & Managing Director C P Gurnani.

What payments banks can and cannot do
  • Accept demand deposits from individuals, small businesses and other entities
  • Hold a balance of up to Rs 1 lakh per individual
  • Set up branches, ATMs, correspondents; issue debit cards; offer internet banking
  • Accept remittances to be sent to multiple banks, or receive remittances from them
  • Distribute mutual fund products, insurance products and pension products; undertake utility bill payments
  • Accept NRI deposits
  • Issue credit cards
  • Set up subsidiaries to undertake non-banking financial services activities
  • Offer other financial/non-financial services of promoters along with payments bank services

Norwegian telecom giant Telenor has entered into a deal with Dilip Shanghvi and infra financier IDFC to endeavour into the payments bank space. “We believe payments bank facilities are a step in the direction of enabling last-mile connectivity to consumers,” a joint statement from Shanghvi and Telenor said.

Payments banks will chiefly deal in remittance services and accept deposits of up to Rs 1 lakh. They will not lend to customers and will have to position their funds in government papers and bank deposits.

These bodies, which are required to have an preliminary capital of Rs 100 crore each, will have to start operations within 18 months. The promoter's minimum initial contribution to equity capital will have to be at least 40 per cent for the first five years.

This is for the first time in the history of India's banking sector that differentiated licences are being set out by the central bank for undertaking precise activities. RBI is expected to come out with a second set of such licences - for small finance banks - and the development for those is in its final stage. The shift is seen as a major step in promoting financial inclusion in the country. Bringing more people into the formal banking system has been a stated objective of both RBI and the government.

By granting 11 banking licences in one go and promising that licences will be offered 'on tap' after acquiring experience from the current implementation, the central bank has also discarded the label of being customary. The time taken to give these licences was less; the process was completed within a year, compared with four years for universal banking licences given out last year.

The 11 candidates for payments bank licences were chosen from among 41 applicants, after applying fit-and-proper criteria, and successful track record in conducting business for five years. An external advisory committee (EAC), headed by RBI board member Nachiket Mor, examined all applications and sent its recommendations.

"The recommendations of the EAC were an input for an Internal Screening Committee (ISC) consisting of the RBI governor and the four deputy governors. This ISC prepared a final list of recommendations for the Committee of the Central Board (CCB)," RBI said in a statement.

The CCB, which met on Wednesday, permitted the announced list of applicants.

"In arriving at the final list, the CCB noted it would be difficult at this stage to forecast the likely most successful model in the emerging business of payments. It further noted that payments banks could not undertake lending and, therefore, believed the payments banks would not be subject to the same risks as full-service banks," RBI added.

Among the unsuccessful applicants were the prepaid payment instrument (PPI) providers like One MobiKwik Systems and Oxigen Services.
RBI, however, kept the way open for the unsuccessful candidates, saying they could be eligible in future. "Going forward, the Reserve Bank intends to use the learning from this licensing round to appropriately revise the guidelines and move to giving licences more regularly, that is, virtually 'on tap'. The Reserve Bank believes that some of the entities that did not qualify in this round could well be successful in future rounds," RBI added.

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