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Payment Banks: What They Are, and What We Think They Should Be


RBI has draft guidelines out for Payments Banks.

Payments Banks: The Concept

RBI wants to create a lower-end concept called payment banks, which are restricted to:

  • opening savings and current accounts for customers, limited to Rs. 100,000 balance per customer
  • Allow customers to withdraw cash through ATMs, or at branches
  • Put all the money they get into government securities (only T-Bills)
  • Become a Business Correspondent for other banks to offer credit etc.

Who Can Create?

This is meant for payment systems (like PayTM or other “wallet” systems), or issuers of pre-paid instruments. Even super market chains can apply.

They have to put Rs. 100 cr. of capital, and maintain a net worth of Rs. 100 cr. all the time. Promoters must own at least 40%, but that must be brought down to 26% or lesser eventually. FDI is allowed – upto 49% initially.

The idea is to allow for easy remittances between cities, or for banking for the poor.

Our View

Right now, the draft guidelines leave much to desire. There are no mentions of lower regulatory requirements, or reporting needs. If a bank like this needs compliance rules of the kind that big banks have, then there will be very little interest.

The 100,000 rupee limit is a pain. Can’t poor people have more? After all, the RBI in its glorious knowledge calls Rs. 50 lakh worth of loans for a house as “affordable” housing. Why can’t the poor have Rs. 100,000 or more in their savings accounts? The restriction is unnecessary and should be dispensed with entirely. There should be NO limit to the amount in there.

(Yes, if you want KYC, banks should do KYC according to the rules, which anyhow exempts lower balance accounts from major level KYC)

A payment bank should be used to help SMEs and Startups as well. The 100,000 limit there too is unnecessary. These banks should be used to pay for online goods by companies through online-only-cards, for instance, for company purchases. They can be used for payment of utility bills, which will require the utility provider to own an account (and they won’t accept the Rs. 100,000 restriction).

And then, we should allow Payment Banks to provide higher interest rates to customers, even companies. With no fixed deposits, Payment Banks are at a disadvantage. We should allow them to offer constantly changing rates for accounts, so that it can be calibrated with the T-Bill yields. If you get 8% in T-Bills right now, there’s no reason to tell a bank it can’t offer 6% today, which falls or rises according to the T-Bill rate, even on a weekly basis.

The promoter minimum is too high. The promoter should be limited by rules, but there is no reason why the promoter can’t bring in only 10% right now! This can help new companies backed by VCs to set up payment banks (where the promoters might not own more than 20% given the Rs. 100 cr. requirement)

And then, the 100 cr. net worth requirement is a tad high. It should be Rs. 50 cr. with a Rs. 100 cr. paid up capital. If you invest in technology your capital will depreciate very fast, and the need is to invest in technology big time. At the current levels, payment banks will need to bring in more than 200 cr. (100 cr. for capital assets, 100 cr. for opex)  just to get a bank running.

I think the bank should be allowed to collect float. Companies like mutual funds or insurers should be able to open accounts and have customers pay them “instantly” – after all, that is what a payment bank is, to allow for instant payment. Let that happen within the bank and the tech system can instantly provide transfer.

In that context, the objective of such banks needs to be modified. It can’t be to provide payment solutions to the poor. It should be to help make payments better, and faster. Given the low credit risk of such banks, they will be attractive as a “safe alternative” to the behemoth banks we have.

The bank will have very low regulatory capital requirements (since there is no credit). Given current credit spreads, a bank can be phenomenally profitable at 2% spread (difference between interest paid out and received from the government). Also, it should be able to use other revenue sources, such as selling mutual funds,

Branch licensing should be eased substantially. A supermarket chain can’t be expected to get an RBI license each time it opens a store!

What do we think?

We expected a lot more, but payment banks can be huge. For remittances, to transfer money between cities (even countries!) using technology.

For payments, bringing invoicing, requests, credit (through another bank) and deposits under one (technological) roof. This can be issuer generated invoices that can be paid with just a few clicks, or payer generated payments for services (like salaries, pension investments etc.).

In general, this would be a brilliant idea if executed well. (I have so many ideas I’m bubbling with them, but I’ll hold off until we have better regulations).

Please post your comments. In the end I will write to the RBI about how I think the guidelines can be made more effective.


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