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Payments Banks become a reality

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The RBI has published final Guidelines for Licensing of Payments Banks in India after reviewing feedback and comments obtained by it on the draft guidelines that were published in July 2014 and covered in an earlier post.

The Guidelines have permitted Payments Banks to be established under the Banking Regulation Act by a wide variety of eligible institutions and to be engaged in providing demand deposits and payments and remittance services to domestic underserved populations of small businesses and low-income households through own branches, ATMs, and BCs. There will be no credit intermediation including in the form of credit cards through these banks. An initial restriction of upto Rs.100,000 a year as maximum balance has been placed on such deposit accounts per individual customer. Payments Banks can be part of any card payment network and are permitted cash-out at branches, BCs, ATMs and Point-of-Sale terminals.

The final Guidelines provide more leeway to Payments Banks than what was previously proposed in the draft guidelines with respect to the following aspects:

Deployment of demand deposit balances

While previously 100% of funds were to be deployed in Government securities and T-bills with maturity upto 1 year, the final guidelines relax this to requiring a minimum of 75% in such investments. The Payments Banks are free to deploy the remaining 25% in current and time/ fixed deposits with other scheduled commercial banks for operational and liquidity management purposes. This component will also contribute to risk-weighted assets for market risk as previously there would have been be no capital required to be placed for market risk (due to zero risk-weights for Government securities/T-bills). Also, temporary liquidity needs can be met through the interbank uncollateralised call money market and the collateralised repo and CBLO markets.

Non-risk based backstop

The leverage ratio while previously set at not less than 5% (ie., outside liabilities must not exceed 20 times of its networth / paid-up capital and reserves), has now been eased to at not less than 3% (outside liabilities not exceeding 33.33 times of its networth/ paid-up capital and reserves). This shift is justified as a leverage ratio of 5% was more conservative than what is prescribed even for full-service banks, and also because Payments Banks have no credit risk to warrant such a strict requirement.

Retaining ownership by promoters

The draft guidelines had required mandatory dilution of promoter holding to prevent any self-dealing by the owners. The final guidelines specifically clarify that it does not mandate a diversified ownership structure, which would have been required if these banks were undertaking credit activities. Payments Banks can therefore be set up as fully-owned subsidiaries so that promoters can leverage adjacencies arising from the use of existing infrastructure of the parent companies by the subsidiary Payments Bank. When the Payments Bank reaches the net worth of Rs.500 crore, and therefore becomes systemically important, then diversified ownership and listing will be mandatory within three years of reaching that net worth. Payments Banks are free to list themselves before this too.

It will be exciting to see how the creation and performance of such Payments Banks will evolve now that the final guidelines have been published by the regulator.

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One Response

  1. Payment Banks (PBs) with a capital base of Rs 100 cr shall be the new weak kids on the block with very fragile structure and limited business potential. The business model proposed for PBs is yet to be tested. Only institution working on the liabilities is Post Office deposits organisation, which is heavily subsidised by the government. Though, the bank balance limit is Rs one lakh per account, yet as no term deposits are being offered, people will shift the higher balances to other banks for investment purposes. Allowing term deposits within the cap of Rs one lakh limit is almost necessary. Otherwise these banks will be left with miniscule balances which may make accounts viability unsustainable.
    Still one wishes the PB experiment to succeed for the sake of financial inclusion. A bank is a shop easy to start but difficult to close. Hence every effort to PBs viable should be appreciated.

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