Payments Bank May Set Up Small Finance Banks To Escape Losses

The Reserve Bank of India (RBI) is reportedly looking to offer new licenses to set up small finance banks. The decision would also allow payments banks to apply for licenses.

A Moneycontrol report, citing people familiar with the development, said that the new licensing norms are coming and fresh licenses will be issued. This would enabled payment banks to also apply for a small finance bank license. However, other players can also apply for the license.

Payments Banks Vs Small Finance Banks

For the uninitiated, a Payments Bank can accept deposits of up to INR 1 lakh ($1,433), offer remittance services, mobile payments or transfers or purchases and other banking services like ATM/debit cards, net banking and third party fund transfers but cannot advance loans or issue credit cards.

The Reserve Bank of India had allowed 11 such banks, out of which only six payments banks began their operations in India. They are Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, and Paytm Payments Bank.

At the same time, banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending. RBI has, till date, approved 10 small finance banks which include Au Small Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank among others.

Recently, India Post Payments Bank had announced its plans to pivot to small finance bank and offer small loans to customer and open one crore bank accounts in 100 days. Also, Aditya Birla Idea Payments Bank announced the shutdown of its operations on July 21, 2019.

With the option available for all the payments bank to receive a small finance bank license, they will be able to offer a wider bouquet of services, including microloans. Payment banks cannot lend money or issue credit.

However, there are credit norms. RBI wants small finance banks to lend 75% of their total credit to borrowers in the priority sector, like those working in agriculture, small enterprises and low-income earners. That limit for commercial banks is 40%. Also, small finance banks will have to make sure that 50% of their loan portfolio should be advance up to INR 25 Lakh.

The State Of Payments Banks

The conversion to small finance banks may improve the fiscal challenges for the payment banks. The sector has seen a collective loss of INR 516.5 Cr in July 2017-18, according to the RBI’s Trend And Progress of Banking in India 2017-2018 report. The losses had doubled from 2016-2017’s INR 242.2 Cr.

“The losses of payments banks are attributed to high operating expenses as large capital expenditure had to be incurred in setting up initial infrastructure. It may take some time for payment banks to break even as they expand their customer base by offering their unique banking products,” the 2017-2018 report stated.

However, the data provided from the latest performance report (till June 2019) by MeitY shows that five payments banks— Jio, Paytm, FINO, India Post and Airtel— have shown improved performance figures.

FINO Payments bank overachieved its targets covering 193.33% of its digital transactions target, while Paytm Payments Bank, which achieved 106.54% of its digital transactions target. While Airtel Payments Bank achieved 96.98% of its target, Jio Payments bank achieved only 59.26% of the set digital transactions target.

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