A day after RBI announced the final guidelines for small finance banks and payments banks, NBFCs, MFIs and prepaid payment instrument players have started working on their business models.
While telecom companies and prepaid payment instrument players (PPIs) are seen as frontrunners for setting up payment banks (see infographic), some analysts say the rules leave little incentive for NBFCs to convert into small banks.
Some PPIs that FE spoke to said a payment bank licence would help them diversify operations to cross-border remittances and also distribute simple financial products like MF and insurance products.
“…we will be able leverage Casa deposits and earn interest on that,” said Naveen Surya, managing director, Itz Cash Card.
However, analysts said since payment banks are not allowed to undertake lending activities, revenue streams would be restricted to income from remittance activities and interest on short-term government securities with other banks.
RBI has also mandated payments banks to put 75% of deposits in government securities and 25% in current and fixed deposits in other scheduled commercial banks. Pramod Saxena, CMD at payment solutions provider Oxigen Services India, said the clause allowing them to invest 25% in bank deposits will earn a higher rate of interest.
While the average yield of a government security with tenure of up to one year is 8.25%, the bank term deposit interest rate for up to one year is at 8.5%. RBI has mandated higher capital adequacy ratio for small banks at 15% than the prevailing 9% for universal banks. That apart, microfinance institutions (MFIs) and NBFCs must also comply with cash reserve ratio (CRR) of 4% and statutory liquidity ratio (SLR) of 22%, which, they feel, would dampen their earnings in the first couple of years of operation.
“The prudential norms like CRR and SLR, and the provisioning norms, all seem to have remained the same as the larger banks. It can potentially impact the way we are doing our business,” said GS Sundararajan, director, Shriram Group.
A report by market research company Jefferies said to serve the purpose of financial inclusion, the draft rules have been diluted to the extent that ‘Universal’ and SFB licensing looks similar, with very little incentive for NBFC-converts.
“Payment Banks are an interesting proposition with good future potential. We don’t expect existing banks to face threats to their business model,” it said.
A Kotak Institutional Equities report also pointed out that though the final guidelines allay a key concern about viability, entry barriers and capital adequacy ratios, which are high, stay unchanged.
According to Lakshmi Narasimhan, CFO at Magma Fincorp, the company is better off allocating a capital of Rs 100 crore for a pan-India presence rather than a local presence as put forth earlier by the draft guidelines. With a net worth of close to Rs 1,500 crore, Narasimhan believes capital would come from internal accruals.
“It looks lucrative. However, the final decision to apply would be taken after board approvals,” he added.
The Jefferies report added: “The RBI has stated in its guidelines that local players and licences for unbanked areas will be given preference — that makes business models tougher. However, the RBI is open for conversion of SFBs to Universal Banks after a satisfactory performance period, thereby making the entire licensing process on tap.”
Hemant Kanoria, CMD of Srei Infrastructure, told FE that the company is evaluating the guidelines and would comment only after it takes a closer look at it.
Rating agency Icra said accounts opened through Pradhan Mantri Jan Dhan Yojana (PMJDY) with an average ticket size of around Rs 3,100 per account, excluding zero balance accounts, small banks would be able to garner deposits at reasonable ticket over the medium term.
Payment banks: Why telcos may be the first to dial new number
With a huge subscriber base in rural areas, telecom operators have the most to gain from setting up payment banks
Likely contenders: Telecom operators, India Post, large business correspondents, pre-paid payment instrument providers and retail chains
Case for telcos: Rating agency Crisil Research believes telcos are ideal candidates. “Telcos are already offering m-wallet services for remittances. In last two years, the value of transactions through m-wallet has more than tripled to over R2,700 crore,” said Crisil in a report
Profitability quotient: The m-wallet (launched in 2011) transaction is estimated at R2,750 crore in the last fiscal, mostly from remittances. A volume pick-up is likely to further boost their profits
Why telcos lead the race: Significant presence in rural areas may add to remittances. Of the 900 million subscribers, over 40% are in rural areas.
The distribution infrastructure is in place (Bharti Airtel sells products through 1.5 million retail outlets)
Benefits for telcos: Telcos will be able to increase touch points with their customers, provide services (deposits and payment related)
Operators would be able to retain customer and bag a greater share of the customer wallet over a period of time
May become an additional channel of income as telcos can earn a spread on deposits
Can save on commission they pay to banks whenever a customer withdraws cash
Why not others: Limited customer base
May have to invest a significant amount on expanding distribution network
Investment on technology infrastructure and brandbuilding can be huge