Not allowed to issue FDs and give loans, how payments banks function and offer higher interests on deposits?

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Published: January 19, 2019 7:09:23 PM

Some payments banks started their operations by offering higher interest rates than most scheduled commercial banks on savings account deposits, as well as other incentives like cash backs on payments made through them.

payments banks, India Post Payments Bank, IPPB, State Bank of India, SBI, interest rates, fixed deposits, FD, FD interest, interest on savings accounts, demand deposits, time deposits, loans, NPA, cash backsPayments banks have been set up to address the key issues of banking services accessibility in under-banked and un-banked areas.

Payments banks have been set up to address the key issues of banking services accessibility in under-banked and un-banked areas through their widespread network of branches, banking outlets and merchant points. However, they are not allowed to accept time deposits / fixed deposits (FDs) and sanction loans, and may accept only demand deposits through savings bank accounts and current accounts.

Despite the bars on these key banking activities, some payments banks started their operations by offering higher interest rates than most scheduled commercial banks on savings account deposits, as well as other incentives like cash backs on payments made through them.

Although the rate of interests on deposits were lowered subsequently, but one may wonder, how payments banks may offer greater benefits despite unavailability of cheaper funds through acceptance of FDs and generating returns by sanctioning loans at a higher rate!

Payments banks are allowed to generate income by investing 75 per cent of the customer deposits in government securities and the rest in other instruments allowed by the RBI.

Given the limitations on their product offerings, payments banks enter into partnerships with commercial banks, NBFCs, fintechs and other financial service providers. As payments banks have greater reach in the areas of the country, where other financial institutions don’t have their reach, such partnerships are mutually beneficial.

To compare the reach of commercial banks and payments banks, lets take the example of India’s largest PSU bank State Bank of India (SBI) and India Post Payments Bank (IPPB). While the number of SBI branches is a little more than 24,000, IPPB is on its way to open about 1.55 lakh points of services.

Such partnerships allow payments banks cross sell for a fee a range of credit, investment, savings and payments solutions to customers through their huge network. The process of facilitating transactions for customers of other banks, especially in rural areas, through micro ATMs and their own payment systems helps payments banks to increase their revenue.

Moreover, payments banks may work peacefully, because they don’t have to bother for loan recovery and face the risk of developing non-performing assets (NPAs) as they are not allowed to give loans.

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