Telcos, above all, are finding the model viable
That RBI has been flooded with applications for licences for payments banks and small banks is not surprising. The financial services space is perceived as one with huge potential and given such a large section of the population has little or no access to banks, that is probably true. The top telecom players—Vodafone and Bharti Airtel—have thrown their hats into the ring, hoping to leverage their reach or customer service points, as it were, to make some money. To be sure, the pickings could be attractive as suggested by the growing value of transactions, via the m-wallet, which has tripled in the last couple of years, to around R3,000 crore.
However, it could be a while before any of the payments banks make meaningful money, simply because the value of the transactions are likely to be small, therefore requiring large volumes to be generated to defray costs and leave the promoters enough of a margin. For this to happen, the transactions need to be more than merely remittances and the banks must offer customers financial products that can earn them fees. CRISIL estimates that the contribution from this business will remain minuscule even after years. A couple of corporates—Reliance Industries Limited and Bharti Airtel—have teamed up with banks probably to use their experience and expertise in managing cash and other systems; payments banks are permitted to accept deposits and will need to put the money to work.
Banks, for their part, are looking to leverage the reach that telcos have in the hinterland; via the payments banks, lenders can hope to pick up customers in rural India which might otherwise take them another five years. While, over the longer-term, banks will need to create some infrastructure to be able to scale up the business in the interiors, in the immediate future, they will use the business correspondent model and depend on the customer data that the telcos have to try and build an asset portfolio by lending to small businesses. Since the initial capital costs aren’t high—especially for a player like State Bank of India—there can be no harm in trying it out. Indeed, at this stage it would appear the banks have more to gain from the partnership. Small banks will have to deal with the challenges of not being able to diversify and scale up the loan portfolio beyond a point; the vagaries of regional growth are not easy to deal with. But microfinance lenders like Bandhan have proved that the model can be viable and while larger banks may have ended up with large agriculture NPAs, smaller banks working at the grassroots level might do a better job of lending to farmers and micro-industries.