Some of India’s top business houses such as Future Group, Aditya Birla group are among the 100 entities that have applied for payment and small bank licences, the application deadline for which ended yesterday. Bharti was the first to announce plans for a payment bank licence, through an association with Kotak Bank.
Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services, feels telecom companies will be able to emerge as good payments banks and expects large conglomerates and retail companies to be successful.
He feels small banks with balance sheet size of Rs 800-900 crore would be healthy but feels that real earnings for payment banks will come only after 3-4 years.
Below is the transcript of Ashvin Parekh's interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.Sonia: The only fly in the ointment could be the fit and proper guidelines and that could be an issue for certain companies that have pending litigations against them and the regulator has said that they won’t issue payment bank licenses for these companies. How much of a concern do you think it could be for big corporate like Reliance, AB Nuvo etc who do have some litigations against their name?A: There are two-three ways in which we should be looking at this, for payments bank particularly the whole definition of fit and proper perhaps assumes different connotation. Let me articulate my point – this reform, to begin with is little bit of a question mark, the reform itself, not the companies or the people who have applied – to the extent that - I am getting an impression that the capital burn that was happening with the public sector banking in doing the inclusion, is now being passed on to private sector by virtue of offering these new licenses. Who will be able to bare this is a question mark. Telecom companies will easily be able to bear it that kind of capital burn and after few years they may emerge as good payments banks. Large corporate will certainly do that – (a) they will have deep pockets (b) they will have large network of their dealers, customers, if they have telecom companies in their group for example then they are much better-off. So that will perhaps determine the payments banks. However, small finance banks in a slightly different issue because those banks are going to do loaning. Those guys are going to have loan books and therefore the quality of loan books, the ability to keep the quality well, is something that becomes different. Therefore, I would say in case of small banks, the large corporate in any case, by the guidelines, kept out of the ambit. We are necessarily talking about small banks with local community level, economic level of knowledge and payments bank with large infrastructure, large platform, large number of customers making the cut.
Reema: How many applications is the RBI received overall for each of them and in your assessment how many licenses due to thing will be actually given out?A: Time and again we have seen that there is been a huge amount of spur, huge amount of interest that people have showed from throughout the company. In case of small finance bank for example macro finance companies from north eastern parts, south Indian parts I mean several parts of the country have showed interest. So, I would certainly look at some where around 45-50 applications coming in from that. The list shall soon be out so we will see how what are guess is. However, incase of payments perhaps I was placing the number at 25-30. To say that there will be about 100 applications looks to me a little perhaps out of the range but I would still look at about 70-80 applications unless of course after the guidelines the interest level has dropped down tremendously. Reema: How many will actually get the permits? A: This is where the whole issue is. As far as this small finance banks are concerned my guess, time and again the governor himself has said that he may not be able to place a number to it but my guess is that the whole experiment of community banking that is taking small banking to smaller communities, smaller regions and cover the financially excluded that experiment demands that at least 20-25 good small finance banks are allowed to take place are allowed to come into being. In such a scenario and then only we will know the out come. If we give away 5 or 7 licenses or 10 licenses then perhaps we may end up in a situation where if for any reason the experiment does not work then the whole reform may have an egg on its face. So we will say what did the reform lend us into. So I would still guess that if those who have come forward for small finance banks demonstrate very clearly that they have the ability to work with smaller communities, they understand their economic activities very well. They will able to bring in a capital of about Rs 100-200 crore to begin with thereafter there were to dilute in any case. The promoter is required to dilute then I suppose those guys may make it. So micro finance companies up to the size of about Rs 800-900 crore of loan book is a very good cash meant kind of an area for small finance banks. Small NBFCs are a good candidates for small finance banks. Those local entrepreneurs who have a good understanding of local activities may also make it to getting the license. Payments is going to be a different one. People who have possessed large platforms who have large numbers of customers and have a very good tie ups with banking system perhaps may make it. So there I would say that number could be about 15, there I would include telecom companies certainly. I would look at large corporate or large conglomerates and I would certainly look at large retail houses. Those are the one who will be able to make successful payments banks.
Sonia: To understand this whole process little more in-depth, how long do you think it could take the payments bank to make money and who will make more money in this process. Will it be the telecom companies or will it be the banks?A: Let’s look at it differently. In terms of small finance banks the equations are different compared to payments banks. In case of small finance banks – those banks who maybe able to weather out any economic up and down in the local region, for example if your activities are going to be around agriculture or around small and medium enterprises (SMEs) or micro, small and medium enterprises (MSMEs) then if you have good first three or four years then in a period of about two to three years you may still make it. In their cases what will happen is in the first two or three years -based on some of the applications that my firm has filed, I can share with you, a lot of capital will not be burnt in the first or second year; Rs 100 crore - they may need at the most about Rs 25 crore to Rs 30 crore, the balance Rs 75 crore is still available for loaning, which gives him a good income of anywhere around 12-13 percent. So I would say small finance banks, if they do their first two-three years well then in the second year itself will start seeing good results thereafter they can do well. However, payments banks is going to be a different story altogether; there you will have to take deposits of Rs 1 lakh that too it to be deposited in the government security, almost all of it, 75 percent and the balance with banks. Therefore, the real breaking even or the earning will come only after the fee income exceeds the cost of running your infrastructure, overheads and everything else, so there it may take anywhere between three-four years provided very large number of transactions do happen. They are going to work only on fee income. Reema: Many of these payment banks hopeful, many of these corporate like Aditya Birla Group; they were the ones which had submitted an application even for a full-fledged bank when they had come out a year-and-a-half back. Do you see eventually the ones who get license for payments bank; a few of them actually become full-fledged banks later on?A: I have my own doubts about this and the reason is very simple – payments bank is a different route. What you are doing is, you are acquiring customers only to conduct their transaction, to assist them in conducting their transactions. You are not loaning and therefore you do not have the credit capability. You may not be able to demonstrate it even any given point in time that you have the ability of running a loan book of a size that can make you eligible for universal bank. therefore, payments bank to my mind is a slightly different route and even if you study the guidelines, there is an indication that for small finance banks there is a natural migration possible, in the sense if they grow their loan book, if they demonstrate that they have the capability of mobilising capital on one side and also deposits on the other and therefore they can expand their loan books, road for them to migrate, to grow into, would certainly be a universal bank licence.
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