The Reserve Bank of India on Thursday issued final guidelines for companies seeking to set up payments banks and small finance banks in a bid to expand banking services to more people and small businesses.
Reacting to the news, Ashvin Parekh of APAS says the guidelines are a little more liberal compared to what he was expecting at one point in time. This may be of some interest to all three constituents i.e. to telecom companies, supermarket chains and also to NBFCs, he adds.
But Parekh says, the only question now is how to establish financial viability of such entities if they are going to work purely out of the interest income received on SLR.
Sanjay Kapoor, former CEO, Bharti Airtel feels the proposition about joint ventures with banks has made the proposition more interesting. “One of the basic criteria's is anybody who has a very large distribution network is an eligible bachelor from a viability perspective for a payment bank,” he told CNBC-TV18.Shinjini Kumar of PWC India says the game is about changing the banking ecosystems and not individual banks and bringing non customers of traditional banks into the banking framework.
Below is verbatim transcript of the discussion:
Ashvin Parekh, APAS
Q: Will it be supermarket chains, will it be non-banking financial companies (NBFCs) or will it be telecom companies that will apply?
A: I am seeing that the guidelines have been a little more liberal compared to what we were expecting at one point in time and therefore, to all the three constituents i.e. to the telecom companies, to the supermarket chains and also to the NBFCs this may be of some interest.
The only question that kicks on now is how will the financial viability be established of such entities if these entities are going to work purely out of the interest income received on the SLR.
Q: There is no interest prescription.
A: True, but my submission is that, if the on demand deposit can be only up to Rs 1 lakh then the balance deposit is going to be savings deposit or fixed deposits.
Q: They can also have payment services and they can do remittance service. These cannot be paid services, right?
A: Yes, these are going to be fee based. Therefore, after maybe four-six years, after the infrastructure, if you are a payments bank you will have to create infrastructure in the sense you have to create points of contact at various locations from where remittances and payments, transactions can be collected.
So from that point of view there is going to be an investment in infrastructure in terms of building up the network and building up the points of contact.
The viability of such entities will happen perhaps at a later stage, compared to a commercial banker or strictly a universal bank. That is because of the lending margins and nothing else, but if I on the other hand look at anybody who is going to apply for it and looks at it as a marginal approach that is they feed some additional income.
If a telecom company has the infrastructure, for example in so many contact points then it makes a little more sense.
Sanjay Kapoor, former CEO, Bharti Airtel
Q: Will telcos throw their hat into the ring?
A: This proposition about joint ventures with the bank has made the proposition a little more interesting. Some telcos should come forward.
One of the basic criteria's is anybody who has a very large distribution network is an eligible bachelor from a viability perspective for a payment bank. Now with banks coming in I think you could easily see some joint ventures coming across between some private sector banks and some of the large telcos.
Q: If your capital is Rs 100 crore you can take deposits up to Rs 3,300 crore. The leverage ratio is 3 percent. So, will that be a tall ask?
A: Rs 100 crore is not a tall ask at all. I have said this earlier and I hold on to my position even with the existing guidelines that to make money out of payment banks is not going to be that easy.
To be viable in a payment bank business your transaction both in terms of volume and in terms of what you charge for your transaction is going to determine the viability.
Q: You are going to determine the viability. You are going to make some 7-8 percent on your treasury bills because you have to keep 75 percent of the deposits in SLRs which on an average will give you 7 percent and you could get money by distributing mutual funds, insurance products which I don’t think will be very lucrative in the customers that you may be intending, as well you can make remittances. Do you make so much money on remittances and payments?
A: That is exactly what I was saying. So, all transactions whether you deposit money or you transfer money or you withdraw money, ultimately those transactions and the cost associated with the transaction will be the glow to make some money.
However, if I am a telco I am not doing this business for only banking services. I am doing this business because it enables me to differentiate versus my competitors and has a high potential of bringing down my churn. If I can bring down my churn the value of that for a telco is humongous.
Q: If you bear the hat of a super market chain will it make sense?
A: Not compared to a telco.
Shinjini Kumar – PWC India
Q: What is your sense, Mr Parekh wasn’t sure that it is going to be viable for a standalone business?
A: I am not looking at it as an individual bank and how they will profit from there which will also happen. However, the game is about changing the banking ecosystems and bringing non customers of traditional banks into the banking framework.
If that has to happen it is a matter of how fast that ecosystem scales up and therefore, how everybody benefits from it. So, payment banks will be the frontend of that critical march and they will get more focused on the customer side of it over a period of time. Then multiple players will come to develop that ecosystem.
Today, payment players are creating their own ecosystem and therefore, they are focused around certain segment of population where they play in the multiple ecosystem spaces.
Over a period of time, if there is enough scale multiple payment bank will take care of the frontend and the backend will come up through that competitive collaborative sort of structure b2b business. Then people will specialise and then that whole ecosystem will begin to get profitable for everyone.
If there are many payment banks that cover the ecosystem and bring non customers into the system it will be a profitable business model for everyone.
If it is just one or two and they need to create their own ecosystem then it may not be a profitable venture for any of them.
Q: Would you see a multiplicity of telecom companies wanting to get into this and that being a starting point?
A: For telecom companies it is a natural set of continuity business. So, when we think about what is the easiest distribution channel the mobile is the most visible representative of that? In that sense it becomes very attractive for them to think about it. However, I don’t think that is the only segment that should or will be able to create this business.
There is a need for different types of players to build this business so that again we are able to capture different utilities, different contiguity, and different cost of structure.
If it is just one type of player that is playing to that thing I don’t think that we will get the full benefit out of that model again.
Q: There is again that fit and proper clause, do you think it will mean that some of the established players will again have problems passing the fit and proper test? After all last time around for that universal bank license from a basket of about 25 big applicants only 2 were found fit and proper?
A: Fit and proper is very important because we are talking about banks and financial services. At the same time we are talking about a business model whose risk profile is very different from the universal bank.
The purpose for releasing the banks into the systems is also very different. If the purpose is to experiment, innovate, collaborate and create a sort of a huge ecosystem then it has to be fit and proper.
I hope that’s not the case that we have only two or three people that are fit and proper to run a payment bank with a limited risk model. So, I am not for sure that should be a constraint.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
