Thanks Jami,
This article came across my desk, which provides a very useful analysis on this subject, and prods for further review.
anuj
Payment Banks: What They Are, and What We Think They Should Be
Written on July 23rd, 2014 by Deepak Shenoy
Categories: Banks, RBI
RBI has draft guidelines out for Payments Banks.
Payments Banks: The Concept
RBI wants to create a lower-end concept called payment banks, which are restricted to:
- opening savings and current accounts for customers, limited to Rs. 100,000 balance per customer
- Allow customers to withdraw cash through ATMs, or at branches
- Put all the money they get into government securities (only T-Bills)
- Become a Business Correspondent for other banks to offer credit etc.
Who Can Create?
This is meant for payment systems (like PayTM or other "wallet" systems), or issuers of pre-paid instruments. Even super market chains can apply.
They have to put Rs. 100 cr. of capital, and maintain a net worth of Rs. 100 cr. all the time. Promoters must own at least 40%, but that must be brought down to 26% or lesser eventually. FDI is allowed - upto 49% initially.
The idea is to allow for easy remittances between cities, or for banking for the poor.
Our View
Right now, the draft guidelines leave much to desire. There are no mentions of lower regulatory requirements, or reporting needs. If a bank like this needs compliance rules of the kind that big banks have, then there will be very little interest.
The 100,000 rupee limit is a pain. Can't poor people have more? After all, the RBI in its glorious knowledge calls Rs. 50 lakh worth of loans for a house as "affordable" housing. Why can't the poor have Rs. 100,000 or more in their savings accounts? The restriction is unnecessary and should be dispensed with entirely. There should be NO limit to the amount in there.
(Yes, if you want KYC, banks should do KYC according to the rules, which anyhow exempts lower balance accounts from major level KYC)
A payment bank should be used to help SMEs and Startups as well. The 100,000 limit there too is unnecessary. These banks should be used to pay for online goods by companies through online-only-cards, for instance, for company purchases. They can be used for payment of utility bills, which will require the utility provider to own an account (and they won't accept the Rs. 100,000 restriction).
And then, we should allow Payment Banks to provide higher interest rates to customers, even companies. With no fixed deposits, Payment Banks are at a disadvantage. We should allow them to offer constantly changing rates for accounts, so that it can be calibrated with the T-Bill yields. If you get 8% in T-Bills right now, there's no reason to tell a bank it can't offer 6% today, which falls or rises according to the T-Bill rate, even on a weekly basis.
The promoter minimum is too high. The promoter should be limited by rules, but there is no reason why the promoter can't bring in only 10% right now! This can help new companies backed by VCs to set up payment banks (where the promoters might not own more than 20% given the Rs. 100 cr. requirement)
And then, the 100 cr. net worth requirement is a tad high. It should be Rs. 50 cr. with a Rs. 100 cr. paid up capital. If you invest in technology your capital will depreciate very fast, and the need is to invest in technology big time. At the current levels, payment banks will need to bring in more than 200 cr. (100 cr. for capital assets, 100 cr. for opex) just to get a bank running.
I think the bank should be allowed to collect float. Companies like mutual funds or insurers should be able to open accounts and have customers pay them "instantly" - after all, that is what a payment bank is, to allow for instant payment. Let that happen within the bank and the tech system can instantly provide transfer.
In that context, the objective of such banks needs to be modified. It can't be to provide payment solutions to the poor. It should be to help make payments better, and faster. Given the low credit risk of such banks, they will be attractive as a "safe alternative" to the behemoth banks we have.
The bank will have very low regulatory capital requirements (since there is no credit). Given current credit spreads, a bank can be phenomenally profitable at 2% spread (difference between interest paid out and received from the government). Also, it should be able to use other revenue sources, such as selling mutual funds,
Branch licensing should be eased substantially. A supermarket chain can't be expected to get an RBI license each time it opens a store!
What do we think?
We expected a lot more, but payment banks can be huge. For remittances, to transfer money between cities (even countries!) using technology.
For payments, bringing invoicing, requests, credit (through another bank) and deposits under one (technological) roof. This can be issuer generated invoices that can be paid with just a few clicks, or payer generated payments for services (like salaries, pension investments etc.).
In general, this would be a brilliant idea if executed well. (I have so many ideas I'm bubbling with them, but I'll hold off until we have better regulations).
Please post your comments. In the end I will write to the RBI about how I think the guidelines can be made more effective.
Sent: Tuesday, July 22, 2014 11:49 AM
Subject: [MFP] Fwd: FW: Unbanked News - India
fyi article from Mr. Klingman's listserv on new banks in India:
From: Charles.Klingman@fsoc.gov [Charles.Klingman@fsoc.gov]
Sent: Tuesday, July 22, 2014 12:00 PM
Subject: Unbanked News - India
Financial Services Monitor Worldwide
July 19, 2014 Saturday
Payments Banks will not lend money
The Payments Banks that the Reserve Bank of India plans to licence will accept demand deposits - current and savings bank deposits - but will not undertake lending activities.
However, a Payments Bank can become a Business Correspondent (BC) of another bank for credit and other services which it cannot offer, according to the Reserve Bank of India's draft guidelines on licensing of differentiated banks.
The primary objective of setting up of Payments Banks is to further financial inclusion.
The banks will provide small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganised sector entities, and other users. Going by the guidelines, these banks will not provide term deposit facility.
The RBI said preference will be given to those applicants who propose to set up Payments Banks with access points primarily in the under-banked States/ districts in the North-East, East and Central regions of the country.
However, to be effective, the Payments Bank should ensure widespread network of access points particularly in remote areas, either through their own branch network, BCs or through networks provided by others.
Eligible entities
The existing non-banking pre-paid payment instrument (PPI) issuers and other entities such as Non-Banking Finance Companies (NBFCs), corporate Business Correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities can apply to set up Payments Banks. Banks, too, can take equity stake in a Payments Bank to the extent permitted under the Banking Regulation Act, 1949.
Payments Banks will initially be restricted to holding a maximum balance of [#x20b9]1 lakh/customer. After the performance of the Payments Bank is gauged by the RBI, the maximum balance can be raised. The minimum paid-up voting equity capital of the Payments Bank shall be [#x20b9]100 crore. Any additional voting equity capital to be brought in will depend on the business plan of the promoters. Further, the Payments Bank should have a net worth of [#x20b9]100 crore at all times.
The Payments Bank will be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by the RBI from time to time.
However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I standards. The promoter's minimum initial contribution to the paid-up voting equity capital of Payments Bank will be at least 40 per cent which will be locked in for a period of five years from the date of commencement of business of the bank.
Shareholding by promoters in the bank in excess of 40 per cent should be brought down to 40 per cent within three years from the date of commencement of business of the bank.
Posted by: Anuj Jain <ajain@stfx.ca>
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