Wednesday, August 19, 2015

Dawn of a new era: RBI Granted Payment Bank Licence to Postal Department


The Reserve Bank of India (RBI) on Wednesday allowed 11 business houses, including Reliance Industries, the Aditya Birla group and leading telecom companies Airtel and Vodafone to start payments banks.

Bharti Airtel and Reliance Industries had earlier tied up with Kotak Mahindra Bank and State Bank of India, respectively, for payments bank operations.

The Reliance-SBI payments bank has an ambitious plan to cover 250,000 villages and 5,000 towns in three years. While it plans to start with a Rs 100-crore capital base, this will be ramped up to Rs 400 crore in three-four years, depending on business volumes.

  • Reliance Industries
  • Aditya Birla Nuvo
  • Vodafone
  • Bharti Airtel
  • Department of Posts
  • Vijay Shekhar Sharma (CEO of One Communications, which runs PayTM)
  • Cholamandalam Distribution Services
  • Tech Mahindra
  • National Securities Depository Ltd
  • Fino PayTech
  • Dilip Shanghvi (Sun Pharma promoter)
“This partnership brings together the combined strengths of two of India’s Fortune 500 corporations committed to making a transformative impact on India's financial inclusion landscape. We see this licence as an opportunity to promote financial inclusion,” said SBI Chairman Arundhati Bhattacharya.

The Department of Posts and Aditya Birla Nuvo, both unsuccessful in race for universal bank licences last year, succeeded this time. Welcoming RBI's decision to announce payment banks, Finance Minister Arun Jaitley called the move a significant one. He said it will bring in more money into the system and spread the reach of banking to rural areas. “RBI giving payments bank licences is a significant and important step. Payments banks will reach out to people in rural areas.”

A finance ministry official who did not wish to be named said: "We believe that private players are better equipped to start payments bank operations."

Vijay Shekhar Sharma, chief executive of One Communications (which operates fast-growing mobile wallet company Paytm), and telecom major Vodafone were also among the successful candidates. The other applicants that received RBI's approval for rolling out payments banks were Sun Pharma promoter Dilip Shanghvi (who had applied in his own name, and not as Sun Pharmaceutical Industries), information technology (IT) firm Tech Mahindra, payments technology provider Fino PayTech, financial services provider Cholamandalam Distribution Services, and National Securities Depository Ltd (NSDL).

said it would partner Mahindra Finance for payments bank. “This will allow both the digital and physical aspects of business to come together. Technology is breaking barriers and creating opportunities for new business models to emerge,” said Tech Mahindra Chief Executive & Managing Director C P Gurnani.

What payments banks can and cannot do
  • Accept demand deposits from individuals, small businesses and other entities
  • Hold a balance of up to Rs 1 lakh per individual
  • Set up branches, ATMs, correspondents; issue debit cards; offer internet banking
  • Accept remittances to be sent to multiple banks, or receive remittances from them
  • Distribute mutual fund products, insurance products and pension products; undertake utility bill payments
  • Accept NRI deposits
  • Issue credit cards
  • Set up subsidiaries to undertake non-banking financial services activities
  • Offer other financial/non-financial services of promoters along with payments bank services
Norwegian telecom giant Telenor has also entered into a deal with Dilip Shanghvi and infra financier IDFC to venture into the payments bank space. “We believe payments bank facilities are a step in the direction of enabling last-mile connectivity to consumers,” a joint statement from Shanghvi and Telenor said.

Payments banks will mainly deal in remittance services and accept deposits of up to Rs 1 lakh. They will not lend to customers and will have to deploy their funds in government papers and bank deposits.

These entities, which are required to have an initial capital of Rs 100 crore each, will have to start operations within 18 months. The promoter's minimum initial contribution to equity capital will have to be at least 40 per cent for the first five years.

This is for the first time in the history of India's banking sector that differentiated licences are being given out by the central bank for undertaking specific activities. RBI is expected to come out with a second set of such licences - for small finance banks - and the process for those is in its final stage. The move is seen as a major step in pushing financial inclusion in the country. Bringing more people into the formal banking system has been a stated objective of both RBI and the government.

By granting 11 banking licences in one go and promising that licences will be offered 'on tap' after gaining experience from the current exercise, the central bank has also shed the tag of being conservative. The time taken to give these licences was lowered; the process was completed within a year, compared with four years for universal banking licences given out last year.

The 11 candidates for payments bank licences were chosen from among 41 applicants, after applying fit-and-proper criteria, and successful track record in conducting business for five years. An external advisory committee (EAC), headed by RBI board member Nachiket Mor, scrutinised all applications and sent its recommendations.

"The recommendations of the EAC were an input for an Internal Screening Committee (ISC) consisting of the RBI governor and the four deputy governors. This ISC prepared a final list of recommendations for the Committee of the Central Board (CCB)," RBI said in a statement.

The CCB, which met on Wednesday, approved the announced list of applicants.

"In arriving at the final list, the CCB noted it would be difficult at this stage to forecast the likely most successful model in the emerging business of payments. It further noted that payments banks could not undertake lending and, therefore, believed the payments banks would not be subject to the same risks as full-service banks," RBI added.

Among the unsuccessful applicants were the prepaid payment instrument (PPI) providers like One MobiKwik Systems and Oxigen Services. They would be disappointed as the central bank had said in its final guidelines that PPIs would be considered for licences.

RBI, however, kept the door open for the unsuccessful candidates, saying they could qualify in future. "Going forward, the Reserve Bank intends to use the learning from this licensing round to appropriately revise the guidelines and move to giving licences more regularly, that is, virtually 'on tap'. The Reserve Bank believes that some of the entities that did not qualify in this round could well be successful in future rounds," RBI added.