Payment banks have wider reach

In 2015, the Reserve Bank of India (RBI) approved applications for 11 payment banks (PB) and subsequently three applicants opted out. The Airtel Payment Bank was the first PB to commence operations from November, 2016. The India Post Payment Bank was launched on January 30,2017. Paytm Payment Bank is likely to open soon.

As per Banking Regulation Act, ‘banking’ means accepting, for the purpose of lending or investment, money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise. The PBs are not permitted to lend (except to own employees).

Not less than 75% of demand deposit as on three working days prior is to be invested approved government securities/treasury bills with maturity up to one year and not more than 25% with the scheduled commercial banks (SCBs). The investments/deposits with SCBs shall not be less than 100% of the demand deposits.

Only savings and current accounts (SA, CA) with aggregate limit of Rs 1 lakh per customer is permitted. Arrangements for sweeping excess amount, with the consent of the customer, with any other banks can be made. The PBs need not issue passbooks, may provide statement in paper form on request (may be on chargeable basis) as well as information through multiple modes such as SMS/internet banking. They should provide confirmation through SMS/e-mail/printed proof for account transactions.

The PBs mostly adopt single product approach, have wide reach (especially for prompted by mobile companies), lesser incremental cost of operations, ease for KYC compliance and no pressure on asset liabilities management. Credit risk management is not applicable, but is subjected to market risks, operational risk, liquidity risk and strategic and reputational risk. The core challenges are effective business models optimising the distribution networks and creating real value for their customers.

The Airtel Payment Bank is a joint venture between Bharti Airtel and Kotak Mahindra Bank; it offers interest of 7.25% on SA - more than term deposit interest of many SCBs. With 4% CRR carry cost, effective cost comes to 7.55%. The funds mobilised kept in T-bills is at interest of about 6.25% and in SCBs with lesser than 7.55%. The net interest income from the deposits mobilised is likely to be negative. The bank cannot sustain the savings interest of 7.25%. May be to mobilise more accounts, higher rate is now offered. As there is no minimum balance requirement, no charges are applicable for non-maintenance
of minimum balance. Account opening process is simplified and mobile number of Airtel customers is the account number.

Customers should be aware of the services provided and charges thereon. Free services include: account opening, cash load (Internet banking, mobile app and banking points); funds transfer within the bank and to other banks (internet banking, mobile banking app) up to Rs 1,000. For fund transfer above Rs 1,000 charges will be at 0.50%. Heavy charges (0.65%) are levied for cash withdrawal of Rs 4,000 and above and for others on slab basis (Re 1 to Rs 25). Limits are fixed for number of transactions.

Digital wallet
Basic requirements of a typical SA customers like cheque facility, ATM card, term deposits, keeping balance above Rs 1 lakh etc, are not available. Deposits are safe. The motive is to digitise cash and provide access to small income households especially in unbanked areas capitalising on mobile connectivity. The SA is not a substitute for a regular SA with SCBs.

Instead of keeping money in digital wallet, funds can be parked in the SAs and earn interest of 7.25%. Therefore, one can expect flow of funds from digital wallet to SA of such PBs.

India Post Payment Bank (IPPB) was launched with a 100% government equity and a total corpus amount of Rs 800 crore (Rs 400 crore equity and Rs 400 crore grant). When a 150+ year old government organisation with more than 1.55 lakh post offices (most widely distributed network in the world) opens a bank, it is a real challenge to the existing banks.

The IPPB is likely to have around 650 branches by September 2017. Three lakh postmen will be more alive when the bank starts functioning in full scale.

The bank provides higher interest rate on SA at 4.5%, services like cheque book facility, ATM cards (with per day limit of Rs 25,000/transaction limit of Rs 10,000), free ATM transactions at 1,000 India Post ATMs and Punjab National Bank’s over 9,000 ATMs and three monthly transactions at other banks’ ATMs, funds transfer, door step banking (for a fee Rs 15–Rs 35) etc. Regular SA has initial deposit of Rs 100 and there is no minimum balance requirement. In due course, IPPB will also provide CA and access to third party financial services like insurance, mutual funds, pension, credit products, forex etc.

Considering the product offering of IPPB, many lower and middle class households may open SAs with it. People can also substitute their digital wallet with SA payment banks promoted by mobile operators.

(The writer, a former banker, is part of Banking Faculty, ICICI Manipal Academy, Bengaluru)

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