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Did India’s Central Bank get Payments Bank Approvals Right?

India’s central bank, the Reserve Bank of India (RBI), has lagged behind other countries, moving gradually through a series of small steps to open up regulation for innovative models. However, on August 19, 2015, RBI finally took a massive catch-up step in digital finance, and, arguably, re-branded itself as innovation-friendly. It approved 11 applicants, including five of India’s MNOs, to organize and launch payments banks by early 2017. (The full list with ownership structures can be found on the RBI website and Quartz India).

Payments bank is a new category of specialized bank that can offer a variety of payment services. It can also provide an interest-bearing deposit account, a feature that extends the abilities of payments banks beyond a typical e-money issuer. In effect, from a regulatory perspective, payments banks have as much teeth as one can wish for on the liabilities side of the bank business.

While RBI was expected to give approvals this year, making it an important year for digital financial services in India, there were no guarantees on who would get a license. Some speculated that RBI would approve just the Department of Post as a first incremental step. But RBI has surprised most RBI-watchers.

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Photo Credit: Sandipan Majumdar

RBI got a lot right by awarding approvals to a strong cast of institutions and partnerships with enough financial muscle between them to take risks and innovate and with enough diversity among them for experimentation in approaches. This is possibly the first time RBI has awarded any licenses or approvals to a sizeable number of applicants in one go. By doing so, they have clearly taken a portfolio approach and stacked the bench, as they say in American sports. Approvals were given to one or more in each category: MNO (Airtel, Idea, Reliance, Vodafone, Uninor), prepaid issuer (Paytm, Tech Mahindra and others), agent or business correspondent company (FINO), non-bank finance company (Cholamandalam) and government (Department of Post). Commercial banks are participants directly or indirectly. For instance, Kotak Mahindra has a 20% stake in the entity that will be set-up with Airtel; State Bank of India will have up to 30% percent stake in the entity set-up with Reliance; multiple banks, including ICICI Bank, have a stake in FINO; and multiple banks have a stake in National Securities Depository Limited (NSDL). Many expect that with banks involved, payments banks will quickly move to facilitating a link to credit products.

RBI may have also got it right in its attempt to balance innovation with stability, integrity and protection, both in what it has required from payments banks and who it has approved in this first batch. The payments bank requirements have capital requirements, promoter stake dilution roadmaps and deposit protection measures with the intent to protect public deposits. Moreover, included in the approvals were India’s largest corporate houses and high net worth individuals – Sanghvi, Ambani, Birla, Mittal, Murugappa, Mahindra – with collective net worth of close to $55 billion between them, not to mention Jack Ma, whose Alibaba has 25% stake in Paytm, one of the awardees. By awarding the licenses to some of the wealthiest corporates, not only in India but globally, RBI is saying that it will back innovative models, but only if they have financial muscle behind them. It is also a recognition from the RBI that financial strength will be needed to weather the challenges of the growth phase and the arduous path to profitability. Specifically, payments banks will need to develop massive agent networks, a large share of the cost of the business, which will require upfront investments with delayed returns.

The downside of an extreme application of this approach is that players, like Oxigen, Suvidha and Novopay, who may not have the same financial strength of India’s big corporate honchos but are not financially insignificant either, have not been given approvals. Those players have already made investment in agent infrastructure for financial services, larger, at least in the case of Oxigen, than any of the MNO’s financial infrastructure to date. It is unclear if RBI has different plans for businesses like those previously licensed as both prepaid payment-instrument issuers and business correspondents. The approach also does not explain why the Future Group did not get a license given that retail conglomerate’s financial muscle and efforts to go downmarket as one of India’s fastest growing retail groups.

RBI also got it right in terms of what these approvals mean for the financial system. Even if RBI had approved just a couple of entities, it would have taken an important step towards realizing a vision of a competitive financial system and differentiated banking articulated at different points by Governor Raghuram Rajan, Nachiket Mor - who is on the RBI’s board, chaired the RBI committee whose report recommended the payments banks and chaired the payments bank committee - and other members of RBI’s leadership (see here and here). With the payments bank approvals, along with the two new commercial bank licenses awarded in 2013, one of which, Bandhan Bank, launched recently, and the upcoming small finance bank licences, RBI has taken steps to realize that vision.

RBI deserves kudos and its moment of self-congratulation. The real test of this moment though, will be whether RBI can make innovation-friendliness a habit. Soon RBI will face a massive expansion in agent footprint set-up by payments banks. With agent scale, consumer protection and other issues will surface. How it reacts to that will be an initial test. Payments banks and their bank and non-bank owners will experiment with product categories unlike others RBI has seen in traditional banking, especially on credit. How it reacts when faced with those products will be another test. Existing incumbent banks for whom deposits are an invaluable part of their business model will be quick to protest any perceived imbalance in the playing field on regulations. How the RBI reacts to that will be yet another test. Lastly, we expect other new, unexpected interventions in financial services. This is, after all, as Nandan Nilekani put it recently, a “Whatsapp moment” for financial services in India. RBI has undoubtedly played catch-up but will it fall behind again?

Comments

27 August 2015 Submitted by Rajeev Gopal (not verified)

The article does little beyond analyzing RBI's actions. It tends to pat RBI on the back but in a superior 'teacher patting the child' manner. What I would have liked to see more of is how the approval for payment banks will affect India's economy and what more will need to happen to make payment banks successful in India. A comparison with other countries' efforts in the payment bank area would also have been useful.

28 August 2015 Submitted by Mark Flaming (not verified)

I am still puzzling over the question of why payments should ever be regulated with a "bank" license. Retail payments occupy a well defined space in a payments system where risk-based approaches to oversight (vs supervision) support a very light regulatory approach. It seems to me that the RBI "payments bank" license may simply invite regulators to impose more rules and supervision than a risk-based approach to retail payments oversight would warrant. It most certainly creates barries to entry that will quickly define the first mover space. Bottom line, the RBI license does not seem to allow the PSPs to do any more with the float than they are authorized to do in a typical emoney framework. So where is the public good of regulation with a more complex license, that is large enough to offset the inevitable costs?

I think we will promote innovation and market development best by applauding the regulators that are willing to make the most of modern risk-based approaches to retail payment systems development. On this foundation, it is acceptable to assert that the cash merchants we have been mislabeling as "agents" are simply one end-user exchanging cash and digital money with another user, the same as merchants have done with cards for decades. And that payments platforms are no different that the card networks that have worked well for years.

Innovation in the digital space will simply require more market freedom than regulators have typically imposed on banks. Nobel prize nomination please for the regulator with the vision to anchor that freedom in the retail payments space where the benefits of innovation are weighed with a premium.

01 September 2015 Submitted by Anand Shrivastav (not verified)

Well written albeit patronizing article. Street knew long ago that Payment Banks (PBs) licences are for telcos. PBs indeed are good for organizations wanting customer retention. Not surprising 5 telcos, 2 NBFCs, 1 etailer applied and got the same. As for India Post NSDL - they would have received it anyways. But let us not fool ourselves that PBs (except for India Post) can and are going to promote financial inclusion.

01 September 2015 Submitted by Dr V.Rengarajan (not verified)

Dear Kabir Kumar Anand raman
While admitting one positive impact of these payment bank is that there would be likely a decline in myriad forms of suspect savings and investment schemes run by unregulated entities and individuals, still there are four concerns as follows.
First, in Indian context with the given level of skewed infrastructure growth in terms of finding developed district cheek by jowl backward one at sub district level on one hand and illiteracy and ignorance causing exclusionary implications in the last mile on the other, , does India want seriously institutional innovations like payment banks?
Second, while Average Population Per Branch Office (APPBO) is hovering around 12000 , are these network considered inadequate for ensuring zero level financial exclusion?
Third what happened to performance of innovated financial institutions like regional rural bank, Local Area Bank ( LAB) , NBFCs , village banks which have emerged as champion of inclusion of rural mass ? Why have been allowed to exist without any accountability and responsibility for mandatory social banking ? In this context will the so called Payment bank “also run” in rural financial landscape?
Last will the new arrival nurtured with digital means lead to reduce or widen the gulf of inequality in India ?
Dr Rengarajan

10 September 2015 Submitted by John BaRoss (not verified)

Good article. Throughout 2015 there was uncertainty and speculation with what exactly the RBI was looking for in considering the 41 applicants. Kabir and Anand did a reasonable job in discerning what the RBI's selection criteria priorities were focused on.

The RBI deserves kudos for pioneering the Payments Bank model (fundamentally opening up licensing of providing basic financial services by non-traditional banks). What we do know is that no other approaches to advancing financial inclusion by traditional banks have made meaningful progress in India. While not known before the RBI's announcement of the 11 selected, now it is clear that the prominence of Carriers/ MNOs looks logical. The Carrier industry currently is #1 at distribution/ access to the last mile in India and globally. Carriers have over 7B mobile accounts globally which represents over 7B established transacting relationships (nearly equaling the world's population).

"Carrier Mobile Money" has been the #1 innovation in the mobile commerce industry in recent years so the RBI's choices of granting licenses to all Carriers/MNOs applicants is not based on theory, but reality that "Carrier Commerce" helps advance financial inclusion broader, deeper and faster.

Of course there will be challenges and details to work through as the 11 pivot to launching and scaling. The target populations for Payments Banks will play a major role too as they will select which of the 11 methods are most adaptable to their life styles. Watch for India's Payments Bank models to become global flagships to guide accelerating financial inclusion to the other 80% of the world's ~2B remaining unbanked beyond India.

14 September 2015 Submitted by Y p issar (not verified)

1.RBI has a tendency to convert every type of institution like NBFCs, mfi, payment organisation into a bank and then regulate it in a uniform manner. If the institution in the process loses its usp, it is its problem. RBI has very limited range of regulatory bandwidth and hence a payment bank structure.
2. Telcos were not agreeing to tie up with banks and keep overnight floats with the latter. To still bring these on board, next best thing for RBI was to convert these into limited mandate bank. RBI correctly does not believe is letting public deposits with any institution in Indian milieu except a bank.
3. It may be even better to call these Nachiketa More Banks. Mr More headed the committee which proposed the concept. He being insider got the two vital conditions relaxed- on seeking local address of customers, and the 30 km distance limit between the base branch and Agent location, which only made use of technology possible and with eKYC based on Aadhaar, opening of accounts a straight through processing action. He then chaired the independent committee recommending the names for consideration as payment bank. Finally as a RBI director he was part of the approval process. ( He is known as close to RBI governor and even was tipped to be fifth Dy Governor.) Never seen such an influence of one person on banking policy!
4. Not permitting these banks to have term deposits within 1 lakh deposit limit is impractical and sooner the RBI lifts it better it is. Otherwise, account holders /the customers will be disadvantaged by keeping funds at 4% rate in savings account or search for other bank.
5. Let us not expect any financial inclusion efforts from these as the margins are thin and entire focus is going on the remittance corridors to tap business and earn handsome commission, and thus being viable.
6. RBI needs to set up a separate Ombudsman or Rgulator for BC agents if their malpractices are to be controlled and illiterate/poor consumer protected. If the record of public sector banks is not very high in consumer protection, expecting the high standards from private institutions is asking for the moon. RBI must in the initial years set very high standards of behaviour for payment banks and monitor closely.
7. Tag of a bank shall give lot of credibility to these institutions with poorer sections of society.
Let us wish these banks do not remain an urban phenomenon and also reach the hinterlands which are the ones waiting for formal banking services for ages.

03 October 2015 Submitted by ramanujan (not verified)

Payments Bank is the current optimum thought process in pushing Financial Inclusion in the unbanked and under-banked areas of India. The cast-mix reflects strong mobile players (MNOs) who would like to exploit mobile/digital payments technology,IndiaPost with it's massive outreach and Trust-surplus factor and a few others who have niche strenghts. The interesting thing to watch will be how the MNOs will reach the last mile and how IndiaPost will energize it's network with technology.Collaboration between the two will be formidable and strategic for their survival.
The Payments Bank will be transactions driven and earn fees and commisions.Margins are thin because Asset-Liabilities are largely pre-defined and narrow. So it's a game of hi-volume/low-value business. For solo players competition will be tough and market might see shakedown in a couple of years. FI as an economic agenda is too huge,too complex and too unremunerative to get into. The way forward for all the applicants would be to sit together,pool their USPs and form a network of alliances so that there is something for everybody in this social game. If the players haven't understood the nature of the game each one them will stand to lose,Payments Bank is not so much about banking as much as Financial Inclusion and if the FI objective is not met then the Regulator will be within it's rights to penalize/annul the license.

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