The Reserve Bank of India's (RBI) new 'on tap' licensing window for Small Finance Banks (SFB) opens the door for Payments Bank to convert themselves into small banks.
Payments Banks are already feeling suffocated under the existing regulatory framework which doesn't allow them to do lending activities while putting a cap on deposits at Rs 1 lakh per depositor. They are also mandated to invest a minimum of 75 per cent of their deposits in government securities where returns are abysmally low. The requests for relaxation in the guidelines by payments bank didn't get any favourable response from the regulator.
This restricted banking framework was one of the reasons why three out of the 11 successful applicants didn't even start operations. Anand Mahindra's Tech Mahindra, South-India based Cholamandalam and Sun Pharma's Dilip Shanghvi surrendered their license right at the start citing long term business viability and profitability issues. Aditya Birla and Vodafone exited soon after starting operations.
Those which have scaled up operations and showing promise have already expressed their intention to convert into small banks. Fino, PayTM and India Post will most likely convert into small banks under the new guidelines.
That leaves the field for Reliance's Jio and NSDL Payments Bank. SFBs have left payments banks behind. In fact, the new banking model under the differentiated banking model was the brain child of former Governor Raghuram Rajan. The objective was to create a new institutional framework for achieving financial inclusion. The traditional commercial banking model was not well suited because of legacy issues, low technology adoption and high cost structure. The idea was novel but the fast changing banking space with digital technology playing a big role had made it unviable as commercial banks are also catching up and doing small value transactions.
The payments bank idea was a sort of experiment. At the time of the licensing, RBI had said that the idea is to start with few licenses, learn from the experiment and then move to on tap licensing of payments bank. There were 41 applicants for payments bank license.
In fact, the fact that wide variety of players given licenses from mobile operators to depository to technology companies was to see which model works. The SFB licenses mostly went to micro finance institutions. The way forward is to relax some payments bank guidelines to make it more attractive.