Payments Banks May Convert To Small Finance Lenders In Three Years: RBI Working Group
An internal working group constituted by the Reserve Bank of India has recommended that payments banks looking to convert to a small finance bank can apply to do so after three years or operations.
This is lower than the minimum five-year threshold which the RBI has set in its on-tap licensing guidelines for small finance banks released in December 2019.
A payments bank seeking to convert to a small finance bank will have the ability to start a lending business, which would result in a more profitable use of the deposits it garners from customers. Currently a payments bank can only provide services such as savings bank account, remittance services and other payment options.
“The RBI’s original licensing guidelines had required that payments banks must have a five year background in the payments space to be able to apply for a license. This means that these entities are not new entrants in the payments space and have experience,” said R Gandhi, former RBI deputy governor and adviser to Paytm Payments Bank. “The working group perhaps took note of this fact and allowed them to convert to small finance bank sooner.”
Payments banks are allowed to invest 75% of their demand deposit balance in government securities or treasury bills with maturity up to one year. From the remaining 25%, the payments banks can also invest in certificate of deposits.
The banking regulator had granted in-principle approvals to 11 entities to start payments banks in 2015. Currently only six payments banks are operational in India, including Paytm Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank and NSDL Payments Bank.
“Permitting conversion to small finance banks provides payments banks an opportunity to strengthen their business model by offering credit at scale to small business and individual customers, primarily by leveraging underlying payments transactions data,” said Fali Hodiwalla, partner—financial services consulting, EY.
“The lending opportunity could be a key driver for payments banks to consider conversion,” he said. “Key use cases that could be addressed post conversion could include receivables’ financing for merchants and short-term personal loans underwritten based on each individual’s transaction pattern.”
The internal working group of the RBI has also recommended easier guidelines for listing of payments banks and small finance banks.
According to the recommendations by the working group, existing payments banks and small finance banks should list within six years from the date of reaching net worth of Rs 500 crore or ten years from the date of commencement of operations, whichever is earlier.
While granting licenses in 2015, the regulator had specified to small finance banks and payments banks that they must list within three years of achieving Rs 500 crore net worth. Even while issuing on-tap licenses for small finance banks, the regulator reiterated this requirement.
For small finance banks, the group has also recommended a higher initial capital requirement of Rs 300 crore, as compared with Rs 200 crore right now.
“The working group perhaps felt that small finance banks would need higher initial capital to invest sufficiently into IT infrastructure and build branch network, besides business growth,” Gandhi said. “Therefore, this should be seen as an attempt to build a strong foundation for small finance banks in India.”