Why India Post Payments Bank Wants To Change Its Model

India Post Payments Bank is considering a change in its business model less than a year after it launched full-fledged operations. The payments bank is evaluating a conversion to a small finance bank—a model which will allow it to lend to small businesses along with providing payment services.

The in-principle decision was taken at the annual meeting of heads of circles of India Post, PTI reported on Thursday.

Suresh Sethi, chief executive officer of IPPB, told BloombergQuint that the company is evaluating the SFB model and how the payments bank can transition over time to a micro-lending institution.

Since its launch in September last year, IPPB has trained over 2,00,000 postmen and Gramin Dak Sewaks to provide doorstep banking services and set up nearly to 1.35 lakh banking access points, Sethi said. Sethi said IPPB has mobilised over Rs 200 crore in deposits till date with over 85 lakh customers across the country. He declined to share data on profitability of the venture.

At present, IPPB offers mobile banking, micro-ATMs and SMS and missed-call banking remittance services, merchant and bill payment services through a tie up with the Bharat Bill Payment System.

To this, the payments bank will add micro credit offering should the conversion to a small finance bank materialise. IPPB has already been accorded scheduled bank status and included in the second schedule of the RBI Act of 1934.

Not The First Attempt

The Postal Department has been toying with the idea of launching banking operations for more than a decade. It first considered the option in 2007 but shelved the plan due to the global financial crisis.

In July 2013 the DoP applied for a universal banking license when the Reserve Bank of India opened up a new round of bank licences. However, at the time, the RBI did not consider the postal department’s application as the regulator was not inclined to add another public-sector bank to the existing ecosystem, a senior banking analyst told BloombergQuint requesting anonymity.

In early 2015, India Post applied for a payments bank licence and was one of the entities that got regulatory approval for the same.

If IPPB were to convert into an SFB it would continue to be a wholly-owned government entity under the DoP’s ambit, Sethi said. He declined to comment on specifics of any discussions with the regulator.

The RBI, in June, said that it would allow on-tap licensing for small finance banks. Sethi said IPPB is watching out for those guidelines.

Viability Of Payments Banks

The RBI released guidelines for the licensing of payments bank in November 2014.

The rules place a cap on deposits at Rs 1 lakh per customer and prevent any direct lending. Since industrial corporations were allowed to participate in this banking model, strict restrictions were also placed on where these deposits could be deployed, with a large chunk of them mandated to be invested in government securities.

As a result, payments banks earn no interest income on loans and little on deposits. This means that payments banks are solely reliant on the fee income they earn for processing transactions and cross-selling third-party services. Most payments banks were being used for remittances but with a number of digital options emerging for bank transfers in the last few years, that market, too, has become crowded.

As a result, payments banks have found it difficult to become profitable. In 2017-18, payments banks reported collective losses of Rs 516.5 crore, showed data included by the RBI in its ‘Trends and Progress In Banking’ report released in December 2018. Data for 2018-19 is not available.

The practical challenges have meant that only six of the 11 licensed payments bank players are operational today. IPPB is one of them.

Sethi said that with several payments services, from money transfer to e-commerce getting cheaper with competition and technology, “the margins that one used to earn are getting smaller”. As such, payments banks can only earn revenue by cross-selling third-party products like insurance and mutual funds.

Sethi added that for now IPPB is looking at opportunities to monetise the transaction data that it has collected from its customers. This would enable the payments bank to create credit-scoring capabilities for this segment of customers, he said. IPPB also earns from the fee it charges for transactions. At present, these charges are set between Rs 15-25 per transaction but IPPB is looking at moderating some of these charges based on the feedback received from customers, Sethi said.

A few weeks before the IPPB commenced operations, the goverment revised its outlay for the ‘asset-light’ bank from Rs 800 crore to Rs 1,435 crore. Around Rs 400 crore was to be used for technology investments and Rs 235 crore for human resource costs, the government said in a statement.

Sethi said that IPPB may need further government equity if it were to become an SFB, both to meet regulatory requirements and to build out lending infrastructure.