In aggregate, payments banks — Airtel, India Post, Fino, Jio, NSDL and Paytm among them — have seen their losses mount to Rs 626 crore in March 2019 from Rs 515.6 crore the previous year. It raises questions about the banking system that the Reserve Bank introduced in 2015 based on a study report submitted by the bank’s Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by Nachiket Mor. The situation is not new. The payments bank model was introduced with the rural unbanked masses and their financial inclusion in mind. It was also seen as a model aimed at broadening the services of India Post. The idea was to make it viable under circumstances wherein its regular kitty of offerings has seen drastic shrinkage with the advent of telecommunications technologies. However, the India Posts Payments Bank (IPPB) was reported to be struggling with mounting burden of salaries and limited business. The initial costs of establishing such a bank are huge while they have little space to operate. The challenges in the space are evident from the fact that the losses have mounted despite positive changes in business. According to the ‘Trend and Progress of Banking in India’, these banks saw a 45 per cent increase in interest income — that is, Rs 255 crore — from a year ago. They also saw their other income (including commission on transactions) double from last year to Rs 2,093 crore. The number of payments banks has also risen from five to seven by this year. Further, these banks have seen remittances through them rise by 23 per cent from Rs 89,653 crore to Rs 1.10 lakh crore. UPIs have played a vital role in this as they became the most prominent channel for inward and outward remittances in terms of value and volume. The deposit base of the banks also doubled from Rs 438 crore to Rs 883 crore, despite them not being allowed to collect more than Rs 1 lakh as deposit from individual customers.
What has countervailed all these positives is that the liabilities and provisions of the banks have also nearly doubled to Rs 4,363 crore year-on-year. The total liabilities saw a 45 per cent increase to Rs 7,114 crore from a year back. Added to this, operating expenses have seen a 74 per cent increase year-on-year to Rs 2,925 crore and return on equity worsened from 27.9 per cent to 34 per cent in 2019.
Although the RBI had approved 11 payments banks initially, only seven are operating currently. Sometime back Aditya Birla Idea Payments Bank Ltd, which was a full service digital bank started in February 2018, wound up operations owing to “unanticipated developments in the business landscape that have made the economic model unviable”. Following the merger of Vodafone and Idea the m-pesa PPI also closed. Another failure was that of Cholamandalam Distribution Services Ltd that was granted approval for a payments bank in 2015, but dropped out a year later citing concerns over profit. Tech Mahindra, too, failed to start a payments bank after securing a licence citing thin margins and long time it was likely to take for returns on investment. The silver lining, perhaps, was Paytm, which returned profits within the second year of operation and reported Rs 19 crore profits for financial year 2018-19.
The biggest handicap with payments banks is that they are unable to lend. That leaves them with streams of revenue that are at best supplementary rather than being the main source of income. It cannot be disputed that such banks do serve the needs of the unbanked masses to some extent. The government, therefore, should probably consider issuing them with licences for small finance banks so that they can make their operations profitable, while serving the need of financial inclusion.
The RBI itself has in the meantime launched a semi-closed Prepaid Payment Instrument (PPI) that can be used only for purchase of goods and services up to Rs 10,000 per month. The central bank’s idea is to “give impetus to small value digital payments and for enhanced user experience”. The fact though is that the RBI had itself limited the growth of PPIs when it made KYC mandatory for their operation. Against this backdrop, it is important that the central bank pays attention to prospects of each service it allows. They should be allowed adequate space to evolve into robust systems before undue competition is introduced.