The Payments Banks are in their infancy. But, going by their mandate and technological prowess, the potential to grow abounds. Notwithstanding, they need to worry about cyber risks associated with remittance business. The ultimate determinant of success in payments business is the cost of remittance.
Dr Manas R Das
The Payments Banks (hereafter PBs)debuted in the Indian banking scene following the recommendations of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households(2014) (Chairman: Nachiket Mor). The principal objective of PBs is to help expand financial inclusion by providing(i) small savings accounts and (ii) digitalized payments/remittance facilities to migrant labourers, small businesses, low-income households and other entities in the unorganised sector. At Mar-end 2020, there were six PBs in operation.
The combined balance sheet of the six SFBs at Mar-end 2020 stood at Rs.8,424 crore. Deposits constituted 27.4% of the total sources of funds.On the assets side, Balances with Banks & Money at Call/Short Notice and Investments constituted 73.3% of the total – 24.9% and 48.4% respectively. The investment/deposit ratio stood at 176.8%.
Since PBs are prohibited from lending, their interest income comprised income from balances with RBI and investments in interest-bearing instruments. For the financial year 2019-20, interest income contributed a tenth to the total income of Rs.3,464 crore.Non-interest income which contributed the remaining nine-tenth denoted income from remittances, their main business.
Income, Expenditure and Loss
Of the total expenditure of Rs.4,400 crore, interest expenditure constituted just 1.4% and operating expenditure the rest 98.6%. Very low interest expenditure implied low level of deposits/depositors. Expenditure on technology and establishments was reflected in high operating expenses.
The PBs incurred an operating loss of Rs.935 crore and a net loss of Rs.833 crore due to heavy operating expenses.
Net Interest Margin at 4.8%can be considered as good. Return on Assets and Return on Equity stood at -9.9% and -44.7% respectively. The efficiency ratio, i.e., total cost/total income was 125.2%.
During 2019-20, the average amount of remittances by the PBs stood at: Rs.1,765 (inward) and Rs.1,874 (outward). By both value and volume, inward and outward remittances through the Unified Payment Interface had the highest share followed by the Immediate Payment Service channel. The Real Time Gross Settlement channel registered solid growth with its share increasing.
In nutshell,the PBs are in their infancy. However, going by their mandate, the potential to grow abounds. First, the ‘effective’ incidence of financial inclusion, i.e., financial inclusion computed on the basis of number of active bank accounts, instead of total number of accounts opened, is still low. It indicates that the PBs have a fertile land to till.
Second, with the mobile technology accelerating day by day with operating systems and procedures becoming increasingly simple,large swings in favour of digital transactions are in sight. Th PBs can capitalize on that. Further, over time, an expanding customer base and transactions will lead the PBs to reap economies of scale, and their operating expenses will come down.
Third, since the PBs are not into lending activities, they can focus majorly on customer acquisition and services to be rendered. Notwithstanding, they need to worry about cyber risks associated with remittance business.They have to build appropriate and adequate firewalls against cyber frauds and constantly update those.
Fourth, the PBs need to have good funds managers to place their funds in markets.
However, PBs are bound to face stiff competition from the commercial banks,especially the Public Sector Banks, as they are established players in rural to metro areas in several ways.
The ultimate determinant of success in payments business is the cost of remittance,without compromising on safety, security and timeliness of the transactions. It will be the differentiator between who will survive and who will not.
Payments business is,by nature, tech- and capital-intensive. This, coupled with several players in the turf, can generate diseconomies. Therefore, going ahead, the players need to explore alliances – strategic and technological – among themselves. That will help keep their cost low and maximize business as well as customer delight.
Customer education, especially related to the rules and regulations, and awareness about safety and security of their remittances against the backdrop of rising cyber insecurity is yet another determinant.
Finally, in order to avoid overcrowding, regulators need to give licences in a planned way. Besides, regulations need to be up-to-date in keeping with the fast-evolving technology, its uses and abuses.
About the Author:Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medallist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.