ANALYSIS. Airtel Payments Bank: Disruption at a cost

Ever since the RBI doled out payments bank licenses to various entities — from mobile operators and niche NBFCs to deep-pocketed corporates — the industry has been keenly awaiting the interest rate that these players would offer on their deposits.

The speculation was put to rest on Wednesday, when Airtel Payments Bank (subsidiary of Bharti Airtel) — the first to commence operations — set the rate on its savings deposits at 7.25 per cent, far higher than what most banks offer currently. The payments space hitherto consisting of prepaid cards and mobile wallets, has also been shaken up as the money you load in these wallets, does not earn you any interest.

But Airtel Payments Bank will have to pay a price for such disruption. A back-of-the-envelope calculation shows that Airtel may incur a loss of close to 1.25 per cent on each deposit.

As per the RBI guidelines, payments banks are allowed to take deposits up to ₹1 lakh per account. Such niche banks can provide payment and remittance services through various channels and can issue debit cards. But these banks cannot lend money or issue credit cards.

The income of these banks will mostly consist of interest from its investments in safe government securities and fee income that it can earn by distributing simple financial products such as mutual funds and insurance. These niche banks need to invest 75 per cent of their deposits in government securities with maturity up to one year and the balance 25 per cent can be parked with commercial banks.

Currently, yield on one-year G-Sec is quoting at about 6 per cent. This means that for every say ₹2,000 deposit, on which Airtel Payments Bank pays 7.25 per cent interest, it will incur a loss of about ₹25 per annum or ₹2 per month. This is a ball park figure and the actual loss can vary depending on other factors. But it is evident that the bank will be paying some price to rope in customers in the initial period.

Entities that provide payment services through prepaid cards, mobile wallets and online platforms have been infringing on banks’ turf. The RBI paving the way for new format banks has intensified the competitive landscape. To take on competition many large banks, particularly private ones, have been making significant leaps into the digital arena.

The one advantage that new payments bank have over traditional banks, is their far lower operating cost structure, giving them leeway to offer higher interest rate on their deposits. This can help them garner a pie of low-cost deposits. Following the deregulation of interest on savings account from Oct 2011, YES Bank and Kotak Bank, being late entrants, chose a similar strategy to build their deposit base — offering higher rates on savings deposit to catch up with the biggies. The strategy has paid off to a lot extent.

For payments bank, a much higher capital adequacy ratio of 15 per cent against the 9-odd per cent that traditional banks have to adhere to, also works to their advantage. While payments bank do not carry any lending risk, the extra capital can help absorb losses, if any, in the initial phase of ramping up distribution network and business.

While the payments bank operations may incur a loss in the initial period, for Bharti Airtel, the promoter of Airtel Payments Bank, the value-add that it can offer its customers through this differentiated banking services, can help lower its churn of customers.

The cost of acquiring a customer is high and incurring a ₹2 loss per month to retain a customer may not seem like such a bad proposition. Telecom is a near 40 per cent EBITDA margin business for Airtel. The operating guidelines for the new format banks that was released recently by the RBI, has also offered more flexibility. In case of payments banks promoted by a telecom company, the RBI has allowed a seamless transition of mobile users into bank customers, if the KYC norms are already met.