For some, small & payments banks are no big deal

Even as several entities line up for a licence to become a payments bank or a small finance bank, there are some who do not see this as a viable business proposition.

Rajeev Jain, CEO of Pune-based Bajaj Finance, said the business model for payments bank is not viable. “No lending is allowed in payments bank. I don’t think it will work as lending is where my profit comes from,” he explained.

Bajaj Finance applied for a full-service bank, but did not make the cut. The RBI has invited applications for payments and small banks with the intention of providing credit and deposit services to vastly un-banked and under-banked population.

The central bank believes such specialised banks will help reach out to people who have been hitherto untouched by regular full-service banks.

A payments bank will be able to accept deposits but cannot lend. It has to park the amount it accepts as deposits in Government bonds. Small banks, on the other hand, can lend as well as raise deposits, subject to certain caps on both the activities.

According to industry participants, these differentiated banks do not provide the bandwidth for a scalable economic model and also many players will apply only to increase their valuations.

“Considerations like priority sector lending are of big banks, compliance structures are of big banks but the area to operate is small… So this is an entrepreneurial call rather than a business model call,” Jain explained. “I think people will enter the small bank space believing to make it big some day.”

Manish Khera, MD and CFO of mobile money service provider YTS, said most of the applicants for a payments bank licence have chinks in their armour.

According to him there are trust issues with mobile companies, which see a high amount of churn in their customer base.

It is likely that majority of the applicants for a payments bank licence will be mobile service providers and other small financial entities. Khera said: “It’s a liability business, the trust factor and franchise is critical. It’s the customer’s money. Why would the customers trust a new payments bank just because the RBI has licensed it?”

A lot of this excitement, he argued, is primarily to increase their valuation.

Khera was earlier the founder-CEO and Managing Director of FINO PayTech, which has applied for a payments bank licence.

Tuesday is the last date for submitting applications with the RBI. Players who have applied include Bharti Airtel and Dewan Housing Finance.