Technology-oriented business models of Payments Banks (PBs) are no longer their niche as almost all banks are leveraging technology to improve and expand delivery of financial services and products, as per a RBI report.
“These efforts (leveraging technology) have received a boost with the establishment of digital banking units (DBUs). Against this backdrop, concerns are being raised in some quarters about the viability and sustainability of differentiated banking models,” RBI said in its Report on Trend and Progress of Banking in India 2021-22.
The central bank said it needs to be ensured that business models of PBs are sufficiently robust and good governance and technological standards are adhered to so that they survive in a competitive environment.
PBs were set up as niche entities to facilitate small savings and to provide payments and remittance services to migrant labour, low-income households, small businesses and other unorganised sector entities.
Improving numbers
As of end-March 2022, six PBs were operational, of which only three managed to become profitable in their operations.
“Notwithstanding the increase in both interest and non-interest income, PBs ended 2021-22 with losses due to high operating expenses,” RBI said.
The net loss of PBs narrowed to ₹130 crore in FY22 from ₹798 crore in FY21.
PBs earn their revenues primarily from six income streams: (i) earnings from micro-ATMs for providing remittances and cash withdrawal services to customers; (ii) providing business correspondent services to other banks; (iii) transaction charges on utility bill payments and other small transactions; (iv) cash management/ collection services; (v) commissions on transactions through PoS terminals and MDR charges; and (vi) para banking activities.
Since PBs are barred from offering credit as a product, their interest earnings are low.
Reduction in losses
Although efficiency, measured by the cost-to-income ratio, improved for the fourth consecutive year, margins were thin even for the profitable PBs, the report said.
Their net interest margin declined for the third consecutive year (from 4.8 per cent in FY20 to 2.8 per cent in FY21 and 2.3 per cent in FY22).
RBI said other performance metrics such as return on assets, return on equity, operating profit to working funds ratio and profit margins remained negative during the year, but the extent of losses reduced considerably.