Recent reports about payment banks approaching the Reserve Bank of India (RBI) seeking permission to start lending to their customers reflects the predicament they are in. They have played a reasonable role in extending monetary facilities to the under-served and many of them are also able to make profits, but their business model is not scalable and they face stiff competition from new age fintech companies.
While the payment banks want RBI to permit them to lend to retail borrowers with loan size up to ₹2 lakh which matches their average deposit size, allowing them to engage in lending activities was not the intention when the licenses were initially given in 2014. These banks were intended to enable only cash and deposit management of smaller customers. Allowing them to begin lending operations is not the right solution as lending activities should be restricted to entities such as scheduled commercial banks and NBFCs which follow tight guidelines on capital adequacy and risk mitigation. Also, many of these payment banks are owned by corporate houses, which increases the risk in allowing them entry into the lending segment. There is however a strong case for allowing these banks to continue to be in operations and RBI should look for other alternative revenue streams for them.
While initially 11 payment bank licences were handed out in 2014, five of the banks withdrew from the space, even before commencing operations, largely due to fear of competition from fintech players. Currently the industry is split between six players, including state-run India Post Payments Bank. The popular belief, that payments banks have not taken off as envisaged, is not entirely true. Three players — Airtel Payments Bank, Fino Payments Bank and Paytm Payments Bank are profitable and making inroads into the less-catered urban and rural markets, proving that this model isn’t a failure. These banks have the potential to replace banking correspondents with a more credible and reliable infrastructure and more transparent service. The model has demonstrated that steady flow of fee income is good enough for these businesses to operate profitably.
That said, the payments-as-service has evolved in the last five years. With more number of people adopting the digital route for payments, fintech companies have been gaining a large market share. The RBI has streamlined the fintech payment segment by handing out payment aggregator and payments gateway licenses. The licensing guidelines of payment banks, which was only superficially changed in 2021 needs an overhaul. Instead of opening the window to lending, they could be permitted to operate in the end-to-end of payments domain (acquirer, gateway and processor all in one). Since the demand for these services is growing, allowing credible players such as India Post in this segment will serve customer interest well and give the payment banks a more sustainable business model.