Why are payments banks failing?

It is reported that India Post Payments Bank is struggling to survive with mounting salary bills and very little business. This is not totally unanticipated.

Just some months back, Aditya Birla Idea Payments Bank Ltd, which is a full service digital bank, informed that it was winding up its operations. The decision, the bank said, had been taken due to unanticipated developments in the business landscape that have made the economic model unviable. In fact, thebank had started its operations only in February 2018. Vodafone Idea Ltd has decided to close its m-pesa vertical following the closure of Aditya Birla Idea Payments Bank, in which it was being merged with.

The Reserve Bank of India had issued guidelines for payments banks in November 2014 with the objective of improving financial inclusion. Right from the beginning there were reservations about the viability of payments banks as the operations of these banks are very restricted. Though they are called banks, their functions are similar to those of deposit-taking companies.

Dropping out

Cholamandalam Distribution Services Ltd was granted approval to launch a payments bank in 2015, but it dropped out a year later citing profitability concerns. Tech Mahindra had secured licence but failed to start citing thin margins and the long wait for return on investments.

Sun Pharma promoter Dilip Shanghvi (who teamed up with IDFC Bank and Telenor Financial Services) had also secured licence, but did not begin operations for reasons best known to him.

Finally, Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, Paytm Payments Bank and NSDL Payments Bank are the only ones that are functioning.

Tough time ahead

Airtel Payments Bank reported a 10 per cent increase in its loss at ₹272 crore during fiscal 2017-18 against a loss of ₹244 crore in the year-ago period.

India Post Payments Bank was launched only in September 2018 and the then Telecom Minister Manoj Sinha expected that the bank would be profitable after two years. But the current status of the bank does not support his views.

According to Rishi Gupta, MD and CEO of Fino Payments Bank, the bank will post losses this year since it is on expansion mode and in the second year it will start consolidating and focus on profitability. He is optimistic about Fino turning profitable by 2020.

Jio Payments Bank, which is part of Reliance group, got licence in August 2015 but started operations only in April 2018

Paytm Payments Bank has turned profitable within its second year of operation, reporting a profit of ₹19 crore for the financial year 2018-2019.

NSDL Payments Bank started operations only October 2018.

From this it is evident that there were not many takers for the idea of starting a payments bank. Even after obtaining licence some have left without starting. The payments banks that have become operational are having a tough time.

Why are they unviable?

It is fundamental that banks can sustain only if they are profitable in short as well as long term. A bank’s profit is mainly from its lending (financial intermediary) operations. Profits generated by other activities form a very small percentage. The ‘other income’ component can only supplement a bank’s revenues. Any bank’s failure is on account of insufficient net interest income margin and not on account of lack of ‘other income’.

When these payments banks are restricted from giving loans and advances, one cannot expect them to thrive merely on commission earned on making remittances.

A payments bank’s deposit portfolio is restricted — it can take only up to ₹1 lakh as deposit from a customer. These banks have to maintain Cash Reserve Ratio on their deposits. Apart from CRR with the RBI, they are required to invest minimum 75 per cent of their “demand deposit balances” in government securities/treasury bills (with maturity up to one year) that are recognised by the RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR) and hold a maximum of 25 per cent in current and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. These prescriptions cannot yield much income to the bank.

As if the CRR, SLR and non-lending provisions are not enough for the safety of deposit, the eligible deposits mobilised by the payments bank is covered under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). This involves payment of guarantee commission by the bank.

It was prescribed that the minimum paid-up equity capital for a payments banks shall be ₹100 crore and the payments bank should have a leverage ratio of not less than 3 per cent — that is, its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

These restrictions do not leave any scope for sufficient earning for the bank or its promoters. Hence the day may not be far off when more payments banks exit the scene. Some of these payments banks are toying with the idea of converting themselves into small finance banks.

It is better to wind up these banks or merge them with other commercial banks to save depositors’ money.

The writer is a retired banker