Long live India Post Payments Bank
AJune 2016 report in Mint described India Post Payments Bank (IPPB) as the "hottest game in town". Some 50 entities, including International Finance Corp., Barclays Plc., Deutsche Bank AG, Citibank NA and several state-owned banks were jostling to form different kinds of partnerships with the department of posts, or DoP, the promoter of the payments bank. Apparently, commercial banks, insurance firms and asset management companies were making a beeline to form equity partnerships, joint ventures and many other mutually beneficial arrangements with IPPB.
It's almost a year since its first two "pilot" branches at Raipur (Chhattisgarh) and Ranchi (Jharkhand) were inaugurated by finance minister Arun Jaitley and minister of state for communications Manoj Sinha through video conferencing. Where are these banks, insurance firms and asset management companies? How has IPPB been doing? IPPB has a customer base of a few thousands and its deposit kitty is less than Rs1 crore.
The objective of this column is not to write an obituary of this initiative-something I had done not so long ago for Bharatiya Mahila Bank Ltd, a misadventure of the erstwhile United Progressive Alliance-led government. Of the 11 entities that had got the Reserve Bank of India's (RBI's) in-principle approval to set up payments banks so far, only four-including IPPB-have gone live and three have opted out even as another four are busy sorting out regulatory, technical and business issues.
There seems to be something inherently wrong with the business model itself. On top of that, IPPB, being government-owned, has unique challenges.
Going by the RBI guidelines for payments banks, there is a need for transactions and savings accounts for the underserved in the population. Also, remittances have both macroeconomic benefits for the region receiving them as well as microeconomic benefits for the recipients. Higher transaction costs of making remittances shrink these benefits. So, the primary objective of setting up payments banks is to "further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, lowincome households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology-driven environment."
Most of these services are currently provided by India's mainstream banks, albeit with a degree of reluctance as these activities are seen to be loss-making. The challenge is how to make profits out of these services. IPPB started operations with a borrowed information technology (IT) platform from Punjab National Bank (PNB). How will a bank with very different objectives move ahead on the IT platform of a conventional universal bank? Can banking by surrogacy succeed in the payments space? A large number of bankers coming on board from PNB on deputation hasn't helped the cause either.
Most regulatory constraints that universal commercial banks face are applicable to the payment banks as well even though their product line is thin and so are the revenue streams. IPPB, like all other payment banks (and small finance banks), is required to maintain 15% minimum capital adequacy ratio and also the cash reserve ratio, or the mandatory deposits with RBI on which it does not earn any interest (currently, it is 4% of deposits). On top of this, a payments bank needs to invest 100% of its demand deposits (it cannot take fixed deposits and recurring deposits) in government securities and deposits of scheduled commercial banks in the ratio of 3:1.
So, how will a payments bank make money? It cannot make money from deposits as the return typically is less than the cost of deposits; it can make money from payments transactions only if it has a robust, secured and comprehensive technology platform that enables clients and service providers to come together seamlessly and transact at an extremely competitive cost. The regulatory capital of Rs100 crore seems to be too little to create such infrastructure. RBI's operational guidelines and regulatory controls give one the feeling that it wants to create banking fair price shops in the guise of payment banks.