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Monday, July 21, 2014

As RBI opens floodgates, get ready for a Railway Bank, or an Airtel Bank:

Suddenly, we have to view the idea of what it means to be a bank differently. On Thursday (17 July), the Reserve Bank of India put out draft guidelines for the setting up of two new types of banks – payment banks and small banks – and the guidelines are such that we could see a 100 new “banks” over the next five years.

That’s assuming, of course, the RBI does not play dog-in-the-manger and routinely blackballs all applicants it does not consider to be blue blooded.
In the last two decades, the RBI has handed out only 12 private banking licences (including one converted from cooperative banking, Development Credit Bank). Some lost their way and got merged (Bank of Punjab, Timesbank, Centurion Bank, Global Trust Bank), but the survivors are effectively indistinguishable from the others. (What, for example, is the difference between HDFC Bank, UTI Bank, ICICI Bank,  IndusInd Bank, Yes Bank, or Kotak Mahindra?). They all essentially have the same business model – heavy use of technology (ATMs, internet), high service charges, an urban and semi-urban orientation, strong treasury operations, a judicious mix of low-cost and wholesale deposits, et al. Effectively, they created the new idea of the bank – less stodgy than the public sector ones, but essentially exclusive bankers to the better off sections of the urban and semi-urban classes, and operating on high margins.
The addition of two more universal banking licensees three months ago - IDFC and Bandhan – will not necessarily make traditional and new age Indian banking more inclusive. IDFC essentially wants to become a universal bank like the rest and reduce its dependency on infrastructure lending, while Bandhan wants to upgrade from being an inclusive non-bank financier to a proper bank, albeit offering a larger raft of services to its core small borrower constituency.
India needs more banks, differentiated banks, cheaper banks. And the RBI's idea of small banks and payment banks could conceivably threaten the comfy oligopoly among existing big banks.
Small banks are intended to lend to the currently under-banked or under-served constituencies (farmers, unorganised sector, SMEs) in a limited geographical area. Payments banks are simply deposit-taking institutions with no lending operations. They will be “normal” banks as far as depositors are concerned, but account limits (as defined in the draft rules, which could change) cannot exceed Rs 1 lakh per customer. The difference is these banks cannot lend. They have to keep all their money either with the RBI (as cash reserve ratio) or with the government (by investing in bonds/instruments) with up to a year’s tenure left. They can also keep some cash in their vaults to meet expected customer requirements. Payments banks are thus effectively 80 percent lenders to the one borrower who can’t default: the government. So they are safe for depositors.
What these two new categories of “differentiated banks” will do is open up banking to multiple categories of promoters as they have low entry barriers (a start-up capital of only Rs 100 crore): for example, every telecom company that now needs a bank interface to facilitate small payments can, conceivably, set up its own payment bank. Airtel struggles to popularise its Airtel Money payment system. Right now banks allow transfers to Airtel Money accounts (for onward payment of bills) in chunks of Rs 1,500, which means constant need for replenishments. Vodafone has mPesa. Both Airtel and Vodafone – not to speak of Idea or other companies - can set up basic banking operations as payment banks. They could potentially take the whole business of bill payments and other such services away from banks.
Point of comparison: Airtel has around 210 million subscribers, Vodafone 170 million. State Bank of India has around 220 million customers. Potentially, Airtel has the potential to serve as many customers with basic deposit banking as State Bank of India.
Assuming the promoters of Airtel pass the RBI’s fit-and-proper text for starting a payment bank, it could attract a substantial chunk of the dormant savings account balances from traditional banks – the low-cost CASA (current account, savings account) money that is just lying around, earning banks a huge margin. Most banks pay nothing on current accounts and just 4 percent on savings accounts
An Airtel Bank, if it comes to be, would have other advantages. It would need a starting capital of only around Rs 100 crore, and would need nothing more than an internet presence to start and run banking activities. The RBI guidelines specifically allow for internet-based banks.
Secondly, since an Airtel Bank (or an Idea Bank or Vodafone Bank) would invest primarily in government paper of maturities below one year, it can offer higher rates for savings accounts. Interest rates on government paper (91-day to 364-day T-Bills) currently hover around 8.6 percent. Assuming an intermediation cost of even 1-1.25 percent (which is not improbable for an asset-light payment bank with minimal staff and largely driven by technology), an Airtel Bank could offer upto 6.5-7 percent interest on its accounts. Attractive enough for young people with small balances and low long-term investment requirements.
Idle money could thus shift from nationalised banks and private sector banks to an Airtel Bank – even though this will be an additional account. (It is inconceivable that anyone would shift entirely to a Vodafone Bank from SBI, but people will move a lot of billing and transaction funds to such accounts.)
Thirdly, the payment bank option would be attractive to a lot of non-bank financial institutions dealing with small debits and credits. Gold loan companies, for example, may find it useful to float payment banks since typically gold loans are for small-ticket sizes below Rs 1 lakh. More than 60 percent of gold loans fall in this category. A gold lender thus could take the metal as collateral in his NBFC and credit the proceeds to the payment bank and run a moderately profitable banking operation. Manappuram Finance, Muthoot Finance could be interested in either running payment or small banks.
Fourth, it is not inconceivable to see any utility company – say LPG sellers – also starting payment banks if the government shifts to direct cash transfers for payment of subsidies. The subsidised populations run into millions, and it is not a stretch to imagine that an Indian Oil could offer a payment bank to all its LPG customers in urban and rural areas.
Fifth, small banks, meant to cater to a couple of districts and low-value customers such as farmers and small businesses, could allow large companies selling in rural areas (fertiliser and pesticide companies, for example) to set up a small banking operation. Payments of fertiliser subsidies could then go through these banks, and so can other government payments like old age pensions.
The Indian Railways, too, could conceivably run their own payment banks.
Even today’s big banks may see virtue in running a payment bank subsidiary with much lower costs to penetrate newer areas and access low-value customer accounts.

The possibilities are enormous. But one thing is clear. The old hegemony and monopoly of the universal banks is likely to be challenged by the new payment banks and small banks. Five years from now, with a 100 new “differentiated banks” coming into existence, the easy money, high margin days of the SBIs and HDFC Banks may be coming to an end.