Payments banks approach RBI to rehaul regulations 

With the payments bank model not evolving in the expected way, industry participants approached the Reserve Bank of India to reconsider the regulations.

Industry participants point out that unlike other categories of banking channels such as microfinance banks and universal banks that have seen significant changes in their licensing guidelines since the time they came into force, the payments banking space has not made significant progress in the terms of its operating framework.

Since these banks were conceived, licensed and operated, a lot has changed in the payments industry. “But the laws governing payments banks have remained more or less the same,” said a senior executive at a payments bank, who asked not to be named.

Not a source of income

It is no longer a matter of existence but of expansion opportunities, sources said. Payments banks have approached the banking regulator to allow them to operate in the small retail loan space, sources said.

“Ultimately, if we have to build a balance sheet, we need to focus on building assets and this cannot be done in the current framework,” said the CEO of the Payments Bank.

He added, “This has become a constraint on building the deposit book because unless there are ways to propagate it, raising it (deposits) is just an additional cost for us, not a revenue stream.”

Why lend?

Payments banking players believe that allowing them to tap into the small retail loan market may help them differentiate between correspondent banks, payment aggregators and other players in the payments system.

Moreover, relying solely on treasury earnings on government securities may not be a viable option from a deposit deployment perspective.

However, the RBI is believed to be reluctant to let these players into the lending business. “Some of them are being promoted by large conglomerates and with payments banks having the option to turn into smaller finance banks, it could mean a back door entry into the main banking business,” said one person familiar with the matter.

To set the record straight, Payments banks can now raise up to $2 lakh deposits from customers; It is limited to ₹1 lakh till 2021. However, now with the interest rate cycle turning positive, it has helped the banks to generate float income from these deposits, which in turn has helped most of the players in preventing the state-owned Postal Payments Bank of India to close the financial year 23 with net earnings.

In August 2015, the Reserve Bank of India granted 11 payments banking licenses out of which five entities gave up their licenses without even starting the business, leaving only six active players in the sector at present.