Trends in BankingPart-IV

Payment Banks(A threat to universal Banks)

Reliance Industries Aditya Birla Nuvo Vodafone

Bharti Airtel

Department of Post (DoP)

Vijay Shekhar Sharma

(PayTm founder)

Cholamandalam Distribution Services Tech Mahindra

National Securities Depository

Limited(NSDL)

Fino PayTech Dilip Shanghvi (Sun Pharma promoter)

11 entties that got in-principle approval by RBI for payment banks

RBI in August allowed 11 business houses including Reliance Industries, Aditya Birla Group & leading telecom companies Airtel & Vodafone to start payment

banks-Bharti Airtel & Reliance Industries had earlier tied-up with

Kotak Mahindra Bank & SBI for payment bank operations. The Reliance-SBI payments bank has an ambitious plan to cover

2,50,000 villages & 5000 towns in 3 years-Reliance SBI plans to start with a Rs.100 crore capital base &

this will be ramped upto Rs.400 crore in 3-4 years depending on business volumes

Vijay Shekhar Sharma, CEO of One 97 Communications that has PayTm as its flagship brand was one among the successful candidates

Sun Pharma promoter Dilip Shanghvi (who applied in his own name & not as Sun Pharmaceuticals

Industries also got the license. Norwegian Telecom Giant Telenor has also entered into a deal with

Dilip Shanghvi & infra financier IDFC to venture into the payments banks space

The Department of Post & Aditya Birla Nuvo both unsuccessful for universal bank licenses in 2014,succeeded this time

Payments banks will mainly deal in remittance services & accept deposits of upto Rs.1 lakh. They will not lend to customers & will have to deploy

their funds in Govt papers & bank deposits

Payment Banks-A Brief outline

Dos & Dont’s of Payment Banks

DO’s of Payment Banks Dont’s of Payment Banks

Has to use the word Payment’s Bank in its name to differentiate from other banks

No NRO Deposits should be accepted

Accept demand deposits (i.e, Current Deposits & Savings Bank Deposits from individuals ,small businesses & other

entities)

Cannot issue Credit Card

To hold a maximum balance of Rs.1 lakh per individual Not allowed to set-up subsidiaries to undertake Non-Banking Financial Services activities

Allowed to use Debit Cards & also offer Internet Banking

Other Financial & Non-Financial Services activities of the promoters should not be mingled with the working

of payment banks

Can accept a large pool of money to be remitted but at the end of the day the balance should not exceed Rs.1 lakh

Can accept remittances to be sent to or receive remittances from multiple banks

Permitted to handle cross-border remittance transactions in the nature of personal payments/remittances on the Current A/c

Allowed to distribute Mutual Fund products, Insurance products & Pension products

Bank can also undertake Utility Bill Payments

Department of Post(DoP)-Payments Bank Case Study

Amendments will have to be made in the financial rule of the Dept to include banking as a mandate. The DoP is open to partnerships with the other entities which got payment bank licenses from RBI.Under the payments bank, the initial plan of DoP is to have 650 main branches where the Dept has a head or bigger post offices. Subsequently 25,000 spoke branches will be set-up. The other 13,000 Post Offices will act as a business correspondent

DoP has planned to

invest Rs.300-400

crore for setting up payment bank for

Which it has started

preparing a note for

approval by the Public Investment Board(PIB)

According to the detailed project report by Ernst & Young for DoP, the payment bank will be able to break-even in 5 years once operations start. DoP will earn a revenue of Rs.250 crores in the first year from the new banking entity expected to go up to Rs.600-700 crores annually in the five years

The new unit to be financially & administratively independent &

will use the existing

infrastructure of the Dept & also pay user charges

to the Dept

By RBI guidelines the first branch of a payment bank has to be set-up within 18 months from the

date of license. In the budget speech this year, Finance Minister Arun Jaitley had said that the

Govt was committed to increase the access of people to the formal financial system

RBI ‘s fast move to establish Banks in IndiaThe 11 entities are required to have an

initial capital of Rs.100 crore each & will have to start operations within 18 months from the date of license. The promoters

minimum initial contribution to equity capital will have to be

atleast 40% for the first five years

-This is for the first time in the history of India’s banking sector that

differentiated banking license are given out by RBI

for undertaking specific activities

-RBI has already come out with a second set of such licenses known as “small

finance Banks”-The RBI’s move is seen as

a major step in pushing financial inclusion in

the country

The 11 candidates for payment bank licenses were chosen from 41 applicants after applying fit-&-proper criteria & successful track

record in conducting business for 5 years

-An External Advisory Committee(EAC) headed by

RBI Board member Nachiket Mor scrutinized all applications & sent its

recommendations

The recommendations of the EAC were an input

for an Internal Screening Committee(ISC)

consisting of the RBI Governor & the 4

Deputy Governors. The ISC prepared a final list of recommendations for

the Committee of the Central Board(CCB)

The process for granting licenses was completed within a year compared

with 4 years for universal banking licenses given

out last year

Are Universal Banks at threat

Impact on Private Banks & Large Public Sector Banks

oThe impact on private sector banks will be minimal because they have already made strong investments in TechnologyoBanks like Kotak Mahindra Bank, Yes Bank, ICICI Bank have all tied up with payment Banks & hence will not be affected muchoSome of the Large Public Sector Banks have also tied-up with payment banks

Impact on Small & Medium Public Sector Banks

There could be an impact on small & medium public sector banks as incremental

deposit growth & market share will see some impact from payment banks especially in

rural & semi-urban areas Public sector banks are also seeing their Current & Savings Bank Account (CASA) share slowing & have a huge pile of Bad

Debts that is affecting their profitability & growth

India Post-A Big competitor for many banks

India-Post V/s

Other Banks

Since Payment Banks are allowed to take Deposits upto Rs.1 lakh, Public Sector

Banks could lose out on customers who

might open Savings Bank Account with

Post-Office

A big pressure on Public Sector Banks

could arise from India-Post which has

received the Payment Bank approval. India-

Post’s reach with 1,39,000 post

offices significantly exceeds the number of

Public Sector Bank branches at around

44,700 in rural areas

Post-Offices have long been trusted

for long-term Deposits & by offering CASA Deposits, they

could potentially cannibalize Public

Sector Bank’s CASA share in rural markets

which makes-up around 90-90-

95% of the CASA Deposit according

to a Nomura Global Markets Research note

dated 19th August

How can Payment bank have a edge over other

universal banks

Competitive Deposit ratesPayment Banks could also start offering competitive Deposit rates as high as 6-7% to lure customers compared with the average of 4% Savings Deposit rates of many Public Sector Banks-according to Ambit Capital Pvt.Ltd. This could weigh on the deposit franchise of Public Sector Banks in the long run

Payment Banks backed by strong Technology & capitalBesides the threat to Deposits, competition for state-owned banks will intensify as payment banks which are backed by Digital platforms, adequate capital, zero legal issues & low-cost innovative & convenient services will compete heavily for liabilities in rural & semi-urban areas

Decline in Market ShareThere could be a loss of market share in payment transactions & Government transfers also-according to CSLA report

Is RBI pushing banks for high growth

From 2015,competition is only get tougher & tougher & RBI has also announced the list of small

finance banks. That means, in the longer term, some of the small Public Sector Banks may remain

under pressure particularly those that are strapped for cash & cannot participate fully once a

full-fledged recovery happens

India is far from being the only country where Technology armed with Financial Apps is challenging traditional banks.For instance in China-Mobile Apps have mushroomed & have started threatening the backward & inefficient traditional banks so much so that many customers have switched directly from Cash Transactions to Banking through Mobile Apps

RIL-SBI Payments Banks to push Digital Banking

(Reliance has entered into a partnership with State Bank of India for Payments Bank)

RIL which has been granted a Payment Bank license by the

RBI believes that the new bank will be able

to push the digitization of

payments in the country.RIL has entered into a

partnership with SBI for payments bank.

While RIL is the promoter, SBI will be

the Joint-Venture partner with equity investment of 30%

The new bank will be able to leverage Reliance Jio’s

Telecom Network & retail business’s online/offline

presence. On the other hand, SBI will help in

enhancing product capabilities & also provide a strong

distribution networkThe payment bank is

integral to RIL’s digital initiative in a rapidly converging world of telecom,

internet, commerce, media & financial

services

-Mukesh Ambani

RIL-SBI in a first-of-its-kind public-private

partnership have joined on a mission to make India’s financial

services digitally smart. SBI’s vast

experience in structuring financial products for different customer segments

will be combined with the digital access

provided by RIL in completing the most efficient, simple & affordable delivery model with utmost focus on Financial

Inclusion

The payment bank alliance between RIL-

SBI will help in delivering Digital

Banking products & services & will also help in promoting

digital transactions by offering simple

products conveniently at a low cost

RBI’s one big next moveSmall Finance Banks

After granting in-principle approval to

11 applicants for Payment Banks, RBI is ready for another move

for small finance banks. Both Payment & small finance banks

will help deepen financial inclusion in

IndiaRBI had received a total of 113

Applications from players keen to set-up

niche banks like payment & small

finance banks. There were 72 applicants for small finance banks & 41 for payment banks

Small Finance Banks will be similar to

existing commercial lenders & will

undertake basic banking activities of accepting deposits &

lending to unserved & under-served sections.

The maximum loan size & investment limit exposure to single & group obligors cannot be more than 10 & 15% of its capital funds.

-Atleast 50% of their loan portfolio has to include

loans & advances of upto Rs.25 lakhs as per RBI

regulations

The credit growth of the banking system has

slowed down & a key factor has been high

lending rates. India Inc has preferred borrowing from the market where

rates have fallen. Though RBI has cut the repo rate or the rate at which banks borrow from the central bank, banks have been reluctant to pass on the

cuts

-RBI Governor says Banks needs to frontload transmission of monetary

policy. They should reduce lending rates for

boosting demand especially in retail. There

is an uptick in demand-In recent times bad loans have been on the rise. The thing that worries RBI is that how banks recognize

distressed assets in the first place

New Banks et to create 25,000

small town jobs

Varansi based Utkarsh Micro Finance-Utkarsh plans to recruit 2,000 people in the next 18 months & another 2000 over the ensuing three years. Utkarsh operations are based in Bihar, Uttar Pradesh, Jharkand & Madhya Pradesh. They have a total staff strength of 2,200.

IDFCIDFC plans

to begin operations with few branches

than Bandhan’s

500.In 2014,it has recruited 2000

people for its rural

operations

Bandhan Bank-Has recruited 8,500 people in 2014 taking its workforce to 19,500.Nearly 80% of the Bandhan’s staff is posted in small towns & villages.

Ujjivan Financial Services

-is one of the biggest Micro

Finance Institution

has a requirement for 3000 field staff

The starting salary of a filed worker in a microfinance institution is Rs.15,000 & after recent wage hikes in the banking sector, the entry level salary of a bank clerk is Rs.20,000.The new banks have to match their salary according to the new changes. Thrissur-based ESSAF Microfinance

-will need 1,000 new recruits ahead of banking foray

The newly licensed banks will create 25,000 jobs in small towns & villages

•Bandhan & IDFC Bank has already recruited

•The data for Au Financiers, Capital Local Area, Equitas, RGVN is based on informal average estimates by Industry experts on a conservative basis

•Approx.25,000 Jobs to be created in this sector

Anup George RebelloAsst.Manager

The Catholic Syrian Bank Ltd(anuprebello.6@gmail.com)

http://www.slideshare.net/anuppresentations