Why is RBI asking payments banks to maintain higher capital

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Mumbai: The Reserve Bank of India’s (RBI) recent guidelines around the capital that payments banks need to maintain has stumped many. The regulator has insisted that these new-age banks maintain a higher capital adequacy ratio (CAR) of 15%, of which the tier I and tier II ratios are equally distributed at 7.5% each.

This capital requirement from payments banks is higher than what other universal banks are required to hold. Under Basel III guidelines which are prescribed by the RBI for Indian banks, the minimum CAR is set at 10.25% as on 31 March 2017, which will gradually increase to 11.5% as on 31 March 2019.

Even in the case of the two new universal banks, namely IDFC Bank Ltd and Bandhan Bank Ltd, the regulator has asked for only 13% CAR for the first three years. To be sure, universal banks are required to maintain counter-cyclical buffers and capital conservation buffers, which the payments banks are exempt from.

But why is the RBI asking payments banks to maintain a higher capital when they aren’t allowed to give out loans, except to their own employees? Moreover, 75% of the deposits that they garner are required to be invested in government securities, which are considered to be one of the safest investment avenues. This means that the risk component on their books is rather minimal.

As experts points out, deposits are not going to be the big money-making business that payments banks chase. The business that is truly going to ensure revenue would be the float that these banks would earn on transactions and remittances. This means that the fight for acquiring transactions could get bloody, leading to large amounts of capital spent on setting up infrastructure.

As payments banks are a new business, where the models are yet to be proven, there is a good chance that the capital position of many of these companies will get strained and remain that way for a while. Even though the deposits they can accept are limited to Rs1 lakh, allowing the deposit holders to be protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), the RBI would not want a situation where such a guarantee has to be utilised, said Naresh Makhijani, partner and head-financial services at KPMG.

“It is important for the regulator to ensure that the promoters are serious about their business and do not burn excess capital while trying to set up a franchise. Since these are smaller businesses which are dependent on strong channels, the risk of promoters exiting is high,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

While capital requirements are high, the RBI has ensured that payments banks can open accounts even with digital signatures, reducing the need for physical access points. Moreover, these companies can also employ their other group companies and business partners as business correspondents (BCs) to sell their products, allowing for more synergies in distribution.

Even before they could start setting up a payments bank, three in-principle approval holders, namely Tech Mahindra Ltd, Cholamandalam Distribution Services Ltd and Dilip Shanghvi, have given up and removed themselves from the list of 11 payments banks.

Of the eight that remain, four are related to telecom companies Bharti Airtel, Vodafone, Idea and Reliance Jio. The remaining companies include India Post, NSDL, Fino Paytech and Vijay Shekhar Sharma of PayTM.

While PayTM and Airtel have indicated that they would start operations within this calendar year, India Post has already started seeking applications for employees at their upcoming payments bank. The other companies, however, are yet to disclose any details about the status of their individual payments banks.

In the light of the new operational guidelines, it remains to be seen what the final structure of payments banks would look like