Payment banks can ask RBI to let them lend

Payment banks are considering asking the Reserve Bank of India (RBI) to let them venture into microcredit. It will be a reiteration of a similar request made last year, sources told FE. The industry intends to approach the regulator under the aegis of the Payments Council of India (PCI) and ask it to let payment banks with a certain track record of granting loans up to Rs 1 lakh. Under the current framework, payment banks are not allowed to undertake any type of lending. They are allowed to accept demand deposits with balances up to Rs 2 lakh and sell other financial products.

“We are asking for permission to grant micro-loans only to individuals. The RBI’s concerns about lending by conglomerates with non-financial businesses have to do with connected lending. These concerns do not arise when it comes to micro-loans,” said a person familiar with the plan. An email sent to ICP seeking comment on this story went unanswered until press time. payment banks, Airtel Payments Bank and Jio Payments Bank are owned by conglomerates with interests in non-financial businesses.

The payment banking model has been crippled by the non-remunerative nature of payment transactions in India. In a report released earlier this year, Moody’s Investors Service said payments dominance doesn’t necessarily translate into competitive advantages that can be extended to other financial services. The reason is that the Unified Payment Interface (UPI), India’s leading digital transaction network, has an open architecture that levels the playing field for all businesses, Moody’s analysts said.

For example, Paytm Payments Bank, even after three years in business, had a deposit market share of less than 0.1% as of March 2021. “Its market share in wealth management products, such as insurance and mutual funds, is also minimal. In contrast, banks have increased their market share in the sale of third-party products such as life insurance over the past five years,” the report states.

While the RBI has allowed payment banks with five years of business behind them to apply for permission to convert to smaller financial banks, none of the existing players are yet known to have moved in this direction.

According to the RBI’s December 2021 Report on Banking Industry Trend and Progress in India, the balance sheet of payment banks grew by 49% in FY21, in addition to a growth of 17.5 % in FY20. The share of deposits in total liabilities increased to 36.8% from 27.4% a year ago.

Since payment banks are still at a nascent stage of development, they incur significant investment costs to develop basic infrastructure, the central bank said. “Also, their customer base is not yet fully developed, which makes it difficult to break even. As a result, since their inception, they have suffered losses. The same trend continued in 2020-21, despite their improving non-interest income,” the Trends and Progress Report states.

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