RBI’s Homoeopathic Liberalisation For Payments Banks Is Welcome: But Is It Good Enough?

The Reserve Bank of India’s (RBI’s) decision on 8 April to raise the deposit limits of payments banks will surely help them become more viable than before. The relaxation expands the possibility of roping in small traders and micro and small businesses to use their digital services.

In the monetary and regulatory policy announced by Governor Shaktikanta Das, the central bank had this to say: “The extant ‘Guidelines for Licensing of Payments Banks’ issued on November 27, 2014, allow payments banks to hold a maximum balance of Rs 1 lakh per individual customer. Based on a review of performance of payments banks and with a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants, it has been decided to enhance the limit of maximum balance at end of the day from Rs 1 lakh to Rs 2 lakh per individual customer.”

This higher limit implies that payments banks can earn interest by deploying idle short-term balances. This will add to revenue streams which currently involve only the right to sell financial products like mutual funds and earning commissions on them.

While this is good and represents a change in the right direction, one cannot be sure that it will stop the migration of payments banks towards small finance banking or even universal banking at some point.

A bank isn’t a bank if it can’t lend. Currently, payments banks can’t extend overdrafts even to customers with a known track record, nor issue credit cards. You can regulate who payments banks can lend to (by excluding risky micro borrowers, for example), but reducing them mere to deposit-taking institutions and payments facilitators when digital payments earn no fees is not good enough. Especially when the facility to maintain deposits upto Rs 2 lakh has been extended even to KYC-compliant pre-paid instrument (PPI) issuers.

The line dividing payments banks from PPI issuers is thin, the only major difference being that PPIs don’t earn interest. This means PPIs can also be used by issuers to support their main business, whether it is running an app-based taxi service, selling train and bus tickets, or delivering essentials to the home. Purely as a support instrument for facilitating transactions with the main business, PPIs score as well as payments banks. They have the added advantage of not having to pay any interest on deposits. The only real cost is the cost of know-your-customer compliance. This is a one-time cost for adding new customers.

Payment banks are also subject to higher regulatory costs, including maintenance of cash reserve ratio. They have to put 75 per cent of their demand deposits in government securities with maturities of upto one year, and can invest the remaining in bank fixed deposits and current accounts. In short, their liability operations cannot be particularly rewarding either since they have to pay at least savings bank interest rates on deposits.

The RBI could have done better, instead of liberalising in homoeopathic doses. The liberalisation may not be enough to prevent payments banks from seeking to migrate to regular banking in other forms.