Wednesday, August 26, 2015

Can Payment Banks Affect Public Sector Bank's Future?

Government has given license to many business entities for opening newly branded Payment Bank . Our Finance Minister and RBI Governor say that it is not going to harm future of existing public sector banks. I will not say it is their lack of foresightedness or lack of vision about what is going to happen in future, but I will definitely say that fate of public banks is going to move from bad to worse. And ultimately it will be public money which will be spent in saving existing PS banks from disaster.

In 1991 government decided to give license for opening of private banks in the name of privatisation ,liberalisation and globalisation. At that time too , the then government had assured warring trade union leaders that giving license for private banks will create competition and not affect the future of existing Public sector banks. This time too , Government and RBI are trying to fool or purchase Leaders of Trade Unions .

But unfortunately ,during last 25 years and more , Public banks have faced severe erosion in their business, profitability and capital. It is true that they have spent billion of rupees in frequent renovation of bank premises or in rebranding of bank, but they failed to compete with private banks from any point of view. Public banks have spent crores of rupees in changing costume and appearance of their branches, but totally failed to change minds and mentality of bank employees and their  political masters.

Office fixture and furnitures of public banks changed but the mind-set of workers , government and regulating agencies did not change. This is why though banks have expanded their network of branches rapidly and reached almost to all villages but there is no improvement visible in quality of operation, quality of lending and quality of service or housekeeping of public sector banks.

Not only market share of business of public banks has faced sharp erosion , but Quality of assets has also been deteriorating quarter after quarter and government is forced to provide support of capital to weakening banks from time to time. PSBs had a market share of around 80 per cent and private banks 20 per cent as on March 2013. Within PSBs, SBI has the largest market share of 19.1 per cent, and the balance 20 NBs account for 60.6 per cent.

In 1991 too , Government gave absolute freedom to public banks in deciding interest rate structure, in process of recruitment and in process of promotion of bank employees . RBI deregulated power of expansion of branches and empowered all banks to decide their expansion policy keeping minimum norms in mind only. But the bitter truth is that private banks like ICICI , HDFC, Axis Bank, Yes Bank have snatched major chunk of quality business from public banks . Position of public bank officials have become pathetic and these officials are moving from pillar to post to garner good business but always fail.

Not only this , majority of good and quality customers are inclined to bank with private banks only despite the fact that their charges are quite higher than public banks. Even large amount of government fund is parked in private banks. Large corporate houses disburse their salary of their employees through only private bank. Public servants, politicians and even employees of public sector banks in large numbers have their main account with private banks.


Position of public banks is so much pathetic that they are constrained to extend concession in interest rate, concession in processing and other charges and various other concessions to attract customers from private banks. Even by these ill-motivated tactics and even by sacrificing liberally the interest of public money , they face much difficulty in attracting and sustaining quality good customers. Customers who are somewhat of inferior quality and whose integrity is doubtful approach public banks offering so many gifts and temptation of top officials of public banks.

Not only this, when account of such unscrupulous borrowers goes bad and become substandard and doubtful for recovery, they think it wise to rephrase their account, restructure the account or sanction additional loan to keep them standard and to save them from Ministers and their top bosses. Bank management of almost all public banks use to fix target not only deposits and advances but also for Bad assets i.e. for Non Performing Assets. Window dressing is used not only for achieving targets for deposits and advances but also for NPA. Banks use to show false recovery or use other wrong tools as mentioned above to hide bad loans and continue to treat them as Standard Advances so that their target for cash recovery as also for terminal NPA is achieved . Not to speak of loss caused to bank by bad assets, even loss caused due to ever rising incidents of fraud is enormous.

Despite all window dressing methods and unethical lending and unethical write offs, banks are unable to give even half of incremental growth every year which a private bank use to give. Now RBI has given license for payment banks. These payment banks will cut considerable amount of CASA (Savings and Current deposits ) of public sector banks. New generation banks have already taken large portion of CASA. Average CASA of Private banks is more than 40 percent whereas that of public banks is less than 30 percent of total deposits. Now payment bank will cut their share of slice from existing public bank only. There is no doubt that these payment banks will adversely affect the profitability of public banks.

High value loans of good quality and high value bulk depositors have already been taken away by new generation private banks and now small and mid level depositors will also switch to these Payment banks in quest of getting excellent service of deposits and quicker remittances to their target. .

Overall outcome is that public banks are already facing depletion in their capacity to bear with rising burden of rising bad debts .NET interest margin is getting thinner and it will further get thinner when share of CASA will fall due to Payment banks newly created by Government. Cost of deposits of public banks will further go up and yield on advances will fall sharply first due to politically motivated bad lending and then due to constraint in recovery from bad borrowers .

Quality of manpower and quality of management will further add fuel to fire. And lastly government itself take all possible steps to spoil future of public banks for their political gain. It is they who impose various schemes on public banks to attract voters and it is they who get many unproductive work get done by public banks only. As such already public banks are already dead bank or running on ventilators, now Payment bank will prove to be last nail in their coffin.

Last but not the least, if it is assumed that public sector banks will not be affected by newly launched payment banks, then it is almost certain that Payment Bank of Narendra Modi Government will die its natural death within a few years as Mahila Bank of Chidambram almost failed . Private banks will not get much impact because they have already shaken hands with Payment banks directly or indirectly.

Government made experiment by Cooperative Banks ,Regional Rural Bank and now making experiment with Payment Bank. RRB and Cooperative Bank almost died  or on the verge of it or merged with some or the other bigger bank. In future Payment bank will merge with some or the other Private bank of modern era

As a matter of fact Government is using it a social welfare bank when it come to talk f politics , treating them as commercial bank when they review performance of PSBs in comparison to private banks and talk of profitability when bank employees demand respectable wage hike. 

 Mr. Jaitley speaks to media and tells that PSBs are performing better than private banks but when media ask questions about stressed assets , he says that health of assets is not good and volume of bad assets has gone above accepted level.

At Gyan Sangam held last year Mr. Modi assured to give full freedom to banks and to ensure minimum interference in banking operation but it is he who use to use banks for political purpose without caring for deteriorating health of these banks.

Obviously Government has to first make it crystal clear PSBs are commercial  entity or purely profit making entity as private banks are. Charity and business cannot go together . If banks have to be used to distribute charity in social welfare schemes, government should stop talking about profit and stressed assets. Otherwise , if they want Public banks to perform as purely commercial entity, then they should stop using banks for political gain and slowly handover these banks to private business houses .They should ensure all development work , charity work or poverty alleviation work or infrastructure development work through their administrative offices only .Or else they should establish new banks with pure purpose of helping poor .

Know About Payment Bank

A payments bank is a type of non-full service niche bank in India. A bank licensed as a payments bank can only receive deposits and provide remittances. It cannot carry out lending activities. This type of bank was created to help India reach its financial inclusion targets.  This type of bank is targeted at migrant labourers, low income households, small businesses, and other unorganised sector entities.

The minimum capital requirement is ₹100 crore. For the first five years, the stake of the promoter should be 40% minimum. Foreign share holding will be allowed in these banks as per the rules for FDI in private banks in India. The voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10%, which can be raised to 26% by Reserve Bank of India (RBI). Any acquisition of over than 5% will require approval of the RBI. The majority of the bank's board of director should consist of independent directors, appointed according to RBI guidelines.

The bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form subsidiaries to undertake non-banking activities. Initially, the deposits will be capped at ₹1,00,000 per customer, but it may be raised by the RBI based on the performance of the bank. The bank cannot undertake lending activities. 25% of its branches must be in the unbanked rural area. The bank must use the term "payments bank" in its to differentiate it from other types of bank. The banks will be licensed as payments banks under Section 22 of the Banking Regulation Act, 1949 and will be registered as public limited company under the Companies Act, 2013.

On 23 September 2013, Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by Nachiket Mor, was formed by the RBI. On 7 January 2014, the Nachiket Mor committee submitted its final report.Among its various recommendations, it recommended the formation of a new category of bank called payments bank.

On 17 July 2014, the RBI released the draft guidelines for payment banks, seeking comments for interested entities and the general public. On 27 November, RBI released the final guidelines for payment banks.

On February 2015, RBI released the list of entities which had applied for a payments bank licence. There were 41 applicants. It was also announced that an external advisory committee (EAC) headed by Nachiket Mor would evaluate the licence applications.

 On 28 February 2015, during the presentation of the Budget it was announced that India Post will use its large network to run a payments bank. The external advisory committee headed by Nachiket Mor submitted its findings on 6 July 2015. The applicant entities were examined for their financial track record and governance issues.

On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to eleven entities to launch payments banks:
1.Aditya Birla Nuvo
2.Airtel M Commerce Services
3.Cholamandalam Distribution Services
4.Department of Posts
5.FINO PayTech
6.National Securities Depository
7.Reliance Industries
8.Dilip Shanghvi, founder of Sun Pharmaceuticals
9.Vijay Shekhar Sharma, CEO of Paytm
10.Tech Mahindra
11.Vodafone M-Pesa

The "in-principle" licence is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licences under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.

All you need to know about payment banks-The Hindu-20th August 2015

The RBI on Wednesday granted ‘in principle’ approval for payment banks to 11 entities, including big names like Reliance Industries, Aditya Birla Nuvo and Tech Mahindra, as also Airtel and Vodafone.
What are they?
New stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches.
What they can and can’t do
-They can’t offer loans but can raise deposits of upto Rs. 1 lakh, and pay interest on these balances just like a savings bank account does.
-They can enable transfers and remittances through a mobile phone.
-They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.
-They can issue debit cards and ATM cards usable on ATM networks of all banks.
-They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.
-They can provide forex cards to travellers, usable again as a debit or ATM card all over India.
-They can offer forex services at charges lower than banks.
-They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
Who has Reserve Bank granted in-principle approval to be a payment bank?
-Aditya Birla Nuvo Ltd
-Airtel M Commerce Services Ltd
-Cholamandalam Distribution Services Ltd
-Department of Posts
-Fino PayTech Ltd
-National Securities Depository Ltd
-Reliance Industries Ltd
-Dilip Shantilal Shanghvi
-Vijay Shekhar Sharma
-Tech Mahindra Ltd
-Vodafone m-pesa Ltd
Why are they going to be a game-changer?
This is for the first time in the history of India's banking sector that RBI is giving out differentiated licences for specific activities. RBI is expected to come out with a second set of such licences — for small finance banks — and the process for those is in its final stage. The move is seen as a major step in pushing financial inclusion in the country.
It’s a step to redefine banking in India. The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking. It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. The innovation is also expected to accelerate India’s journey into a cashless economy.
India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
Also, this is the first time since banks were nationalized, that private sector business groups have bagged the RBI’s nod for banking services.
What has the experience been in other countries?
Payment technologies have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives.

Employee union opposes entry of payment banks -Economic Times-21.08.2015

VADODARA: A leading bank employee union today opposed setting up of payment banks and said their entry will hurt the interest of public sector lenders.

RBI has granted in-principle approval to 11 entities to set up Payment Banks, who will be able to collect deposits (initially up to Rs 1 lakh per individual), provide Internet banking, facilitate money transfers and sell insurance and mutual funds. They can issue ATM/debit cards, but not credit cards.

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