Tag: conversion

One 97 Communication’s Paytm Payments Bank explores possibilities for conversion into SFB

Banking & Finance

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Paytm Payments Bank, an associate entity of the recently listed Paytm (One 97 Communications), is exploring possibilities for conversion into small finance bank and providing more services and offerings to customers.

According to Vijay Shekhar Sharma, Founder and CEO, Paytm, a conversion into small finance bank would help it solve a number of payment problems and also facilitate more services to its customers.

Solve payment problems

“A banking licence is an opportunity or decision which the regulator Reserve Bank of India gives to entities….so it would not be right on my part to comment on applying for a banking licence. But if we can become a small finance bank then we can solve a lot of payment problems and there are a lot of other things we can do,” Sharma said when responding to a question of whether the company would apply for a banking licence moving forward.

He was addressing the annual session and AGM of the Indian Chamber of Commerce virtually on Thursday.

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The plan to consider applying for conversion into a SFB was disclosed in the draft red herring prospectus filed by One 97 Communications (Paytm) with SEBI before its initial public offering (IPO).

Five-year track record necessary

According to existing RBI guidelines, for ‘on tap’ licensing of small finance banks in the private sector, existing payment banks with a successful track record of at least five years can apply for conversion into SFB. An internal working group of the RBI had recently also suggested that a successful track record of three years may be considered sufficient for such conversion.

It may be recalled that Paytm Payments Bank got its licence to operate as a payments bank from RBI in 2017.

As per information available on its website, Paytm Payments Bank has over 100 million KYC customers with 0.4 million users added every month.

Payment-led model preferable

As at end-March 2021, Paytm Payments Bank had 6.4 crore bank accounts and demand deposits of ₹3,200 crore (including savings accounts, current accounts, fixed deposits with partner banks and balance in wallets).

Also see: Paytm Money launches Margin Pledge feature

According to Sharma, a payment-led credit business would be far more scalable as compared to a bank-based credit model as the payment-led model helps ascertain the creditworthiness of a customer.

“It is an obligation for a company like Paytm to discover and serve the underserved population by providing them access to finance,” he said.

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Government announces conversion of two G-Secs into six FRBs

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The government on Wednesday announced the conversion or switch of two Government Securities (G-Secs), both maturing in 2022 and aggregating ₹36,000 crore (face value) into six floating rate bonds (FRBs) maturing between 2028 and 2034.

Thus, the government does not have to redeem the aforementioned G-Secs on their maturity dates — April 13, 2022 (for the security carrying 5.09 per cent coupon rate) and August 02, 2022 (for the security carrying 8.08 per cent coupon rate). Redemption pressure on the government is alleviated to the extent of the face value of the securities being converted or switched.

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Marzban Irani, CIO – Fixed Income, LIC Mutual Fund, said, “There are two reasons for going in for the conversion or switch of the two G-Secs into FRBs. Firstly, market participants have shown an appetite for this instrument as they expect interest rates to reverse (go up). Secondly, this move postpones the maturity of the G-Secs, thereby lessening the redemption burden on the government.”

Auction for conversion

RBI, in a statement, said the conversion or switch will take place through a multiple-price based auction, which has been scheduled on October 18.

In this auction, successful bids will be accepted at their respective quoted prices for the source and destination securities.

RBI started conducting auctions for the conversion of G-Secs on the third Monday of every month from April 22, 2019.

Bidding in the auction implies that the market participants agree to sell the source security/ies to the government, and simultaneously agree to buy the destination security from the GoI at their respective quoted prices.

Online portal

Market participants are required to place their bids through the e-Kuber portal, giving the amount of the source security and the price of the source and destination security expressed up to two decimal places.

Also see: RBI announcements roil the markets

The price of the source security quoted must be equal to the FBIL (Financial Benchmarks India) closing price of the source security as on the previous working day.

Bond price

Meanwhile, price of the 10-year benchmark G-Sec carrying 6.10 per cent coupon rate moved up about 8 paise to close at ₹98.445 (against the previous close of ₹98.36). Yield of this security thawed about a basis point to 6.3145 per cent against 6.3263 per cent.

Bond price and yield are inversely correlated and move in opposite directions.

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Paytm Payments Bank may soon apply for conversion to Small Finance Bank

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Paytm Payments Bank, an associate entity of IPO-bound Paytm, may consider applying for conversion into a Small Finance Bank (SFB) on completion of the required time period under law.

If the firm is successful in conversion, Paytm Payments Bank will be able to undertake additional banking activities such as lending.

The plan to consider applying for conversion into a SFB has been disclosed in the draft red herring prospectus filed by One 97 Communications (Paytm) with SEBI recently for the digitial financial services major’s ₹16,600 crore initial public offering (IPO).

Currently, under the existing RBI guidelines for ‘on tap’ licensing of Small Finance Banks in private sector, existing payments banks with successful track record of at least five years can apply for conversion into SFB.

Moreover, an internal working group of the RBI had recently suggested that a successful track record of three years may be considered sufficient for such conversion.

It maybe recalled that Paytm Payments Bank got its licence to operate as a payments bank from the RBI in 2017.

Net profits

Meanwhile, for the year-ended March 31,2021, Paytm Payments Bank, which has the largest scale among all payment banks, had recorded net profit of ₹17.88 crore on sales of ₹1,987.84 crore, financial data disclosed in the prospectus showed.

One 97 Communications owns 49 per cent equity interest in Paytm Payments Bank, while the rest 51 per cent is owned by Vijay Shekhar Sharma.

The objective of a payments bank is to widen the spread of payment and financial services to small business, low income households, migrant labour workforce in secured technology driven environment. A payments bank is like any other bank without involving any credit risk. It can carry out most banking operations but cannot provide loans or issue credit cards. It can accept demand deposits up to ₹2 lakh, offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and the third party fund transfers.

As at end-March 2021, Paytm Payments Bank had 6.4 crore bank accounts and demand deposits of ₹5,200 crore (including savings accounts, current accounts, fixed deposits with partner banks and balance in wallets). As of March 31, 2021, more than 50 percent of its registered merchants (over two crore20 million) hold an account with Paytm Payments Bank.

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Budget proposes tax neutral benefit for conversion of UCBs into banking company

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In a move that will help cooperative banks to convert to banks, the Budget has proposed tax exemptions.

It has provided tax neutral benefit for conversion of urban cooperative bank into banking company.

“It is proposed to expand the scope of business reorganisation to include conversion of a primary co-operative bank to a banking company and the deductions available under Section 44DB of the Act shall also be made applicable in relation to such conversion,”said the Memorandum to the Financial Bill.

The Budget has also proposed that transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under Section 47 of the Act. Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer under the said Section of the Act, it further said.

These amendments will take effect from April 1, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years, it said.

The Reserve Bank of India had, in September 2018, permitted voluntary transition of primary cooperative banks [urban co-operative banks (UCB)] into small finance banks through transfer of Assets and Liabilities.

However, players say that the scheme has till now enthused few cooperative banks.

Vidyadhar Anaskar, President, Maharashtra Urban Cooperative Bank Federation, said the proposal aims to help cooperative banks that have applied to convert to an SFB.

The RBI had in January granted an “in-principle” approval to Shivalik Mercantile Co-operative Bank, an Uttar Pradesh-based multi-state urban co-operative bank, to transition into a small finance bank.

According to a recent statement, Shivalik Small Finance Bank (SSFB) will start its banking operations from April.

With the developments at Punjab and Maharasthra Cooperative Bank, the government and RBI have been working to improve governance and oversight of the co-operative banking system.

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