Tag: payment banks

Payments Banks want RBI to hike max day end deposit balance to ₹5 lakh

Banking & Finance

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Payments Banks (PBs) want the Reserve Bank of India (RBI) to up the maximum end of the day balance a customer can maintain with them from Rs 2 lakh to Rs 5 lakh in sync with the increase in the deposit insurance cover.

PB executives feel an enhancement in the aforementioned limit will be opportune as the Deposit Insurance and Credit Guarantee Corporation (DICGC) has increased the deposit insurance cover five-fold to Rs 5 lakh.

DICGC insures bank deposits such as savings, fixed, current, and recurring.

Previously, under the Guidelines for Licensing of PBs, issued on November 27, 2014, these banks could hold a maximum day end balance of ₹ 1 lakh per customer. This was in line with the then deposit insurance cover of Rs 1 lakh.

Although the deposit insurance cover was raised to Rs 5 lakh, with effect from February 4, 2020, the maximum balance a customer can hold in a PB at the end of the day has not been increased commensurately.

RBI had doubled the maximum balance a customer can hold at end of the day in a PB to ₹2 lakh on April 8, 2021.

Micro, small and medium enterprises (MSMEs), small traders and merchants can benefit if the maximum end of the day balance per customer is enhanced to Rs 5 lakh as cash flow management will become better, said a top official of a PB.

Further, this can also increase PBs pool of low-cost current account, savings account (CASA) deposits.

“This is the right time to revise the maximum day end deposit limit upwards in view of the changing economic scenario. It will also be in keeping with the increase in the deposit insurance limit,” said the chief of a PB.

RBI Governor Shaktikanta Das, in a statement on April 7, 2021, said that 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 ₹1 lakh to ₹2 lakh per individual customer.

Currently, if a customer’s deposit with a PB at the end of the day exceeds Rs 2 lakh, an auto sweep arrangement allows the PB to open a fixed deposit on behalf of the customer with a partner Bank (usually a small finance bank or a private sector bank).

For example, Fino Payments Bank and Paytm Payments Bank have partnerships with Suryoday Small Finance Bank and IndusInd Bank, respectively.

PBs are niche banks that leverage technology for financial inclusion and are aimed at small businesses and low-income households.

According to RBI guidelines, the primary objective of setting up of PBs is to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment.

Being a nascent business model that requires heavy overhead costs especially at the beginning, most of these banks are yet to turn profitable, per the Report on Trend and Progress of Banking in India 2019-20.

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RBI Report on Trends: Payments banks yet to turn profitable

Banking & Finance

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Most payments banks are yet to turn profitable and their sources of income may come under strain with the increased unemployment and reverse migration yet to be corrected, noted a report by the Reserve Bank of India.

“With elevated levels of unemployment and reverse migration still to be corrected for, these banks’ sources of income may come under strain,” said the ‘Report on the Trends and Progress of Banking in India 2019-20’, which was released on Tuesday, adding that in the recent period, weighted average G-Sec yields have fallen to their lowest levels in 16 years impacting their interest income

The RBI report further said that most of these banks are yet to break even, largely on account of high initial infrastructure costs.

“Generation of capital funds in the absence of credit products poses a challenge for them,” it said. Their business model focuses on small remittances which are stored in digital wallets that can, in turn, be used for purchases of goods and services, the report further noted, adding that being a nascent business model that requires heavy overhead costs especially at the beginning, most of these banks are yet to turn profitable.

‘Limited operation’

At end-March 2020, the number of operational payments banks declined to six as compared with seven in the previous year as one bank surrendered its licence.

As on March 31, 2020, they reported net losses of ₹833 crore although their consolidated balance sheet increased in 2019-20 on a hefty increase in deposits with their share in liabilities more than doubling to 27.4 per cent from 12.3 per cent in 2018-19, despite the cap of ₹1 lakh per account.

“The limited operational space of these banks, coupled with high initial costs in setting up of the infrastructure, implied that the initial years would be invested in expanding their customer base and they will take time to break even,” the report further noted.

In terms of remittances, UPI had the largest share in the total remittance business of payment banks in 2019-20, in terms of both value and volume, followed by IMPS.

According to the report more than 46 per cent of inward and 37 per cent of outward remittances in terms of value were made through the UPI channel.

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