Barely nine months since the Reserve Bank of India announced the names of the 11 applicants who had won “in-principle” approval to start payments banks, three have backed out. Tech Mahindra this week became the latest to drop its plans, and joined Cholamandalam Investment in citing ‘competition’ and a ‘long gestation period’ as key considerations in reaching the decision. That a corporate entity, which initially evaluated the business to be attractive enough to apply and was prepared to compete with other players to win a ‘coveted’ licence, could have cited competition as a reason to withdraw is intriguing. While it is true that this experimental banking licence would allow licensees limited scope to earn attractive interest spreads since they are prohibited from lending loans, the constraints of the business model were already known. Similarly, given the banking regulator’s focus on extending a remittances and payments network to unbanked and far-flung rural areas, it was understood that this new breed of niche banks would take more than a few years to establish standalone profitability. So, the argument of a long gestation period also wears thin. The logical surmise is that after the first flush of excitement at the prospect of winning a ‘banking licence’ — albeit a watered down one — they have realised that catering to a customer base that largely comprises low-income households, farmers and the migrant workforce may not be such a rosy proposition after all.
For the RBI, the experience of having its chosen applicants develop cold feet must be disconcerting, given the time and effort invested in the process. Its disappointment is reflected in Deputy Governor S.S. Mundra’s recent comment that some kind of a processing fee could be considered as a levy on those withdrawing their applications. But central bankers too need to do some introspection. For one, the ground has shifted in the months since the RBI released draft guidelines for the payments banks in November 2014. The National Payments Corporation of India recently introduced its Unified Payments Interface that is expected to alter the way payment transactions are conducted. Also, commercial banks are now aggressively pushing their own mobile application-based offerings, eroding the potential that payments banks had for the banked and technology-savvy segment. Ultimately, though, it is in everybody’s interest to see a pared down field of banks unveiling their payments services when the licences are finally issued, especially if the goal of widening financial inclusion is to be sustainably met over the long term.
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