New bank format appears to be less of a risk. RBI has issued draft guidelines on two new formats of banks: (1) small banks and (2) payment banks. Small banks would operate in a specified area while payment banks would be involved in mobilizing deposits. Minimum capital adequacy ratio (15%) and high capital to begin (Rs1 bn) could hamper the economics of the model. We don’t see any impact from these banks for existing players as they are unlikely to provide serious competition and believe that a few banks could look at even promoting these types of banks, as it serves their PSL requirements. Read Full Report
Small banks and payment banks: two niche banking formats introduced
RBI has issued draft guidelines on two new banking formats: (1) small banks and (2) payment banks. The primary objective of small banks is to play an important role in credit supply to MSME, agriculture and banking services in unbanked and under-banked regions in the country. The primary objective of payment banks would be to provide small savings/current accounts and provide a platform for high-volume, low-value payments/remittance services. There is a big focus on reaching out to the customer through a strong technological platform. The guidelines have been fairly silent on mergers and acquisitions.
Return ratios and scalability appear to be a challenge
Niche banking comes with niche problems; however, we construe that small banks can be more profitable but payment banks can give better growth. Small banks, given their charter, may have issues on scalability and events like a debt waiver, impact of high interest rate in MFI and the consequence of being involved in the vagaries of regional growth can result in volatile earnings performance. On the other hand, payment banks may be constrained in lending as they will be allowed to invest only in G-Sec portfolios. It does appear that profitability will be a function of their cost of deposits, operating expenses model and fee income on the high-volume transactions.
Collaborators and not competitors for now
We don’t see these new banks emerging as a major threat to the frontline banks, at least in the short term, as they will be working in a tight environment with defined objectives that do not overlap with each other. Besides, we think that banks, especially private banks, would act as promoters rather than competitors of the