Payments banks may seek RBI nod for small-value Fixed deposits

Payments banks may seek RBI nod for small-value Fixed deposits

Subject: Economy

Section: Monetary Policy

Context:

• Payments banks (PBs) may approach the Reserve Bank of India (RBI) to allow them to take small-value fixed as well as recurring deposits, in addition to these , also for small-ticket loans to individuals and micro- and small enterprises (MSEs).

Reason:

• Garnering low-cost savings bank (SB) deposits is proving an uphill task given the high-interest rates being offered by commercial banks on term deposits.
• Small-ticket loans can enhance their viability.

Why scope of activities enhancement is needed:

• As five out of the 11 applicants who were given in-principal approval to start a PB in 2015, either not commencing operations or voluntarily giving up their certificate of registration.

PBs-vertically differentiated banks:

• Now, only six PBs — Airtel Payments Bank, Fino Payments Bank, India Post Payments Bank, Jio Payments Bank, NSDL Payments Bank, and Paytm PB — are operational.
• Out of these six, the RBI has imposed severe restrictions on Paytm PB-
• Due to “persistent non-compliances” and continued material supervisory concerns in the bank.
• Fino PB has applied to the RBI to convert into a small finance bank.

Current deposit scenarios:

Commercial banks low-cost CASA (current account, savings account) deposits have come down over the last few quarters.

Reason :  As customers prefer investment in fixed deposits, non-convertible debentures, mutual funds, equities, etc.–which offer better returns. 

Given this situation, there is no way PBs can stop the decline in their savings bank (SB) deposits.

Solution: 

• The way to stop deposit outflow is to allow us to offer FDs and recurring deposits (RDs).
• Allow PBs to offer small-ticket loans in select segments, such as individuals and MSEs—which will fetch a higher yield on advances and will help in servicing high-cost FDs and RDs.

Structural solution: Up the cap

These vertically differentiated banks (which are focused on small savings and payments/remittance services) also want the RBI to increase the maximum end-of-day balance a customer can maintain with them from ₹2 lakh to ₹5 lakh in sync with the increase in deposit insurance cover.

Significance of PBs:

• PBs provide payments and remittance services to the migrant labour workforce, low-income households, small businesses, other unorganised sector entities, and other users.

Other Features of PBs: 

• These banks can only accept demand deposits (current account and savings bank account/CASA) with a maximum balance of ₹2 lakh per individual customer.
• They cannot undertake lending activities but distribute financial products like mutual fund units and insurance products, etc., and
• Act as business correspondents of another bank.

Current deposit status of PBs:

As per RBI Data- 

• As of March 2023, the six operational PBs collectively had deposits (predominantly SB deposits) and investments (mostly in government securities) aggregating ₹12,174 crore (₹7,829 crore as of March 2022) and ₹12,064 crore (₹9,937 crore), respectively.
• Five PBs were profitable in 2022-23.