#40 Everybody wants a license!
Fino Payment Bank and the NUE race.
Fino Payment Bank enters the Club!
My favourite payment bank is now a Scheduled Commercial Bank!
Here’s the official notification from RBI:
So when I read this, I had a few doubts. I figured a lot of other people will have similar questions, so here’s a FAQ compiled just to make sense of all the consequences of this notification:
Q: What is the Second Schedule of the RBI Act, 1934?
A: The RBI Act document, like any legal document, has a lot of Schedules and Sections, some of which have been repealed or omitted. The First Schedule is mainly concerned on areas covered by local boards (think of local area banks). The Second Schedule is the big one, which lists ALL the recognised banks in the country, divided into a couple of categories:
Public Sector Banks
Private Sector Banks
Small Finance Banks
Regional Rural Banks
Q: So is Fino still a Payment Bank (PB)?
Very much so. To be able to lend out customer deposits, it still has to convert itself into a Small Finance Bank (SFB), which can only happen next year if this particular recommendation of an internal group in RBI becomes finalised (which states that a track record of three years is sufficient for a PB to convert into a SFB). If the recommendation doesn’t pass, Fino will have to wait till 2023.
Q: If it cannot lend, what is the benefit of being in the Second Schedule?
A: For starters, it can expand its treasury operations and access the liquidity windows of RBI.
In English, although the liability side (customer deposits) doubled across payments banks in 2019-20, the asset side (loans) remained nil. So their only source of “interest” income was by keeping money with other banks, some investments, money market and some cash with RBI.
Through the Second Schedule, a couple of direct benefits would be:
Access to government business - being able to manage pension, provident funds and various welfare schemes such as DBT (direct benefit transfer).
Can become a member of the clearing house - think cheque clearing system, although majority of it as become electronic in nature, I feel Fino’s target market (rural, remote) will be able to utilise this access in a more efficient way
Can borrow money directly from RBI at the lowest rate possible (and other benefits like rediscounting of first class exchange bills)
One of the major indirect benefit is of course, the recognition - If Fino can market and leverage it well, they might be able to gather more business through the additional trust that comes with this tag.
Q: Is Fino the first Payment Bank to become a Scheduled entity?
A: Surprisingly, no. India Post Payments Bank received the approval last year.
Q: So what’s the road ahead?
Apart from the SFB conversion, Fino may also file for an IPO (as a payment bank) to raise funds.
Out of 11 approved entities, only six PBs remain today, out of which Fino is one of the sole profitable ones. So out of a sea of failures, I’m really curious to read the IPO prospectus to find out how Fino did things differently (although I have a few ideas) - I presume their remittance segment is bringing in a lot of revenues but I don’t know how big it is in their overall scheme of things.
As of now, the only concern is that it may list as a PB before it can convert into a SFB. If this happens and it decides to go for the conversion post listing, market participants might get jittery as it is a complete business model change. (Now you understand the benefits of remaining as a private entity?)
What’s up with RBI?
In a pretty expected move, RBI has decided to extend the applications for the pan-India NUE (new umbrella entity) - a.k.a. the competitor to NPCI.
FYI: I’ve already done a deep dive on NPCI vs NUE, where I’ve explained the significance of this new entity. Check it out here (skip to the RBI section)
Just like the rest of us, even banks scramble to do everything at the last moment!
When I last wrote about it, the competition was only from a handful of names, with the likes of PayTM, Reliance and ItzCash.
And now, just a week before applications were due to close, it seems EVERYONE wants a piece of it.
You have two of the largest private banks in the country forming separate camps!
This is kind of like our own Bollywood, Shahrukh vs Salman camp (even more interesting, I would say!)
Each camp has their own strength - one has Bharti Airtel (with it’s payment bank), Mastercard’s network and PayU’s gateway and the other has Amazon’s reach & distribution, Visa’s network and BillDesk’s gateway!
Ofcourse, this by no means undermines the strength of the other two camps, led by PayTM and Reliance.
So why are these players forming a consortium anyway? Why can’t they just apply on their own?
That’s because as per the regulation, no single promoter can have more than 40% ownership. The minimum stake is 10%.
Amidst all of this, it seems that the public banks have backed out - most likely because the Finance Ministry didn't want the government-owned PSBs to compete with NPCI, which also runs government projects such as RuPay and Aadhar-based payments.
But why are Banks interested in the first place? Isn’t this a Fintech-dominated space?
A regular reader of Bank on Basak, Sanjay has explained this excellently in a tweet thread.
He claims that the majority of the UPI market share is not with banks (you know who the top three are!), so this time, they’re not gonna take things lightly.
One of the most common concerns related to the companies applying for the NUE license is that a lot of them already have ownership in NPCI. Additionally, it is unclear if RBI is going to have one or multiple licenses!
Hopefully, RBI is going to release the list soon!
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