Lenders eyeing stakes in upcoming payments banks

Leading banks may take equity stakes in upcoming payments banks to expand their financial inclusion footprint and tailor special products to meet the needs in rural areas.

Payment instrument issuers (PPI) such as ItzCash and Oxigen are likely to get equity investments from leading banks after they get licences from the Reserve Bank of India (RBI) to operate as payment banks.

ItzCash is also open to a joint venture with a bank once they get the licence. The PPI has business relations with IDBI Bank, DCB and HDFC Bank.

The final guidelines issued by the Reserve Bank of India on November 28, 2014 are favourable for existing payment instrument issuers to convert their licences into banks. It has also allowed the existing players to have a joint venture with existing banks. However, banks can take equity stake only up to 30% in payments banks under the Banking Regulation Act of 1949.

Naveen Surya, managing director, ItzCash told dna, "Once we get the licence we will also be open to a joint venture with a bank. We have business relations with IDBI Bank, HDFC Bank and Ratnakar Bank; we would also examine the options of a joint venture with these banks. The JV with a bank will help us in scaling up operations and also sharing the technology platforms. We are finalising our business plan in the next 30 days then the contours of our future operations will be clear. With the guidelines the existing prepaid operators have an option of converting the current prepaid licence to a payments bank licence."

ItzCash operates in 250 of the 295 districts that the RBI has identified for financial inclusion with over 30 million customers in the under-banked and unbanked areas.

Oxigen is another payment instrument issuer which will convert its prepaid licence into a payments bank licence. Oxigen Wallet is a non-bank wallet, which is integrated with NPCI (National Payment corporation of India (NPCI), allowing instant money transfer from the wallet of over 60 banks and vice-versa using Immediate Payment Service (IMPS). Money transfers without bank accounts are facilitated by Oxigen. NPCI is an umbrella organisation for retail payments in the country.

Promod Saxena, chairman, Oxigen, told dna, "Though we may not look at a joint venture route we will certainly look at equity investments from banks. Leading banks like SBI, ICICI Bank and Ratnakar Bank for whom we work as business correspondents may be keen to take an equity stake in the payments bank we set up."

A payments bank needs a paid-up equity of Rs 100 crore with promoters holding 40% stake. The draft guidelines had talked about equity dilution of the promoter holding but in the final guidelines the promoters can hold on to their stake with the bank having to go in for listing only if its net worth reaches Rs 1,000 crore.

"For these kind of businesses a longer gestation period is important as the investors need to be firmly in control to drive the initial phase of the business. Banks' financial inclusion programmes are closely associated with our business," said Saxena.

"The payments bank will also allow us to issue debit cards and participate in the remittance business, particularly in the cash segments which is 50% of the total remittances into India. In calendar year 2013 the total remittances into India were Rs 7,000 crore, and 50% of this was cash-to-cash segment," said Saxena.