While presenting the revised Budget for 2021-22, Tamil Nadu Finance Minister Palanivel Thiaga Rajan indicated a proposal to start a payments bank for the State government and all local bodies.

According to media reports, the TN government is planning to seek a payments bank licence soon from the RBI and the Finance Minister said that his State could become the first to get such licence.

But later Tamil Nadu Finance Secretary Krishnan clarified that, “There is nothing as Tamil Nadu bank. This is a long-term visionary plan. We have many treasuries and sub-treasuries. We intend to have a sub-treasury for each taluk. If we keep funds in a bank or any organisation, the government’s fund will stagnate in the bank which could not be used for the State.”

There seems to be lack of understanding of the purpose of a Payments Bank or its design and structure. Payments banks were allowed as part of financial inclusion and are encouraged to open savings, current and fixed deposit accounts for not-so-affluent people with the maximum deposits capped at ₹2 lakh. To ensure safety of depositors’ money, Payments banks cannot lend. It is difficult to comprehend how a State government can keep its funds in an entity with a cap of ₹2 lakh.

The Reserve Bank of India has prescribed the conditions for a promoter of a Payments bank and it does not include State or Central Government, though a government company can apply with the permission of the government.

Stringent conditions

Payments banks are mandated to keep at least 75 per cent of the deposits in prescribed government securities. They can park a maximum of 25 per cent of deposits with any scheduled commercial bank. They must also maintain 4 per cent of deposits as Cash Reserve Ratio. These banks must have a minimum capital of ₹100 crore and maintain 15 per cent capital adequacy ratio on risk weighted assets. They should have a leverage ratio of not less than 3 per cent, that is, its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves). Given these stipulations, how will it be suitable for a State government to start a Payments bank?

Moreover, the history of Payments bank in India shows a failure of the structure. It is fundamental that banks can sustain only if they are profitable in the short term as well as long. Banks’ profit mainly from lending (financial intermediary) operations. Profits generated by other activities form a small percentage. This ‘other income’ can only supplement banks viability.

There are several entities such as Cholamandalam Distribution Services Ltd, Tech Mahindra and Sun Pharma promoter Dilip Sanghvi, which have received licences to start Payments banks but backed out due to the thin margins.

The ones functioning are: Aditya Birla Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, Paytm Payments Bank and NSDL Payments Bank. Aditya Birla Payments bank had to wind up its operations.

Airtel Payments Bank reported revenues of ₹474 crore in FY 2019-20 and said it had turned “contribution margin positive”. India Post Payments Bank had reported net loss of ₹165 crore for 2018-19. Fino Payments Bank had recorded a marginal net profit of ₹1.9 crore in Q1 of FY2021. Jio Payments Bank has incurred net loss and its net worth decreased by 1.20 per cent in March 2020.

Paytm Payments Bank Ltd reported a net profit of ₹29.8 crore for 2019-20. NSDL Payments Bank reported a net profit of ₹95.94 crore in FY 2019-20

These payments banks are looking to convert themselves into Small Finance Banks for better viability and the RBI has already worked out the modalities. This may enable these banks to lend in a small way. There is need for more clarity from the TN government regarding its proposal of converting treasuries as Payments banks.

The writer is a retired banker

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