CRISIL believes east, north-east and central India offer a natural habitat for payments banks because of under-penetration of formal banking in these regions. Eight of 17 states in this geography have a CRISIL Inclusix index score below 40, compared with the all-India average of 50.1 as on Mar. 31, 2013, the latest period for which district-wise data are available from the Reserve Bank of India.
The index measures financial inclusion on three parameters - branch penetration, deposit penetration and credit penetration.
Pawan Agrawal, chief analytical officer, CRISIL said, ''Payments banks will open another alternative channel after internet and mobile banking, and help improve efficiencies and reduce costs involved in catering to customers in the rural and semi-urban areas. However, we do not expect them to significantly dent the business of existing banks given that their services would largely focus on under-banked areas.''
On the other hand, there could be a positive rub-off on existing banks partnering with payments banks through increased access to unbanked and under-banked areas in a cost-efficient manner. Bank credit to GDP in the east, north-east and central India is less than 60%, compared with 77% for all-India.
As for the business model of payments banks, CRISIL believes success will be a function of ability to generate transaction volumes, having a business structure that's light on overheads and smart on technology, and on the ability to extract fees from clients. However, building franchise and managing operational risks while offering last-mile connectivity will be a challenge.
Essentially, there are four key areas of opportunity: fees from domestic remittances, spread on savings deposits, fees from acting as business correspondent and transaction fees through e-commerce and debit card usage.
The major volume opportunity is in domestic remittances, where more than half of the transactions are conducted through informal channels. However, migrant labour workforce may be chary of shifting to formal channels to send money home, and KYC and other documentation could be obstacles, too.
Rural and semi-urban areas today account for nearly 42% of the savings deposits of the banking system, underscoring the large potential in these markets. While, traditional banks are unlikely to lose customers who are easily accessible from their branches, those located in remote locations are a potential target for payments banks.
Says Raman Uberoi, Business Head, CRISIL Ratings - Large Corporates, ''Even if payments banks are able to gather around 10% of rural savings deposits from areas that have banks, and from unbanked areas served by chit funds and other non-banking channels, the opportunity to attract savings deposits will be in excess of Rs 1 trillion over the next 5 years.''
Potentially, payments banks can also enjoy floats - or interest-free monies en route to recipients but which remain with banks facilitating the transfer for a few days - such as those from the central government's direct benefit transfer scheme and subsidies.
CRISIL also sees high synergies with correspondent banking, where traditional banks can side up with payments banks to offer additional services. Such alliances will significantly improve the cost efficiency of traditional banks and help meet their priority sector lending requirements. As a result, traditional banks that tie up with payments banks will be benefitted.
Further, CRISIL foresees payments banks becoming an important channel for selling insurance and other financial products in hinterland, offering points of payment such as at grocers and small businesses.
In the initial years after launch, we do not see payments banks capturing much of the booming e-commerce transactions because the social strata they would target is unlikely to be tech savvy.
However, a boom in mobile commerce - also called mobile or m-wallet - will be a major push factor. India's m-wallet industry has been growing very fast, with transactions touching Rs 82 billion in the last fiscal, a majority of which was remittances. The number of transactions has more than tripled in the last two years, although the average ticket size remains small at Rs 200-400.
