RBI Report on Trends: Payments banks yet to turn profitable

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“With elevated levels of unemployment and reverse migration still to be corrected for, these banks’ sources of income may come under strain,” said the ‘Report on the Trends and Progress of Banking in India 2019-20’, which was released on Tuesday, adding that in the recent period, weighted average G-Sec yields have fallen to their lowest levels in 16 years impacting their interest income

The RBI report further said that most of these banks are yet to break even, largely on account of high initial infrastructure costs.

“Generation of capital funds in the absence of credit products poses a challenge for them,” it said. Their business model focuses on small remittances which are stored in digital wallets that can, in turn, be used for purchases of goods and services, the report further noted, adding that being a nascent business model that requires heavy overhead costs especially at the beginning, most of these banks are yet to turn profitable.

‘Limited operation’

At end-March 2020, the number of operational payments banks declined to six as compared with seven in the previous year as one bank surrendered its licence.

As on March 31, 2020, they reported net losses of ₹833 crore although their consolidated balance sheet increased in 2019-20 on a hefty increase in deposits with their share in liabilities more than doubling to 27.4 per cent from 12.3 per cent in 2018-19, despite the cap of ₹1 lakh per account.

“The limited operational space of these banks, coupled with high initial costs in setting up of the infrastructure, implied that the initial years would be invested in expanding their customer base and they will take time to break even,” the report further noted.

In terms of remittances, UPI had the largest share in the total remittance business of payment banks in 2019-20, in terms of both value and volume, followed by IMPS.

According to the report more than 46 per cent of inward and 37 per cent of outward remittances in terms of value were made through the UPI channel.

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