The time isn’t far when Indian users will be able to transfer money and consolidate savings across multiple wallet accounts all thanks to the central banker’s new policies. The Reserve Bank Of India (RBI) made a slew of announcements this week that could change the banking sector for good.
First, the RBI on Wednesday (April 7) announced that PPIs (prepaid payments instruments) such as digital wallets have to be made interoperable which has been a bone of contention for payments players for a long time. After the RBI released its Master Directions in October 2017, digital wallets were expected to become interoperable within six months. But the plans were put on hold.
Second, RBI announced that payments banks (PB) will be allowed to enhance the limit of maximum balance at the end of the day from INR 1 lakh to INR 2 lakh per individual customer. The decision was taken based on a review of performance of PBs and with a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants.
Third, the RBI has also proposed to enable, in a phased manner, regulated payment system operators, to take direct membership in RBI-operated real-time gross settlement (RTGS) and national electronic funds transfer (NEFT). This will cover non-bank payment system operators like issuers of payments wallets and other walled-garden payment options, card networks, white-label ATM operators and the Trade Receivables Discounting System (TReDS) platforms regulated by RBI. This facility is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments.
And finally, as a confidence-boosting measure, and to bring uniformity across PPI issuers, it is now proposed to allow cash withdrawals for full-KYC PPIs of non-bank PPI issuers (in addition to bank issuers). This measure, together with the mandate for interoperability, will boost migration to full-KYC PPIs and would also complement the banking infrastructure in unbanked regions of the country.
To sum it up, the RBI in one stroke has opened up a huge market for fintech players to expand services that were only possible for banks. Yes, the banks will continue to be relevant for their core lending functions. However, a combination of wallet, payments banks and other payment systems will soon be able to offer users a range of services not very different from neobanking platforms. How is this move going to impact the fintech ecosystem going forward?
The Indian central banker has for the longest time been risk averse, trusting banks with a bulk of the serious work like using the centralised payment systems which facilitated digital transactions. In recent times, the ease of use of UPI allowed private payments operators and underlying banks to take a bulk of new digital transactions with humongous numbers of small value transactions, occasionally choking the technical backbone of banks.
On the other hand, the business model of payment banks is dependent on transactions and investment income to meet various costs. But due to constraints on deposits and a no lending mandate, payments banks have been crippled in their growth. Add to it the fact that they depend on government securities (G-Sec) for income which really hasn’t given them the best returns.
According to a December 2020 report by RBI, with elevated levels of unemployment and reverse migration still to be corrected for, these PBs sources of income may come under (further) strain. In the recent period (FY20), weighted average G-Sec yields have fallen to their lowest levels in 16 years impacting their interest income, it noted. Most of these PBs are yet to break even, mainly due to high initial infrastructure costs. Generation of capital funds in the absence of credit products poses a challenge for them.
So what does this increased limit of INR 2 Lakh closing balance…
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