The limitations of the payments bank model have again taken centre stage as Paytm has asked RBI to convert its payments bank licence to that of a small finance bank, as per a Times of India report. The major difference between the two is that the small finance bank can accept deposits exceeding Rs 1 lakh and lend as well (can offer micro loans).
Under the payments bank model originally envisaged by former RBI Governor Raghuram Rajan, these two are not permitted. This was often cited as the reason there has hardly been any progress made by those who got payments bank licences. Even those who received the approvals have not gone ahead with the opening of the business and one shut it down after opening.
It is entirely possible the banking regulator itself may come around to the view that all payments bank licences by automatically converted into small bank licences. The RBI had floated a discussion paper this year to know the opinion of the public at large on the payments bank model. Though it is not known what type of feedback was received on this, Paytm at least has sent its response saying the small finance bank fits the requirements more aptly than the payments bank. RBI has reportedly said in the past that it has no issues in changing a payments bank into a small finance bank if the basic needs of the model are met.
Paytm Payments Bank is practically 100% owned by the promoters. While the promoter Vijay Shankar Sharma holds 50% equity the remaining is in the name of One97 Communications, the original entity floated by Sharma, that owns all the Paytm ventures.
The company is right now flush with funds having raised $1 billion recently. The company is also under pressure to become a profit-making venture as early as possible. Though Paytm Payments Bank has reportedly posted a small Rs 20 crore profit on a revenue of Rs 1,668 crore, the revenue was all attributed to treasury income. If the company is granted the small bank finance licence, it can quickly scale up its operations and open branches and even start lending. It is interest income from the micro loans it plans to offer that the real profits can be generated.
Paytm is now awaiting the new of the approval of the RBI for making Paytm Payments Bank, a small finance bank.