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GOOD SHOW

Paytm dispels the notion that payments banks can’t be profitable in India

By Nupur Anand

India’s most popular digital wallet has hit a home run again.

After two years of starting operations, Paytm’s payments bank has become the first such business in the country to become profitable. For financial year 2018-19, Paytm Payments Bank (PPB) posted a profit of Rs19 crore ($2.7 million), it said in a statement yesterday (May 23).

“We have more than Rs500 crore deposits in our savings account, which makes us the largest payments bank in India in terms of deposits,” said Satish Kumar Gupta, managing director and CEO of PPB. The bank also said it looks to introduce more products and features on its platform, and increase the number of transactions processed in savings accounts from Rs24,000 crore in the last financial year to Rs40,000 crore in financial year 2020.

Nearly a third of all mobile banking transactions in India are powered by PPB and the firm claims it processes over Rs3 lakh crore worth of digital transactions annually, next only to the country’s largest lender State Bank of India.

These new-age businesses are the latest financial institutions in the country, for which the central bank began giving approvals in 2015 to increase financial inclusion. Besides PPB, the other players in this segment include Jio Payments Bank (owned by Mukesh Ambani, India’s richest man), Airtel Payments Bank, Fino, NSDL, India Post, and Aditya Birla Payments Bank.

The Reserve Bank of India (RBI) allows payments banks to accept deposits of up to Rs1 lakh, but they are not allowed to lend.

The road less travelled

Typically, a bank earns money from the interest it levies on loans. Since payments banks can’t lend, profits have so far eluded them, say experts. These firms mainly rely on fees earned from transactions, as a revenue source. They are also allowed to invest in government securities, which gives modest returns of up to 8%.

The limited revenue streams are a sticking point for the business.

Cholamandalam Investment and Finance Company, part of the Chennai-based Murugappa Group, was granted approval to launch a payments bank in 2015, but it dropped the plan a year later citing profitability concerns.

IT services major Tech Mahindra and Sun Pharma promoter Dilip Shanghvi (who teamed up with IDFC Bank and Telenor Financial Services) had also secured licences, but again failed to take off. While Shanghvi’s reasons are unclear, the thin margins and a long wait for a return on investments deterred Tech Mahindra.

Now, however, Paytm Payments Bank has proved that the segment is profitable.

“One thing that seems to have worked in the favour of Paytm (Payments Bank) is the large captive base they had from to their wallet service,” said Ashvin Parekh who runs an advisory services firm and had also helped select payments banks to chalk up their plans. Paytm has a user base of about 300 million at present.

Another favourable factor was a recent RBI rule asking all digital wallet users to complete their know your customer norms. Since the same guidelines are followed to open bank accounts, it made the latter process simpler, Parekh said.