FUTURE SMALL FINANCE BANKS IN INDIA

 

What we neglected yesterday in the RBI circular is merrymaking for the Payment Bank to get converted into Small Finance Banks. Before we throw light on the potentials we need certain history to be clarified. Last year in a survey it was found that out of 56 Banks in India were evaluated based on the criteria of transaction and terminal that each bank developed and the success rate of digital transactions- Airtel Payments Bank reached 211.66% of its digital transactions target and took the number one position, due to all transaction are done through UPI, debit cards, mobile/internet banking, and so on. Besides that, FINO Payments Bank was ranked second with 209.31% and 122.95% was the result of Paytm Payments Bank. However, only Payments Bank and Airtel Payments Bank reached the top 10 based on these evaluation criteria.

Aspiration will change the dynamics of any Industry. Well M&A will increase in Payment Banking space after this announcement from the RBI space. In the coming years, we will witness a surge in the takeover and lavish amount of price being offered in this space.  The reason being, that consolidation increases the value of the business and control over the industry. Private Equity players behind the payment banks will be jubilant once the small finance banks license is given to them.  Small Finance Banks will play a pivotal role in Indian GDP growth.  Small Finance Banks will help to cater to India to cater to the huge opportunities like Education, healthcare and agriculture segments where the specialised approach to the lending is required so that credit reaches to the most deserved.

India is the high potential country where the penetration of digital C2B payments (cards, UPI, wallets) is expected to increase from ~9% of GDP in 2018 to ~40% of GDP in 2025. UPI payments are expected to grow at 60% CAGR driven by UPI QR payments for merchants. The card spends (debit + credit) are expected to grow at ~23% CAGR. The overall share of UPI is expected to increase 50-55% of digital payments by 2025, while cards would be 40-45%.  Hence private Equity players are going to have a merrymaking Christmas in coming days.

These payments have transformed a major part of Indian unbanked segment. The covid lockdown has been the biggest proof of the same.  Payment banks roles are not hidden from society. Home to 225 million adults without an account, China has the world’s largest unbanked population, followed by India (190 million), Pakistan (100 million), and Indonesia (95 million). Further Women make up nearly 60% of unbanked adults in China and India.  In India, around 4 in 10 unbanked adults are in the age group of 15 to 24 years.

The 11 payment banks  which opened their shop earlier include Aditya Birla Nuvo, Airtel Payments Bank, Cholamandalam, India Post Payments Bank (IPPB), Fino Payments Bank, National Securities Depository Limited, (NSDL), Jio Payments Bank, Sun Pharma group by Dilip Singhvi, Paytm Payments Bank, Tech Mahindra, and Vodafone M-Pesa. These 11 have transformed financial inclusion in India.  Well 3 out of 11 payments banks -- Cholamandalam, Tech Mahindra, and Sun Pharma -- surrendered their license before even starting a business. We remember that way back in 2009 we published an article in The INSTITUTE OF COST & WORKS ACCOUNTANTS NATIONAL CONVENTION SOUVENIR-2010  about financial inclusion and the depth of its requirement.

Payment Banks Like JIO, Airtel , Paytm is enough to eat up the market and take forward the financial inclusion. We will not be surprised if JIO takes up small finance banking license which has been in speculation for a long time. MoneyTap, Capital Float, Lendingkart, Zest Money and Indifi are among the top fintech lenders in the country. Paytm, PhonePe, Freecharge, Razorpay and Mobikwik also offer credit to customers in partnership with banks. These so many companies will face M&A as the price and future valuation of a business and brown-field approach is applied. Lending business will transform once the 5G comes into play which will bridge the current gaps of connectivity.

 The biggest advantage of Small Finance payment the bank goes to Jio and Airtel since they hold the internet speed in their hands. The biggest revolution will come only when the 5G will come up next. 

5G will change the business model of the payment banks and fin-tech segment (excluding the wealth tech). Loan application processing disbursement will happen at quicker speed with 5G as VR and AR will be deployed to change the consumer experience.  AI along with 5G will bring auto-suggested customized product recommendations to the consumer. Machine learning abilities through 5G and Smartphone will change the landscape of the consumption business.  Further 5G will help the payments in super fast Video KYC followed with ease in upload and download of and storage facility of clouds.

Payment Banks will be playing a bigger role in the same. For example, Insurance or investments both will find a significant boost up as the unbanked knowledge levels are also being increased through these payments bank by bringing product recommendation. Indian needs these small Finance banks for getting financial inclusion and creation of employment for the Indian economy. Well once you give birth to inquisitiveness the rest is history if answered properly. Cash will be playing a negligible role in the coming days as 5G will come up. Creation digital branches will come up in rural areas and the increasing trend of aspiration in rural areas will play a pivotal role in the Payments Banks through 5G.

Connecting IoT devices and behavioural an aspect of an individual will help to create significant business growth for the small finance banks. Equipping them with a bank account (actually a digital wallet) would turn them into economic growth by connecting services with aspirations.   For example, high resolution streaming capabilities through 5G will enable a customer to interact with financial consultants or bank consultants and giving them more confidence before making any decisions.

 Technologically the Fin-tech space has developed significantly where the penetration level of the system has been significant through SMARTPHONE use.  Internet speed has changed the landscape of the business model when shifting happened from 2G to 3G and then finally 4G with a fabulous gift of PER GB data cost coming down significantly coming down. Now going ahead the 5G will transform the business model of the payment banks. The low latency, high data capacity and reliability of forthcoming 5G networks will help create a new platform for the delivery of services – virtually wherever the customer is.

Hence in the coming days, the Industry will witness new entrants in the Banking Industry. Welcome to the new Banking ERA.