Payments Bank License – Financial Inclusion or an Insurance for “Too Big to Fail” ?

28th August, 2015

With a noble cause to further financial inclusion [1], the Reserve Bank of India (RBI) gave 11 enterprises licenses to set up payment banks. These 11 enterprises include 1. Aditya Birla Nuvo Limited; 2. Airtel M Commerce Services Limited; 3. Cholamandalam Distribution Services Limited; 4. Department of Post; 5. Fino PayTech Limited; 6. National Securities Depository Limited; 7. Reliance Industries Limited; 8. Shri Dilip Shantilal Shanghvi; 9. Shri Vijay Shekhar Sharma; 10. Tech Mahindra Limited; 11. Vodafone m-pesa Limited.

In arriving at the final list, a detailed investigation was undertaken by both the External Advisory Committee (EAC) and the Committee of the Central Board (CCB) to ensure that all the selected applicants have the reach and the technological and financial strength. The CCB notesthat payment banks cannotundertake lending, and therefore believed that the payments bank would not besubject to the same risks as a full service bank. Therefore, the CCB evaluatedapplicants to assess whether there would be unacceptable risk even to thenarrower functions of a payments bank.” The press release containing the names of the payment bank licensee also states that “the applications were screened for financial soundness, i.e. five year track record of the promoter and the key entities of the promoter group. The assessment also included governance issues with a focus on `fit and proper’ criteria for promoters..”

Although it is not clear on what parameters did the CCB undertake its risk assessment, it appears that the CCB was more worried on the risk to the payments bank. Risks from the failure of  payments bank have not received much or any attention at all. Systemic risks associated with the payments bank licensee appear to have missed the CCB lens.

Are these licensee’s systemically important firms such that if the licensee approaches failure then it may pose a threat to the stability of the financial system as a whole? Has the systemic importance of industrial houses such as Reliance Industries Limited, Airtel mCommerce Services Limited, and the likes been taken into consideration?

In a research paper, Aggarwal et al. (2013)[2] set to identify the systemic importance of India’s 50 largest firms (both financial and non-financial firms) listed on the National Stock Exchange of India Ltd. (NSE) for each quarter during the period from July 2006 to October 2012. Systemic importance is calculated on three parameters namely Granger Causality, Marginal Expected Shortfall (MES), and Conditional Value at Risk (CoVaR). Granger Causality measures (GC) the degree of interconnectedness between firms and the directionality of such relationship. Marginal Expected Shortfall (MES) measures the amount of market capitalization a firm stands to loose on the worst days of the market. The greater the MES, the more vulnerable the firm is to a crisis. Conditional Value at Risk (CoVaR) captures the marginal contribution of a firm to the overall systemic risk. A higher CoVaR implies greater negative spillover effects of the firm on the financial system.
Based on these measures, systemic importance of Reliance Industries Limited[3] is seen to be consistently high over the period. This means a financial shock in the system can have a multiplier effect transmitted through the systemically important Reliance Industries Limited. This multiplier effect has the potential of imposing threats to the payments bank operations (i.e. handling of low value high volume) it may undertake which then will affect the credit and remittance needs of small businesses, unorganized sector, low income households, farmer and migrant work force.

Reliance Industries Limited is just one such example. Airtel mCommerce Services Limited is a wholly-owned subsidiary of Bharti Airtel Limited and the systemic importance of Bharti Airtel Limited[4] cannot be ignored. Aditya Birla Nuvo Limited is a part of the Aditya Birla Group of companies which also comprises of Grasim Industries Limited and the systemic importance of Grasim Industries Limited cannot be ignored.
Other systemically important banks continue to feature in the list either through a direct association or through an indirect association with the payments bank licensee. For instance, Reliance has tied up with State Bank of India (SBI) – India’s largest lender – where Reliance will hold 70 per cent of the joint venture leaving 30 per cent to SBI.[5]  In a similar move, Kotak Mahindra is expected to pick up 19.90 per cent in the payments bank licensee approved Airtel mCommerce Services Limited.[6] ICICI Bank holds a stake in Fino PayTech Limited while at least eleven public and private bankers own stakes in NSDL including SBI, Deutsche Bank AG, HDFC Bank and Citibank.[7] Systemic importance of State Bank of India, Kotak Mahindra Bank, ICICI Bank, amongst others, cannot not be ignored.
Besides, the potential macro-prudential risks, there is also the potential micro-prudential risks associated with the `limited liability’ of the promoters. It is good to learn that there was a thorough investigation done on the soundness of the promoters. However, diversifying the portfolio of systemically important firms can also lead to management taking undue risks and practising unhealthy activities.[8]

This has led to questioning whether the intention of RBI is too further financial inclusion or provide an insurance to industrial houses that are inflicted with the “too big to fail” or the “too interconnected to fail” syndrome? Is the new system solving the problem of financial inclusion or creating additional risks in the financial system through a fancy (complicated) banking structure?

Since the issue of small-bank license is on its way, it wouldn’t be a bad idea for the Reserve Bank of India to consider the systemic importance of the applicants. Besides, naming systemically important banks is not the solution given the incorporation of other financial and non-financial firms in the apparent new banking structure of India.

[1] One of the key features of the Payment Banks guidelines states “the objective of setting up of payment banks will be to further financial inclusion by providing (i) small saving accounts; and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users” (RBI releases Guidelines for Licensing of Payment Banks’ released on 27th November, 2014).

[2] Aggarwal, N., Arora, S., Bhel, A., Grover, R., Khanna, S., and Thomas, S. 2013. A systemic approach to identify systemically important firms. IGIDR Working Paper WP-2013-021.

[3] Market capitalization of Reliance Industries Limited is approximately an average of 19 per cent of India’s GDP for the period July 2006 to October 2012.

[4] Market capitalization of Bharti Airtel Limited is approximately 10 per cent of India’s GDP for the period July 2006 to October 2012.




[8] The role of micro-prudential risks in the global financial crisis of 2008-09 has been discussed at length. The same can be read in my new book titled `Balancing the Regulation and Taxation of Banking‘.


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