New Payment initiatives

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New Payment Initiatives - Way to Bank’s Profitability

NSN REDDY*

Email id: nsn6507@yahoo.com ; Mobile 09490213002

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RBI has been initiating various new payment initiatives since 2005 with an aim to process large value and time critical payments through electronic mode to provide online, hassle-free, cost effective value added services to the bank customers. RBI intended to achieve twin objectives viz., Customer Convenience and Paperless Banking by introducing RTGS/NEFT/ECS products. Now these products have become customer driven and majority of funds transfers are taking place through this route, which is evident from the following figures:

Month	RTGS (Customer)		NEFT
Month	Volume (Lakhs)	Value (Cr)	Volume (Lakhs)	Value (Cr)
June`08	06.21	1646155	19.00	11326
June`09	20.10	2414900	44.81	23813
June`10	37.97	2872300	84.20	52447

Source: RBI Reports

Hitherto, Interest/Dividend warrants and cheques drawn on Banks/Utility organizations for payment of loan installments/utility bills constitute major components of clearing operations. Now the trend is reversed and the vast repetitive nature of transactions are being routed through Electronic Clearing System (ECS) mode, which is evident from the table here under.

Month	ECS - Credit		ECS - Debit
Month	Volume (Lakhs)	Value (Cr)	Volume (Lakhs)	Value (Cr)
June`08	64.17	7553.91	132.25	5196.29
June`09	60.72	8668.66	127.46	5750.13
June`10	89.20	12912.23	128.24	6190.89

Source: RBI Reports

In the initial stage, there was an apprehension in the minds of the bankers that these initiatives may adversely effect the non-interest income of banks since the charges on RTGS/NEFT/ECS are much lower compared to the traditional products hitherto used for transfer of funds.

Profit is the buzz word and banks have been focusing attention on enhancement of Net Interest Income (Interest Earned minus Interest Expended) and reduction of Burden (Non Interest Expenditure minus Non Interest Income). Normally, the Burden is negative since Non Interest Expenditure, the major component, is likely to increase year on year on account of market driven rates and inflation.

To offset the Burden, banks are required to improve NII with proper management of interest rates on Deposits and Advances. In the deregulated environment, although banks are free to fix their own interest rates on Term Deposits and Advances, in reality the interest rates are, with a minor variance, almost similar across banks. In a way, Regulated interest rate regime is in vogue in the deregulated environment. Hence, there is only a little scope to increase interest rates to improve Net Interest Income.

The alternative left to the banks is to have a closer look on deposit mix and initiate steps to augment the composition of low cost deposits. The most striking aspect in the recent years is that all banks are paying focused attention on low cost deposits to stay ahead in the present competitive market. The ownership of deposits throws some important thoughts with regard to composition of deposits across various population groups which are as under:

Population Group-wise Deposit Mix - % to total deposits

No	Sector	Current (%)	Savings (%)	Term (%)	Total (%)
1	Government	14.80	8.00	15.30	13.50
2	Corporate (Private & Finance)	41.10	0.90	21.70	23.30
3	Institutions	34.10	9.13	20.50	19.80
	*Sub-total*	90.00	*18.03*	*57.5*0	*56.6*0
4	Individuals (Household)	6.60	76.27	37.30	38.30
5	Foreign (NRIs)	3.40	5.70	5.20	5.10
	Total	100.00	100.00	100.00	100.00

Source: Ownership of deposits report (2008) published by RBI

Government/Corporate/Institutions are contributing major share (56.60%) of the deposits, of which share of Corporate is 23.30% followed by Institutions (19.80%) and Government (13.50%). The major chunk of these deposits (90.00%) is under Current Deposits. This segment uses the new payment systems viz., RTGS, NEFT and ECS extensively for their day-to-day operations (instant transfer of funds across the locations/banks) and it is an opportunity to the banks to penetrate in to the market to retain the existing high value clientele besides targeting new customers to improve NIM, which is the need of the hour.

To encourage the usage of RTGS/NEFT further, recently RBI regulated the service charges with a cap of Rs.50/- and Rs.25/- on outward RTGS and NEFT transactions respectively.

RTGS/NEFT transactions comprises of two types viz., Inward and Outward. Outward is the one which originates at bank branch by the remitter (account holder), where as Inward is the one which takes place at beneficiary bank branch. Outward transaction of one bank becomes Inward transaction of other bank. Normally, NEFT inward transactions do not require any additional efforts on the part of the banks except providing reliable connectivity where as for outward transactions; banks have to undertake extensive marketing efforts.

However, RTGS transaction (inward and outward) denote the presence of high-value accounts with substantial float funds. The active banks in this segment will have an edge over other banks to improve low cost deposits since the targeted clients maintain reasonably good balances in the accounts (float funds) to meet the funds transfer commitments.

It is observed that RTGS transactions (customer) for the month of June 2010 were 37.97 lakh and this segment is gaining momentum with average annual growth rate of 88.90%. Similarly, NEFT transactions for the month of June 2010 were 84.20 lakh and the annual average growth rate is observed at 87.90%.

Analysis of RTGS Market Share (%):

No	Category	Value		Volume
No	Category	Inward	Outward	Inward	Outward
1	Public Sector Banks	30.11	30.85	44.97	58.52
2	New Generation Private Banks	40.38	41.25	32.30	25.04
3	Old Generation Private Banks	2.61	2.71	5.43	7.83
4	Foreign Banks	23.14	23.24	16.30	7.14
5	Others	3.76	1.95	1.00	1.47
	Total	100.00	100.00	100.00	100.00

Source: RBI Report – June 2010

Ø Although the Public Sector Bank’s share in RTGS inward transactions is high at 44.97%, in terms of value it is just 30.11%.

Ø The market share of new generation private banks at 40.38% in RTGS Inward transactions (value), which speaks the edge of these banks in RTGS business.

Ø The Foreign Banks with their insignificant presence in terms of branch network is still able to acquire noteworthy market share of 23.14% in RTGS business.

Ø The high presence of market share of New Generation Private Sector Banks / Foreign Banks in RTGS business is an indication of their improved performance in garnering the high value accounts especially under Current Deposits which has positive bearing on NIM.

Analysis of NEFT Market Share (%):

No	Category	Value		Volume
No	Category	Inward	Outward	Inward	Outward
1	Public Sector Banks	41.33	27.91	48.41	24.71
2	New Generation Private Banks	33.16	27.49	36.31	40.34
3	Old Generation Private Banks	3.16	2.42	4.96	3.32
4	Foreign Banks	21.49	41.90	9.46	31.39
5	Others	0.86	0.28	0.86	0.24
	Total	100.00	100.00	100.00	100.00

Source: RBI Report – June 2010

Ø In terms of branch network as well as deposits, the major share belongs to Public Sector Banks followed by Private Sector Banks and Foreign Banks.

Ø Contrary to this, Foreign Banks are playing leading role in NEFT outward transactions with a market share of 41.90% followed by Public Sector Banks (27.91%) and New Generation Private Sector Banks (27.49%).

Ø With regard to NEFT Inward transactions, reversal trend is observed by Public Sector Banks i.e. Inward transactions are outnumbered to Outward transactions. It clearly indicates that PSBs are receiving small value credits triggered by Private Sector/Foreign Banks on behalf of their high value clientele. With the proactive approach these banks are able to reduce the cost of deposits substantially by improving the low cost deposit base (Current accounts).

Ø The reasons for sub optimal performance of PSBs could be on account of delayed implementation of Core Banking and poor connectivity. Absence of 15 digit account number also caused delay in crediting the amounts to the beneficiary accounts, which forced the customers to avail these services from Foreign/Private Sector Banks.

Ø PSBs are not evincing desired attention to penetrate further into NEFT market as they feel it is not cost effective compared to exchange on DDs. In the process, these accounts are lost to other banks, causing of other income as well as fall in high-value current account base.

Ø The other contributing factor for the low market share of PSBs is lack of awareness of the product features and its importance among the staff members.

As per RBI reports, around 70% of ECS transactions (Credit & Debit) are being triggered by high-value corporate accounts through New Generation Private Sector Banks.

The strong technology platform and early entry in CBS has enabled HDFC, ICICI and Axis banks to take the advantage of the new payment initiatives, which is evident from the following market share figures.

No	Category	RTGS (Customer)		NEFT		% CASA to Total Deposits
No	Category	Volume	Value	Volume	Value	% CASA to Total Deposits
1	HDFC Bank	17.06	10.77	15.12	13.97	52.03
2	ICICI Bank	5.30	4.60	11.50	5.15	42.10
3	Axis Bank	5.28	4.70	5.77	3.83	40.39

Source: RBI Report – June 2010

HDFC, ICICI and Axis Banks are playing a dominant role and have acquired a considerable market share in the area of RTGS/NEFT operations. The proactive approach adopted by these banks enabled them to improve their CASA deposits beyond 40% as against the industry average of 33.20%. The CASA deposits of HDFC Bank stood at 52.03% which is the highest among all Scheduled Commercial Banks.

In the gamut of new payment initiatives, the PSBs are on the receiving end and their large branch network is being used as conduit by New Generation Private Sector Banks and Foreign Banks for their business development. In the process, PSBs are facing rough weather to retain their CASA market share.

The vast presence of branch network and huge clientele base will definitely place the PSBs in advantage position to market new payment initiatives to corporate clients compared to Foreign/Private Sector Banks. The inhibition of income loss has to be removed from the minds of the staff to enable them to market these products more aggressively.

Metro and Urban Branches need to play a proactive role to popularizing the new payment initiatives as it provides ample scope to mobilize high-value low cost deposit accounts. To make the products more attractive, Bank may offer these services free of cost to select corporate/institutional customers, who maintain substantial balances in the accounts.

Technology is no longer a differentiator in business growth as the banks are now functioning under technology neutral environment. Identifying the niche segment and offering appropriate products with proper positioning will definitely make a difference and pave the way to improve the profitability of banks to enhance the value of the stake holders.

***September, 2010***

*[Mr NSN Reddy, who is working as Chief Manager, in Andhra Bank has B,Com, CAIIB, PGDBM (NIBM) qualifications to his credit and has over 32 years of Banking experience]

Important Notice : [The articles written by authors contains only the academic view of the writer and purely for discussions and updation of the knowledge of the bankers. The views expressed in the articles may not at all be subscribed by the organisation where the author is working and / or AllBankingSolutions.com]