Deciphering the risk universe for payment banks

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ContentsEvolution of payment banks p2/ Payment banks: An overview p4/ Payment banks: The risks p6/ Our solutions and offerings p8/ Contact us p11

2 PwC Deciphering the risk universe for payment banks 3

Evolution of payment banks

Deciphering the risk universe for payment banks 3

How payment banks (PBs) came into existence

As PBs are a high-volume and low-margin business model, the costs need to be balanced with revenue to make the business sustainable.

*Based on RBI circulars, notifications and updates on the FS ecosystem

Discussion paper on the banking structure in India

August 2013

RBI forms a committee on comprehensive financial services (FS) for small businesses and low-income households

September 2013

The PB journey

RBI issues draft guidelines on PBs

July 2014

RBI releases a list of 41 entities for PBs

February 2015

Cholamandalam Investment and Finance Company Ltd. drops plans of setting up PBs

March 2016

Tech Mahindra drops its plan of setting up PBs

May 2016

RBI releases final guidelines on PBs

November 2014

RBI gives in-principle approval to 11 PBs

August 2015

IDFC Bank Ltd. and Telenor Financial Services withdraw plans of setting up PBs

May 2016

4 PwC Deciphering the risk universe for payment banks 5

Payment banks: An overview

Deciphering the risk universe for payment banks 5

Understanding the PB landscape

*Based on RBI circulars, notifications and updates on the FS ecosystem

The objective of the RBI guidelines around PBs is to promote financial prudence supplemented by a robust compliance and risk governance culture.

Key regulatory themes

Prudential guidelines

Risk management

Regulatory reporting

Corporate governance

Product guidelines

Customer service and outsourcing

Accounting

Objective

• Licenced under section 22 of the Banking Regulation Act, 1949

• Governed by various provisions—the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act (FEMA), 1999; Payment and Settlement Systems Act (PSS Act), 2007; Deposit Insurance and Credit Guarantee Corporation Act (DICGC Act), 1961; other statutes and directives, prudential regulations and other guidelines/instructions issued by the RBI

• To further financial inclusion

• To provide low-value payment and remittance services

• Maintain CRR and SLR with the RBI

• Minimum 75% investment in government securities/ treasury bills

• Maximum 25% investment in current and time/fixed deposits with other scheduled commercial banks

Regulation Deployment of funds

Product and services

Issuance of ATM and debit

cards

Acceptance of demand deposits

Distribution of other financial

services

Function as a business

correspondent

Cross-border remittance

Internet banking

Issuance of payment protection insurance

Payment and domestic

remittance services

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Payment banks: The risks

Deciphering the risk universe for payment banks 7

Risks associated with PBs

*Our viewpoint on PBs in India

PBs operate in a regulatory environment; therefore, balancing risks with business objectives is important.

Key risk themes

Regulatory risk

Operational risk

Reputational risk

Fraud riskInformation security risk

Market/liquidity /credit risk

Strategic risk

Support function related risks are as mentioned below:

• Incorrect accounting

• Weak controls over general ledger (GL) code creation

• Weak financial statement close process (FSCP)

• Issues around segregation of duties

• Weak control over authorised signatories

• Payroll-related risks

Key risks:

• Money laundering/terrorist financing

• FEMA non-compliance

• Domestic remittance non-compliance

• Volatility in forex rates

• Failure in delivery of services

Key risks:

• Non-compliance with customers’ due diligence requirements

• Weak operational framework around KYC refresh

• Anti-money laundering (AML) framework not incorporating all the AML scenarios

• AML reporting non-compliance

Key risks:

• Non-compliance with legal documentation

• Failure in delivery of products and services

• Conduct risk/mis-selling risk

• Agent/broker-related disputes

Key risks:

• Changes in monetary policy

• Changes in interest rate

• Weak behavioural analysis around deposit withdrawals

• Volatility in the securities market

• Static duration management of the fixed income portfolio

Key risks:

• Non-compliance with relevant regulations

• Changes in banking regulations

• Changes in governance set-up

• Changes in government policies

Key risks:

• Compromise to information security

• Cyber fraud—hacking and skimming of cards

• System downtime risk

• Failure in delivery of transactions

Para-banking services

Risk universe

Acceptance of deposits Remittance services

Payment channel Regulation Funds deployment

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Our solutions and offerings

Deciphering the risk universe for payment banks 9

PwC’s solutions help build governance blocks to manage inherent risks efficiently.

Information security

audit

Policy andprocess advisory

Compliancereview

Internal audit/

concurrent auditPost-

licencing support

PwC has a pool of highly experienced professionals to assist you along this governance journey.

Internal financialcontrol

Governance framework

Risk framework

Benchmarking

Regulatory advisory

10 PwC Deciphering the risk universe for payment banks 11

Notes

Deciphering the risk universe for payment banks 11

Contact usVivek IyerPartnerFinancial ServicesE-mail: vivek.iyer@in.pwc.comPhone:+91-22-66691173Mobile:+91-9167745318

Dnyanesh PanditDirectorFinancial ServicesE-mail: dnyanesh.pandit@in.pwc.comPhone:+91-22-66691000Mobile:+91-9819446928

Vernon DcostaDirectorFinancial ServicesE-mail: vernon.dcosta@in.pwc.comPhone:+91-22-66691000Mobile:+91-9920651117

Ramkumar SubramanianAssociate DirectorFinancial ServicesE-mail: ramkumar.subramanian@in.pwc.comPhone:+91-22-66691000Mobile:+91-9004644029

Namrata KhannaManagerFinancial ServicesE-mail: namrata.khanna@in.pwc.comPhone:+91-22-66691000Mobile:+91-9820744071

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