What binds Reliance Industries, SBI in their payments bank alliance

The Reserve Bank of India's (RBI) differentiated banking licence scheme has got a shot in the arm with two giants of the industry - Reliance Industries Ltd (RIL) and State Bank of India (SBI) - joining hands to form a payment bank.

The RBI's new guidelines permit setting up of payment banks that can accept deposits and distribute third party products such as insurance and mutual funds. They can also undertake transaction banking including remittances, mobile recharging, ticketing, payment of utility bills, etc. Payment banks would not be allowed to lend.

The profile of the two giants would actually dwarf many other payment banking candidates including banking correspondents, prepaid instrument issuers, retail chains etc. RIL is the largest private sector company in India with a turnover of over Rs 4.46 lakh crore and SBI has a total asset base of Rs 18.74 lakh crore. In fact, Mukesh Ambani's Reliance Industries was reportedly eyeing a banking licence under the universal banking category but finally opted out.

So what binds together RIL and SBI? RIL has been making efforts to expand into retail facing businesses. The modern retail business is  gradually finding its feet while the conglomerate is readying to launch its 4G data services very soon through Reliance Jio. These business are very customer facing and there is an opportunity to do transaction banking right from recharging to remittances to selling insurance and mutual fund products. Similarly, SBI needs a low cost model to reach out to the urban poor or people  in remote areas profitably.

The duo has now formed a joint venture with SBI holding 30 per cent equity in the company. RIL will be a promoter of the bank. SBI will certainly bring banking expertise to the table while  RIL has the financial muscle to spread out in every nook and corner of the country. RIL will also be banking on payment digitisation or mobile banking as Reliance Jio is expected to make a big impact.

But it all depends on how the RBI decides to dole out the licences. In the universal banks category, the RBI recently opted for a small player like Bandhan Financial Services, a micro finance institution, and dedicated infrastructure institution IDFC. In the process, it ignored claims of several industry giants including the Aditya Birla Group, Anil Ambani's Reliance Capital, L&T etc. All eyes would be on the central bank now.