Payment Banks Case Study 1: Why They Got Licenses + Expectations

Cholamandalam Investment and Finance has got in-principle approval from the Reserve Bank of India to set up a payments bank. The payments bank is expected to be a 100% subsidiary of Cholamandalam and expected to have a nationwide presence. However, the firm plans to partner with those who can bring technology or provide access to a broader customer base in the near future.

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Cholamandalam Investment and Finance Company Limited is the financial services arm of Murugappa group, an INR 269 billion Indian conglomerate with a presence in 28 businesses. Cholamandalam commenced business as an equipment financing company and has today emerged as a comprehensive financial services provider offering vehicle finance, home loans, home equity loans, SME loans, investment advisory services, stockbroking, and various other financial services to customers.

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Cholamandalam currently has 534 branches spread across the country and has a customer base of over 750,000 customers, most of whom are truck drivers and small- and medium-business owners. It would be essential to note that 71% of the 534 branches are in rural areas while the other 29% are in urban and semi-urban areas. Looking at the RBI’s objective of setting up payments banks, which was to augment financial inclusion by providing small savings account and payment services to the migrant workforce, low-income households, and small businesses, it is a no-brainer that Cholamandalam got the license.

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Cholamandalam’s parent company Murugappa adds further value to this proposition. The Murugappa group ecosystem offers an even larger base of rural customers. It is estimated that the group together has over 3.5 million rural customers. Key customer segments of Murugappa Group’s other subsidiaries are:

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• Coromandel International: End Customers are farmers; the company has 7,000+ dealer networks spread across India, especially in rural areas.

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• DBS Cholamandalam Asset Management Limited: End customers are retail and institutional investors; the company has 200,000+ customers.

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Cholamandalam plans to use both technology and its physical footprint to reach out to its prospective customers. It is evident from the customer segments (farmers, drivers, and low-income groups apart from SMEs) that they would focus on financial inclusion. However, the group has to overcome two significant concerns. At first, the group has no previous experience in financial technology and will undoubtedly have to partner with a technology provider. Similarly, the current customers of the company are low-value and low-income customers. As we all know, ‘payments’ is a low-margin play, and for small transactions, it would take a lot of effort and volume to make it profitable.