I recently read that the Reserve Bank of India (RBI) has issued ‘payment bank’ licenses. What are payment banks?
The RBI issued 11 payment bank licenses in August 2015, and this is going to be a game changer. Let me explain…
Just as e-commerce today has transformed the retail industry by competing with brick-and-mortar players, payment banks are expected to revolutionise financial services. They are termed as ‘challenger’ banks, as they will compete directly with the traditional banks, and are expected to reach customers mainly through mobile phones rather than traditional bank branches!
These banks aim to to make it easier for anyone to get a bank account. To put it simply, the approach is: “if you have a mobile phone; you can have a bank account!”
Isn’t the Pradhan Mantri Jan-Dhan Yojana (PMJDY) meant to do this?
Of course, the Centre has taken measures to achieve financial inclusion through PMJDY, which essentially provides non-account holders with benefits such as savings and deposit accounts, remittance, credit, insurance and pension in an affordable manner.
The RBI, in my view, has attempted a “public-private partnership” exercise, with the objective to push financial inclusion. Through payment banks PMJDY and insurance schemes can reach a larger population. These banks will focus on the unorganised sector and will offer small savings accounts, allow payments and remittance services to various sections of the society, especially the migrant labour workforce, low-income households and small businesses.
Thus, payment banks will help further the financial inclusion objectives of the Centre.
Can you elaborate on ‘financial inclusion’?
Okay, financial inclusion is the availability and delivery of financial services at affordable costs to vast sections of the disadvantaged and low income groups.
You will be surprised to know that even after 69 years of Independence, a large section of the Indian population still remains unbanked i.e., they do not have bank accounts. This lacuna has led to generations of financial instability among the lower income group, who do not have access to financial products and services.
Are there limits set to the accounts for deposits?
Yes, the limit is set at ₹1 lakh for deposits per account. Now this limit might seem extremely low to most of us, but think for a moment…if you have been outside the banking system, then it is a fairly sizeable limit.
Can payment banks carry on all activities of a traditional bank?
Well, this is the first time that the RBI has issued a “differentiated” bank licence as compared to the universal banking licences. Also, this is the first time since the nationalisation of banks, that private sector businesses have received the RBI’s nod for banking services; hence there are dos and don’ts.
Dos:
- Can raise deposits of up to ₹1 lakh, and pay interest on these balances just as a savings bank account does
- Enable transfers and remittances through a mobile phone
- Offer services such as automatic payment of bills, and purchases in cashless, cheque-less transactions through a phone
- Issue debit cards and ATM cards usable on ATM networks of all banks
- Transfer money directly to bank accounts at nearly no cost
- Offer Internet banking
- Sell mutual funds, insurance and pensions
Don’ts:
- Offer loans or any such lending activity is not permissible
- Issue a credit card under this scheme
Is it safe to have an account with a payment bank?
Of course, without any doubt. First of all, a payment bank needs to maintain the usual CRR (Cash Reserve Ratio) with the RBI. Further, a payment bank will be required to invest 75 per cent of its demand deposit balances in Statutory Liquidity Ratio (SLR), which is eligible Government securities and treasury bills, which being sovereign instruments, are safer. Again, a maximum of 25 per cent will have to be held in current and fixed deposits with other scheduled commercial banks.
Last but not the least, the minimum capital required to set up a payment bank is ₹100 crore!
Hence, all these norms, including capital adequacy, are indeed comforting from safety perspective.
Why are they going to be game-changers?
Let’s discuss some stats. As a report by CRISIL, India’s domestic remittance market is estimated to be about ₹ 800-900 billion and is growing at whopping 11 per cent to 13 per cent, and majority is still “cash” transfers, especially from migrant labourers.
Payment banks, on the other hand, will make it possible for money transfers through mobile phones, and hence is a step in redefining India towards ‘cashless’ economy.
The RBI expects payment banks to target those who transact only in cash to take their first step into formal banking. As one can imagine, it could be uneconomical for traditional banks to open branches in every village, but the mobile phone coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen.
Thus payment banks will target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.
As a result, this competition will force existing banks to offer low-cost basic bank accounts to this unorganised sector and accelerate India’s journey into a cashless economy.
Interestingly, payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.
Thus by offering price differentiation, refreshing approach and choice to the customer, payment banks will indeed be game changers, serving financial inclusion objectives besides the ‘Digital India’ mission of the Centre.
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