PAYMENT BANKS - GOOD OR BAD?

By Aishwarya Shetty (14B103)

Payment Banks – The Change

In the recent years we have heard a lot about Financial Inclusion but the steps taken to bring about this change has had little impact. As Albert Einstein said, “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” So in order to bring about financial inclusion we needed to change the rules of the game and introduce new players – the payment bank is one such new player.

This need for Differentiated Banks was first highlighted by Dr. Raghuram Rajan in his 2008 report titled “A Hundred Small Steps”. This report said that the public sector and large bank led institutions are bound by mandates and legacy so they need to be replaced by efficient and innovative institutions. The latter being backed by financiers who are motivated and have low cost structure and advanced technology can provide value for money as they would see the poor as profitable. It was Nachiket Mor committee that finally came up with the banking model for the differentiated banks. Payment Banks falls under the Vertically Differentiated Banking Design where to have regulatory flexibility payments, savings, and credit are approached independently.

Payment Banks – What & Who?

Differentiated Banks are special because they focus on a niche segment. Payment Banks are differentiated Banks which can accept deposits restricted to Rs. 1 lakh from an individual customer. They are not allowed to take up any lending activity. They can only lend to the Government. They are allowed to issue ATM or Debit cards but not credit cards to help facilitate easy transactions. Currently 11 out of 41 applicants have received in-principal approval from RBI to set up payment banks. This approval is valid for a period of 18 months during which the applicants should follow the guidelines and fulfil any conditions laid down by RBI. The list includes Reliance Industries, Aditya Birla Nuvo, Vodafone, and Airtel.

Though financial inclusion is the major reason for the origin of payment banks, the main change that these will bring about is in remittances. The Vodafone CEO, Sunil Sood said that they have partnered with many government bodies to enable direct transfer of wages and subsidies. This along with the ease with which people in the city can transfer money to their relatives living in small towns and villages marks the payment banks as revolutionary. The payment banks are going to speed up the revolution of making India a cashless economy by making it common for people to carry mobile wallets.

RBI guidelines says that licenses will be granted to mobile firms, supermarket chains and similar bodies, to cater to individuals and small businesses. This would facilitate payments, small savings account and remittances to ensure the constantly migrating labour force, low income households and small businesses thrive. The approved applicants like the Department of Post and mobile networks already have networks spanning a large part of the country which would make the many subsidies from Government easily accessible to the villagers thereby ensuring the success of Government schemes geared for development.

Payment Banks are to maintain Cash Reserve Ratio (CRR) with RBI. In addition, they are also required to invest 75% of demand deposit balances in eligible government securities and T-Bills to maintain Statutory Liquidity ratio (SLR). Moreover, a maximum of 25% is to be

held in current and fixed deposits with Scheduled Commercial Banks. All these measures are taken to reinforce the feeling of safety in the depositor’s minds with regard to their savings in the payment banks.

Payment Banks – The Revolution

The payment banks will make it more competitive for the current banks by bringing in low cost structure banking models with widespread use of technology and higher deposit rate of up to 6-7% compared to the current 4%. This would usher in the era of customers. Both Airtel and SBI have over 200 million customers but a payment bank by Airtel has the advantage of reaching areas heretofore unexplored by SBI. This would make transfer of subsidies easier thereby accelerating growth and development in India. The transition to cashless economy through payment banks will also help in curtailing black money in India. Banking costs would come down drastically with the introduction of payment banks making banking cheaper and more customer centric.

Hence, in my opinion, payment banks are good not just for the customer but the economy and banking environment as a whole. From accelerating development to curtailing black money, payment banks are the single snowflake that is the harbinger of a blizzard in the Banking world.