New kids on the block

By Ramesh Raja
In Banking & Finance
September 14, 2015
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Payments banks could redically alter basic banking at grassroot level

new-banksVERY SOON, the nearest general store to your house or office might become a one-stop shop for depositing and withdrawing money. Thanks to the Reserve Bank of India for allowing in principle 11 entities to start payment banks; so much so that basic banking services will soon be offered even in unbanked areas. As a matter of fact, one would also be able to buy insurance and mutual fund products. These banks, however, will not offer any loans or credit cards unlike the regular banks, often referred to as universal banks. They can only deposit their money in government bonds. Customers who already have regular savings bank accounts can use their payments’ bank account to make daily or monthly cash transactions, such as utility bill payments or payments for groceries, either through debit card or mobiles. This could also help guard against debit card fraud, as customers can maintain a smaller balance in these accounts, as compared to their regular SB accounts. Even if one doesn’t have a regular savings bank account, s/he can still deposit and withdraw money up to Rs 1 lakh.

Among the 41 applicants, the RBI chose 11 to grant “in principle” approval. These include India Post, Reliance Industries, Aditya Birla Group, Airtel, Vodafone, National Securities Depository, Tech Mahindra, Sun Pharma promoter Dilip Shanghvi, Paytm founder Vijay Shekhar Sharma, Cholamandalam Distribution Services and Fino PayTech.

The development promises to be a game-changer for India akin to over 20 years ago when the Narasimha Rao government decided to issue licences to private banks that helped open up the market and pushed state-owned banks to transform both operationally and technologically and in the process add to the asset base of the Indian banking system. The payments banks are believed to be the safest of banks since they have only the government as borrower, and governments don’t default. In future, payments bank licences may be available on tap as almost anybody with Rs 100 crore in his pocket can set up a  payments bank, assuming they pass the RBI’s “fit and proper” norm. We could see even 50-100 such banks being set up over the next couple of decades when India will be fully banked. They will revolutionize money flow – just imagine their geographical
reach and how their mere presence will impact one and all.

The biggest advantage of payments bank is ‘last-mile connectivity’, unlike a regular bank. So, it is possible that your neighbourhood store can function as a bank branch. These banks will essentially depend on technology to reach payment services to all customers, using mobiles as the vehicle of banking, as mobiles go even where humans don’t. Physical bank branches (or bankers or ATMs) will still be needed  for some purposes i.e. for opening an account, depositing cash etc. but all day-to-day payments, including peer-to-peer payments can be done remotely. The mobile phone will become the virtual ATM and small-payments cheque-book. And opening an account is expected to be like acquiring a pre-paid mobile number. Hopefully, this savings in cost will be passed to customers by way of lower fees.

Analysts anticipate intense competition, which should drive down charges for remittances, fund transfers and other banking transactions. Customers who do not have the means to maintain minimum balance will be welcomed into these banks as revenue will be earned through transaction charges and not on the spread of interest between deposits and loans.

The onset of payment banks will also transform social welfare and subsidy schemes. Government subsidy payments to the poor – whether for LPG, kerosene or even food and fertiliser – can now be routed through regular and payment banks. India Post is already there in places where banks aren’t with over 1.5 lakh post offices, and tomorrow Airtel and Vodafone will reach customers through mobile-enabled payment systems. The threesome of Jan Dhan bank accounts, Aadhaar IDs and mobile banking will enable direct payments to the poor and in process eliminate fake recipients and ensure cash in zero-balance accounts, etc. Inclusive banking and subsidy reforms are simply the biggest things to happen in the coming time.

The onset of payment banks will also transform social welfare and subsidy schemes. Government subsidy payments to the poor – whether for LPG, kerosene or even food and fertiliser – can now be routed through regular and payment banks. India Post is already there in places where banks aren’t with over 1.5 lakh post offices, and tomorrow Airtel and Vodafone will reach customers through mobile-enabled payment systems. The threesome of Jan Dhan bank accounts, Aadhaar IDs and mobile banking will enable direct payments to the poor and in process eliminate fake recipients and ensure cash in zero-balance accounts, etc. Inclusive banking and subsidy reforms are simply the biggest things to happen in the coming time.

With payments banks, we now have one supplementary means to eliminate black money in large parts of the financial system. A government that wants to eliminate black money can effectively ban cash transactions once a 95 per cent mobile and Jan Dhan penetration rate is achieved.

The government will be one of the biggest beneficiaries of payment banking, as payments banks will expand its access to cheap funds. Currently, banks are the major investors in government bonds. While this will remain so even with the entry of payment banks, the sheer impact of additional money coming into payments bank accounts which can only invest in short-term government bills of up to one year’s maturity, will drive down shortterm interest rates, and the government can borrow more cheaply.

While this step of RBI has received warm appreciation from different quarters, some experts feel the dawn of payments banks will trigger major disruptions in banking, which will hit the smaller banks hard. As per Ashvin Parekh of Ashvin Parekh Consultancy Services, smaller banks will be under pressure as the large-sized banks have already tied up with partners in payments banks. Similarly, the Fitch Ratings says the proposed payments banks will increase competition for the public sector lenders and could also pose risks to their market share over the long-term. RBI Governor Raghuram Rajan, on the other hand, quashes those fears and says the new kids on the block will rather act as a feeder to their bigger peers. “The idea behind payments banks is to cut preemptions for other banks. Also, banks have the flexibility with SLR, which has been coming down steadily while payment banks are required to keep their money in government securities,” Rajan said in a conversation with SBI chairperson Arundhati Bhattacharya. According to Finance Minister Arun Jaitley, “Payments bank will ensure more money comes into banking system. Various banks are looking at increasing their rural reach, including big banks like SBI, payments banks will help them realise this.”

Although the RBI expects payments banks to target migrant labourers and the self-employed, besides low-income households, offering low-cost savings accounts and remittance services, this new experiment does come with its challenges. Payments banks are stripped down as they will not be allowed to carry out normal lending activities. It does raise questions about who will serve credit needs of the unbanked. RBI suggests that payment banks will serve as a bridge to allow people to eventually migrate to fullservice banks, which is likely. But payments banks also pose new regulatory challenges and RBI will need to step up its game. However, when  seen in the background of limited access to the formal banking system, the move to introduce newer forms of banks is the way to go.

Thankfully, it is an experiment well worth the effort in a country where more than 60 per cent of people earn less than $2 a  day. In this environment costs matter and a full-service bank’s structure has proved cumbersome. RBI should complement this step by making good its promise to authorise small finance banks, should be announced shortly. The small finance banks will undertake basic banking activities of accepting deposits and lending to the unbanked sections like micro-business units, small and marginal farmers, micro and small industries and unorganized sector entities. Once this happens, nonbank finance companies will become small banks and make financial inclusion more complete from the small borrower’s point of view. Between them, payments banks and small banks will make Indian banking more competitive and more inclusive on both the assets and liabilities.