Payment Banks in India

By: Anshul Dwivedi & Anant SirohiIndian Institute of Technology, Roorkee

Table of Contents Introduction

- What is a Payment Bank?- Features- How do they earn?

Birth of the Concept- The Nachiket Mor Committee.- Financial Inclusion

Benefits Challenges Growth Impact on the Society Conclusion

In Recent NewsOn 19 August 2015, the Reserve Bank of India gave "in-principle" licences to eleven entities to launch payments banks. These are:

1) National Securities Depository Limited (NSDL)2) Reliance Industries3) Aditya Birla Nuvo4) Airtel M Commerce5) Department of Posts6) Fino Paytech7) Tech Mahindra8) Vodafone M-Pesa9) Cholamandalam Distribution services10) Paytm 11) Sun Pharma.

What is a Payment Bank These are new stripped-down type of banks, which are expected

to reach customers mainly through their mobile phones rather than traditional bank branches. They are allowed to undertake only certain restricted banking functions that the Banking Regualtion Act of 1949 allows.

RBI in its guidelines says “The objectives of setting up of payments banks will be to further financial inclusion by providing(i) Small savings accounts (ii) Payments/remittance servicesTo migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users”

Features of Payment Banks

Rs 100 Cr is the minimum capital required for payment banks. (It is Rs 500 Cr for a commercial bank)

Can only accept CASA deposits. Cannot sanction loans or accept fixed

deposits. Limit of Rs 1 Lakh per customer. Can issue debit cards. Can offer FOREX services. Can offer services such as

automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.

FDI in Payment banks is same as that in commercial banks (74%)

Usha Thorat committee was setup for approval and screening.

How do they Earn? Traditional banks earn by charging a higher interest rate for

advances and giving a lower rate of interest for deposits. The margin results in the profit for them.

Since Payment banks are not allowed to extend loans to the public and are yet expected to give interest rates at par with the commercial banks to remain competitive, the question being asked is how these new banks will be able to survive in absence of income from lending.

RBI has allowed these banks to invest 75% in Government Securities and 25% as deposit in other banks.

How do they Earn? Continued…

These payments banks are expected to play on volumes as they are likely to romp in to their millions of customers, who are currently not within the fold of the formal financial system.

This would lead to large volumes of transactions fetching the payments banks fees - a charge of even 1 or 2 per cent on a large volume can be lucrative on normal cash transfers, which will include government’s direct benefits transfer programmes.

Moreover, with no need for any provisions or losses on NPAs for these payment banks, they may become fitter banks than existing banks.

Birth of the Concept The Payment Banks came into existence as a result of the Nachiket

Mor Committee.

Officially known as “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households” Formed by the RBI Governer Mr Raguram Rajan on 23 September 2013.

It was an expert committee which was to study and provide much-needed insight on Financial Inclusion in India.

This committee had submitted its report in January 2014 and had recommended, among other things, setting up of the Small Banks and Payment Banks.

Financial Inclusion Financial Inclusion is a drive by the government to

bring everyone in the nation under the ambit of basic Financial Services.

It has 4 basic pillars: BANKING: Savings & payment (through ATM,

cheques, e-transfer etc.) CREDIT: Loans @affordable interest rates. INVESTMENT: Mutual funds, Pension plans, Child

investment plans etc. INSURANCE: Life Insurance and non-life (general)

insurance.

Why we need Financial Inclusion?

It Turns savings into investment. Circular flow of income => helps the economy.

Insurance/investment/savings => Protects family against unfortunate circumstances.

Income inequality falls in areas that have more developed financial intermediaries (banks, insurance companies).

In the 80s, countries that focused on providing easy financial services to small businessmen became large economies today be it Japan, South Korea or USA.

If all of the government subsidy/benefit payments are done via netbanking/e-transfer then Rs.1 lakh crore rupee will be saved per year in terms of manpower-time-paperwork-leakages. [As per Mckinsey research.]

Continued If there are no formal channels to save money (like Bank), then

low income households are more likely to fall victim to fraudulent schemes like Saradha chit fund in Bengal.

IF everyone has bank account=> lowers the transaction costs, paperwork and time. (Compared to counting currency notes, maintaining records, manually recovering money vs cheque drop box and so on.)

Economic well-being of the poor people also ensures social harmony, they’ll not fall into brainwashing by Secessionist/Extremist elements in the society.

Serves to further the agenda of “Women Empowerment”.

Traditional Branch in Rural India A traditional bank branch has high cost of operation – office rent,

staff salary, security guard, light bill, telephone bill etc. Even an ultra-small branch will cost Rs 20-22 lakh per year.

In rural area, most people will get No frills account / Basic savings and deposits account= bank can hardly make any profit to make.

Traditional bank branches have fixed working hours and bank holidays. If a poor labourer wants to access his account, he’ll have to waste 2-3 hours which directly affects his wage.

Most villagers need loans less than Rs.5 lakh. In this type of small loans, bank’s paperwork, loan default risk is high compared to the profit/reward.

Benefits they offer Service charges will come down.

There may not be any requirement of minimum balance which directly implies that the customer will not be forced to maintain a minimum balance in their account.

Competition that will arise as a result of these banks will benefit the industry and society. (Eg RBI Rate Cut benefit)

Payments bank will ensure more money comes into banking system.

Payment banks may make handling cash a lot easier.

Challenges they Face DUPLICATION OF EFFORT:

When the Nachiket Mor committee was set up back in 2013 and when it submitted its findings in January, 2014, Mr Modi was not in power.-On 15th August 2014, PM Modi launched the Pradhan Mantri Jan Dhan Yojna (PMJDY) for financial scheme.-Under this scheme, everyone in the nation was to get a basic bank account with an ATM card, life and accident insurance.-Thus, the basic purpose of the Payment banks was fulfilled as a result of PMJDY.- As a result, the scope of expansion of business for these banks has become limited from the start.

Continued ACCEPTANCE BY THE MASSES:

The big commercial government banks (SBI, PNB, UBI etc) are much trusted by the society today. These new payment banks will find it difficult to earn the level of trust that the government sector banks command today.

COMPETITION FROM EXISTING BANKS:As per RBI guidelines, 25% of all branches opened in a year should be in rural areas. For newer banks this quotation has been modified into “unbanked rural areas”. Which means, there is a good chance that the target audience of these banks has already received the access to basic banking facilities.

Growth Since payment banks are allowed to function as Business

Collaboration Agents (BCA) for big banks, they can co-ordinate their efforts along with the bigger banks with the help of tie-ups and achieve the goal of significantly improving financial penetration in the country.

Some of them have already tied up with existing licence holders. - SBI, the country's largest lender, will take as much as 30 percent in RIL's proposed bank.- Bharti Airtel, India's largest telecom operator, plans to give 19.9 percent stake in the bank to Kotak Mahindra Bank Ltd. - Aditya Birla Nuvo Limited has tied up with Idea Cellular which will have 49 per cent stake in the joint venture.

Impact on the Society“Payment banks will change the way people think, change the way they keep the money, where they keep their money, the way they pay.” - Mr Arun Jaitley

New Payment banks needs to introduce new products or new applications, so that instead of cash, people start carrying out more transactions electronically.

Globally, that has been the trend. However, in India, although the number of users of credit and debit cards have increased yet these have been limited penetration on account of costs involved for merchants or establishments which accept these cards.

Mobile phone platforms still has lot of opportunity to penetrate rural India with alternate methods for transactions.

Conclusion1. These banks would target those masses who cannot afford to

visit a branch for carrying out transactions (Eg: Daily wage workers) by providing them basic banking facilities through mobile platforms and appointing BCAs to carry out basic activities.

2. They will leverage the huge volume of transactions for gaining profit.

3. They will face challenges like any other venture but if successful, the Payment Banks promise to change the banking scenario in India and will allow the government to achieve its goal of financial Inclusion. They will also offer competition to the existing banks and more competition is good for the economy as a whole.

Thank You!!