Executive Summary – RBI announced the granting of license for setting up payment banks to 11 organizations. Payment banks will offer some banking services like deposits, withdrawal, Internet banking and selling of mutual fund schemes and insurance products. The aim of payment banks is financial inclusion and get more people especially the rural poor in the banking system. Here is a lowdown on all you want to know about payment banks.
India has a huge unbanked population which means a huge population does not have any means to access financial services like operating a bank account, getting wages deposited in a bank account. A large percentage of small businesses have little or no access to capital sources.
There have been steps taken to rectify this. Recently the Pradhan Mantri Jan Dhan Yojana was launched with the aim of making sure that all households have a bank account. Many people opened their accounts under this scheme but that was about it. They were not used for any financial transactions which defeated the purpose of the scheme. Therefore, the Reserve Bank of India (RBI) approved in-principle licenses for 11 applicants on Aug. 19 for setting up Payment Banks. Payment banks will be banks that offer restricted banking services like accepting deposits, making payments, Internet Banking etc. The 11 organizations that have got the license are Aditya Birla Nuvo Ltd., Airtel M Commerce Services Ltd., Cholamandalam Distribution Services Ltd., Department of Posts, Fino PayTech Ltd, National Securities Depository Ltd., Reliance Industries Ltd., Shri Dilip Shantilal Shangvi, Shri Vijay Shekhar Sharma, Tech Mahindra Ltd. and Vodafone m-pesa Ltd.
What will Payment Banks do?
The key objective of setting up payments banks is to provide financial inclusion. It aims to reach out to more people especially in the rural areas. Payment banks will provide services like small savings accounts, remitting and payment services to migrant labourers, low income households, small businesses, unorganised sector etc. They will provide Internet banking services and act as business correspondents for other banks.They will also aim to facilitate services such as facilitate money transfers and sell insurance and mutual funds. Besides, they can issue ATM/debit cards.
What does it mean when they say Payment Banks have restricted banking facilities?
They are not permitted to conduct activities such as -
- Issue of credit cards
- Undertaking lending activities
- Set up of subsidiaries
They will not be a major threat to existing banks. Some existing banks have a stake in some of the payment banks being set up. Payment banks will act as business correspondents for existing banks which means these banks will be able reach out to more people and areas with their tie-up with Payment banks.
These banks cannot provide loans and therefore cannot earn revenue from the interest difference between deposits and loans.
They will earn via remittance fees and utility payments made via these banks. They can earn commission by providing services to full-fledged banks and selling mutual funds and insurance products.
Payment banks are required to invest minimum 75 per cent of deposits in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills and hold a of maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks. This will help them earn some interest.
The key factor of their success is volume. The more accounts a payment bank has, the higher chance it has for earning revenue and profits.
What does RBI hope to achieve in the long run using Payment banks?
RBI wants to establish payment banks to bring about financial inclusion in the country. In Africa, M-pesa, a mobile payments service has been very successful in bringing about financial inclusion in places where there is limited access to banking.
Payment banks will provide payments and remittance services to a migrant workforce, low-income households and others. For example, a migrant labourer does not have a formal channel to send money to his family in the village. He has to depend on people to send cash to his family and this is risky for him. Small businesses in villages and urban areas will get access to capital which will benefit their business. As banking spreads across the country, financial illiteracy especially among the poor can be curbed and poverty can be tackled.
Payments Banks can give India an opportunity for financial inclusion. There will be many challenges and the road to profitability will not be easy, but they have the potential to increase the banking subscriber base manifold.