Payment banks, a turning point

The Reserve Bank of India’s in-principle approval for 11 payment banks may mark a new turning point in India’s banking culture and practices. The central bank has not been niggardly in its approval as it was with the grant of universal banking licences last year. The entities which got the approval represent a wide spectrum of players from telecom, postal services, consumer industry and other enterprises. They all have different ways of directly reaching out to customers for financial dealings and this is the last mile connectivity advantage that the new breed of banks can take advantage of. They will not be able to offer all banking services but those that they offer are basic. They can accept up to Rs 1,00,000 as deposits per account, issue ATM and debit cards and offer payments and remittance services. The risk is less because they cannot extend loans and have to invest 75 per cent of their deposits in government securities.

Each of the new entities has millions of customers and a large number of them are not part of the formal banking sector. They include low-income households, migrant workers, self-employed and a large segment of the rural population. The new banks are expected to reach out to them. In spite of all efforts to expand banking to rural areas, only seven per cent of villages have banks. Payment banks have an advantage because they are not weighed down by legacy issues and the high staff and infrastructure costs which conventional banks have to bear. The RBI says they are expected to complement the present banking system. But an element of competition will also enter banking because the new banks can offer higher interest rates than others. This can promote greater efficiency and lead to better customer services. Some of the financial inclusion initiatives like the Jan Dhan programme can better work with the help of leaner and more nimble players like payment banks.

Technology will drive the new initiative as low cost digital payment systems will be widely put to use. The mobile phone can virtually become a banking instrument and it is no surprise that three of the payment bank entities are telecom operators. Some of them already do financial operations but had to be dependent on a bank as an intermediary. They can now directly offer cheaper and better services as they are them-selves banking units. India is way behind many other developing countries in the use of mobile banking
practices. When the new banking entities become popular, they can also take the country in the direction of a predominantly cashless economy.
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