‘PAYMENT BANKS; A GAME CHANGER IN THE INDIAN FINANCIAL SECTOR AND A RACE WITH SMALL AND MEDIUM PUBLIC SECTOR BANKS’

Authors: Ajai vishnu, Adith Venugopal, Gokul Ajayakumar

Abstract

This is for the first time in the history of India's banking sector that RBI is giving out differentiated licences for specific activities. It has given in-principle’ licence to 11 entities to start Payment banks business. RBI is expected to come out with a second set of such licences — for small finance banks — and 10 micro lenders were given in-principle approval to set up small banks to advance loans primarily to the unbanked, small businesses and farmers, micro and small industries and unorganized sector entities which do not have access to finance from the larger banks. The idea behind the payment bank is further financial inclusion by providing small savings accounts used by payments and remittance to migrant workforce, low income households, small businesses, at lowest costs. The payment banks, as the concept is more advanced and visionary, moreover having less risks in activities, will lead to rising competitive intensity (higher savings interest rates and service standards) in the banking system, particularly for PSU banks in non-urban centres. It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. The impact on private sector banks will be minimal because they have already made strong investments in technology. But there could be an impact on small and medium public sector banks as incremental deposit growth and market share will see some impact from payment banks, especially in the rural and semi-urban areas. Moreover, the public sector banks are also seeing their current and savings account (Casa) deposit share slowing and have a huge pile of bad debts, which is affecting their profitability and ability to grow.

Key Words: Payment Banks, CASA deposits.

**MBA, Sree Narayana Gurukulam College of Engineering, Kadayiruppu
INTRODUCTION
The Reserve Bank of India (RBI) issues licences to entities to carry on the business of banking and other businesses in which banking companies may engage, as defined and described in Sections 5 (b) and 6 (1) (a) to (o) of the Banking Regulation Act, 1949, respectively. RBI decided to grant licence to entities with the announcement vide its Press Release dated April 2, 2014 that it would grant “in-principle” approval to two applicants who would set up new banks in the private sector within a period of 18 months . To grab this innovative opportunity, 41 entities from various banking as well as other financial services industries were happened to apply for it. On February 2nd which was the last day for the applications, the RBI appointed an External advisory Committee(EAC) under the chairmanship of Dr. Nachiket Mor director , central board of RBI which has done the initial screening of applications and the second inquiry was done by the Internal Screening Committee, which consists of Governor and the Deputy governors, and the third and final phase which confirmed the 11 entities, was the Committee of the Central Board (CCB), which selected entities with experience in different sectors, with different capabilities so that different models could be tried. Central Bank announced the list of 11 entities on 19th August 2015 to which the in-principle approval was granted to set up payment banks.

The scope of the Payments Bank The Payment banks can enable transfers and remittances through a mobile phone. But it can’t offer loans but can raise deposits of up to Rs. 1 lakh, and pay interest on these balances just like a savings bank account does .They can offer services such as automatic payments of bills, and purchases in cashless, cheque less transactions through a phone. They issue debit cards and ATM cards usable on ATM networks of all banks and they can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks. They provide forex cards to the travellers, usable again as a debit or ATM card all over India and also offer forex services at charges lower than banks. They also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
The entities to which the RBI has granted the In-principle approval for Payment banks: 1. Aditya Birla Nuvo Ltd 2. Airtel M Commerce Services Ltd 3. Cholamandalam Distribution Services Ltd 4. Department of Posts 5. Fino PayTech Ltd 6. National Securities Depository Ltd 7. Reliance Industries Ltd 8. Dilip Shantilal Shanghvi 9. Vijay Shekhar Sharma 10. Tech Mahindra Ltd 11. Vodafone m-pesa Ltd
The criteria of screening of selection; The applications were screened for financial soundness, i.e., five year track record of the promoter and the key entities of the promoter group. The minimum paid-up equity is fixed at Rs 100 crore. The assessment also included governance issues with a focus on ‘fit and proper’ criteria for promoters based on due diligence reports and/or any other information indicating deliberate and repeated violations of law/regulations; significant Incremental contribution in terms of existing and demonstrated physical rural reach, business model innovation, technological and operational capability indicating a model that can handle the required volumes of transactions and money with a high degree of demonstrated fidelity and safety; and proposed business plan in terms of product mix, innovative technological solutions, geographic access and viable financial plan. In order to facilitate assessment of outreach and capability for handling low value high volume transactions, additional data was called for from applicants and was considered by EAC for arriving at the decisions
Why they are going to be a game changer? The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr. Nachiket Mor) in its report released in January 2014 examined the issues relevant to an ubiquitous payment network and universal access to savings and recommended the licensing of payment banks to offer financial services to the hitherto excluded segments of the population. More than two-thirds (69 percent) of India’s 1.21 billion people live in rural areas, according to the 2011 Census of India. .India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. While migration data from the country is not as comprehensive, the 2001 Census counted about 191 million people—or 19 percent of the total Indian population at the time—as internal migrants who had moved long distances to other districts or other Indian states in concerned with jobs, by getting married, or by shifting of house and such ways. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts. Direct Benefit Transfer or DBT of Government of India is an attempt to change the mechanism of transferring subsidies launched on 1 January 2013. This program aimed to transfer subsidies directly to the people through their bank accounts. It is hoped that crediting subsidies into bank accounts will reduce leakages, delays, etc
The major subsidy benefits providing to rural people are subsidy on LPG, fertilizer subsidies and the pension funds to senior citizens and other benefits are also able to be transferred directly to the payments banks account by the Government.
Benefits of Payment banks to the under-banked people; Daily wagers especially migrant workers can deposit small amount of money which promote savings and limits unwanted spending. Apart from maintaining Cash Reserve Ratio (CRR) with RBI it keeps 75% of its demand deposits balance in Statutory Liquidity Ratio (SLR) in the form of Government Securities and Treasury Bills. The people from the different literacy scales can transfer fund easily even by sitting at home or while engaging at their activities, provided they have access and capable to use mobile phones and internet. It will help the migrant workers who may be illiterate, to transfer funds without any time and effort. It avoids time to approach a bank’s branch filling up of forms for fund transfer as it is easy through you mobile phones. Currently, India is the second largest mobile phone market in the world with over 500 million mobile phone users. Today, the network of mobile towers has reached the length and breadth of the country with a count of over 7 lakh. Like other banks payment banks also issues ATM cards and other shopping cards, moreover the payments for any services or shopping can be done through mobiles which reduces the risk of carrying cash while travelling. The customers will get innovative insurance based schemes and access to mutual fund and another such facilities which will help village people to secure their life and reserve for the future.

Benefits of Payment Banks to the Growing Economy of India;

Inclusion of effectively operating entities which includes a mix of large corporates, leading telco’s, new-age technology companies, into the financial services is an important step towards fulfilling the vision of ubiquitous access to a bank account and payment services by all. Improved access to banking will provide the much-needed impetus to increase household’s savings in formal financial instruments and thereby see a myriad forms of suspect savings and investment schemes run by unregulated entities and individuals. The increased competition will improve Quality in Services and it reduces the use of physical cash which helps in environment protection through wide usage of mobile transactions. The growth of IT sector will be accelerated as the use of mobile based applications amplifies the use of mobile phones and technology. It also help in Pooling of blocked savings from the hinterlands. Sufficient fund to the Government in supplementary to the taxation revenue for utilizing the fund for infrastructure and other developmental activities.

Impact on small and medium Public Sector banks;

The impact on small and medium are not that much horrible but to some extent it affects the reduction in its CASA deposit balance in the banks. Inadequate facilities to small and medium public sector banks will be a constraint for them to even make a tie-up with those entities which got payment banks licence, like the other big private and public sector banks did. This will reduce the fund for the ailing banks. Which will in turn reflects in the SLR and CRR reserves of the banks and also the entire bank rates. There could be pressure on public sector banks’ deposit franchise from India Post, which has received payment bank approval. India Post’s reach, with 1,39,000 post offices, significantly exceeds the number of bank branches at around 44,700 in rural areas. Since payment banks are allowed to take deposits up to Rs.1 lakh, public sector banks could lose out on customers who might open savings accounts with the post office. India is far from being the only country where technology armed with financial apps is challenging traditional banks. In China, mobile apps have mushroomed and have started threatening the backward and inefficient traditional banks, so much so that many customers have switched directly from cash transactions to banking through mobile apps. Payment banks could also start offering competitive deposit rates of as high as 6-7% to lure customers, compared with the average 4% savings deposit rates of traditional public sector banks.

The payments banks would have simplified Know-Your- Customer (KYC)/Anti Money Laundering (AML)/ Countering Financing of Terrorism (CFT) norms commensurate with the small accounts for the bottom of the pyramid customers they are expected to handle. As many of the approved entities are mobile operators, it would be managed by them cost effectively as they have enough customers in touch and they can reach each corner of the Nation through business correspondents.

In all respects the payment banks will outperform in the Indian Financial Sector which will pave the way to next generation banking fully depended on mobiles phones will washout the branch concept from the banking sector and will accelerate the growth of our economy.

REFERENCE * https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2900 * http://www.dnaindia.com * http://www.firstpost.com/business * http://www.thehindu.com/business