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Smaller, wider

Payments banks could be game-changers, bring in genuine financial inclusion.

In a move that could radically transform the banking landscape in India and help bring in a more genuine financial inclusion, the RBI has granted “in-principle” approval to set up payments banks to 11 entities from across industries. Subject to meeting certain requirements within an 18-month window, they will be granted licences to set up these niche banks that can accept deposits up to Rs 1,00,000 per account, issue ATM and debit cards, offer payments and remittance services, and function as business correspondents for other banks. Payments banks will not be permitted to undertake lending activities and will have to invest 75 per cent of their deposits in government securities. They are expected to be able to make money on user charges for services rather than on the spread of interest rates between loans and deposits.

The international experience on payments banks, particularly in Kenya and Brazil, has been encouraging. While conventional banks are unable or unwilling to offer small deposit and basic payments services to the low-income market and in far-flung areas, niche players with extant commercial networks are better able to play in low value-high volume waters. Take India Post, which has been granted in-principle approval. It has a pan-India network — 1.55 lakh post offices and nearly five lakh employees — that no conventional bank can boast of. Airtel, which has also got the RBI’s nod, has 23 crore subscribers, comparable to the SBI’s total number of customers. It is hoped that payments banks will be better able to draw in the unbanked through improved accessibility — accessing an account could be similar to going to the post office or the neighbourhood kirana-cum-mobile recharge shop — and cheaper, no-frills services. Given the large number of Jan Dhan accounts that are dormant or empty, poor customer-friendly payments banks might lead to more meaningful financial inclusion.

But there is need for caution, particularly on the regulatory front. For one, payments banks must be effectively ring-fenced from their parent concerns and rigorous corporate governance norms need to be adhered to strictly. Further, India is currently addicted to cash and it will take some time to nudge people towards payments banks. This, as well as the considerable upfront investment required, implies long gestation periods for these banks to become profitable. For now, however, a significant start has been made.