The Consumer Oriented Payment Banks

The guidelines regarding licensing of payment banks were announced in November 2014 and the Reserve Bank of India (RBI), on Wednesday, gave an in-principle approval to 11 of the 41 applicants, including Reliance Industries, Aditya Birla Nuvo, Airtel and Vodafone. The RBI added that it will give such licences more regularly in the future.

The 'in-principle' approval granted to these applicants would be valid for a period of 18 months, during which the requirements under the guidelines of the Reserve Bank are to be complied with.

As per the RBI guidelines, payment bank licences would be granted to supermarket chains, mobile firms and others, to cater to individuals and small businesses. The aim of the move is to provide payment and remittance services in small savings accounts migrant labour workforce, low income households, small businesses and other entities with such accounts.

A payments bank can only receive deposits and provide remittances and cannot carry out lending activities or issue credit cards. They can instead issue ATM and debit cards.

The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for everyone to have a bank account. That is the reason why the cash limit in the accounts is set at Rs. 1 lakh which, outside the banking system, is a fairly comfortable amount. The real effect will come to remittances, as sending money home to smaller towns and villages while working in the city would become easier.

The new payment banks will make people less dependent on cash, even for small sums. Also, m-commerce would face a big impact as a mobile wallet will soon become a bank account.

The reasons why payment banking will revolutionize money movement are many.

First and foremost, payment banks will bridge the last mile between bank branches and the customer living in a remote rural hamlet, using mobile phones as vehicles of banking.

Second, intense competition driven by the future proliferation of payment banks will force banking costs to come down.

Third, efficient payment banks and private sector banks will take away lucrative businesses and prized customers of public sector banks, as they will be both well capitalized and efficient.

Fourth, the arrival of payment banks - including India Post - will transform social welfare and subsidy schemes. The poor can now be routed through regular banks as well as payment banks, as the emotional response that the Indian posts enjoy from its customers would increase the trust for it among the people.

Fifth, now the government has an additional tool to eliminate black money in large parts of the financial system. Once an adequate mobile and Jan Dhan penetration rate is achieved, the government can effectively ban cash transactions

Sixth, payment banks will expand the government's access to cheap funds as the payment banks are only allowed to invest the money customers deposit into government securities.

Seventh, bank depositors are expected to earn higher short-terms deposit rates and old 4 percent savings bank norm will probably fade away.

After payment banks, the RBI will move towards licensing of “small banks” to focus loans on small borrowers rather than big corporates. Once this happens, non-bank finance companies will become "small banks", making financial inclusion more complete from the small borrower's point of view.

Between them, payments banks and small banks will make Indian banking more competitive and more inclusive for both depositors and borrowers. The era of the consumer is finally at hand.

- Pulkita Sharma