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By: Anshul Dwivedi & Anant Sirohi
Indian Institute ofTechnology, Roorkee
- What is a Payment Bank?
- How do they earn?
Birth of the Concept
- The Nachiket Mor Committee.
- Financial Inclusion
Impact on the Society
On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to
eleven entities to launch payments banks. These are:
1) National Securities Depository Limited (NSDL)
2) Reliance Industries
3) Aditya Birla Nuvo
4) Airtel M Commerce
5) Department of Posts
6) Fino Paytech
7) Tech Mahindra
8) Vodafone M-Pesa
9) Cholamandalam Distribution services
11) Sun Pharma.
These are new stripped-down type of banks, which are expected
to reach customers mainly through their mobile phones rather
than traditional bank branches. They are allowed to undertake
only certain restricted banking functions that the Banking
Regualtion Act of 1949 allows.
RBI in its guidelines says “The objectives of setting up of
payments banks will be to further financial inclusion by
(i) Small savings accounts
(ii) Payments/remittance services
To migrant labour workforce, low income households, small
businesses, other unorganised sector entities and other users”
Rs 100 Cr is the minimum capital
required for payment banks. (It is Rs
500 Cr for a commercial bank)
Can only accept CASA deposits.
Cannot sanction loans or accept
Limit of Rs 1 Lakh per customer.
Can issue debit cards.
Can offer FOREX services.
Can offer services such as automatic
payments of bills, and purchases in
cashless, chequeless transactions
through a phone.
FDI in Payment banks is same as that
in commercial banks (74%)
Usha Thorat committee was setup
for approval and screening.
Traditional banks earn by charging a higher interest rate for
advances and giving a lower rate of interest for deposits. The
margin results in the profit for them.
Since Payment banks are not allowed to extend loans to the
public and are yet expected to give interest rates at par with the
commercial banks to remain competitive, the question being
asked is how these new banks will be able to survive in absence
of income from lending.
RBI has allowed these banks to invest 75% in Government
Securities and 25% as deposit in other banks.
These payments banks are expected to play on volumes as they
are likely to romp in to their millions of customers, who are
currently not within the fold of the formal financial system.
This would lead to large volumes of transactions fetching the
payments banks fees - a charge of even 1 or 2 per cent on a large
volume can be lucrative on normal cash transfers, which will
include government’s direct benefits transfer programmes.
Moreover, with no need for any provisions or losses on NPAs for
these payment banks, they may become fitter banks than existing
The Payment Banks came into existence as a result of the Nachiket
Officially known as “Committee on Comprehensive Financial
Services for Small Businesses and Low Income Households”
Formed by the RBI Governer Mr Raguram Rajan on 23 September
It was an expert committee which was to study and provide much-
needed insight on Financial Inclusion in India.
This committee had submitted its report in January 2014 and had
recommended, among other things, setting up of the Small Banks
and Payment Banks.
Financial Inclusion is a drive by the government to bring
everyone in the nation under the ambit of basic Financial
It has 4 basic pillars:
BANKING: Savings & payment (through ATM, cheques, e-
CREDIT: Loans @affordable interest rates.
INVESTMENT: Mutual funds, Pension plans, Child investment
INSURANCE: Life Insurance and non-life (general) insurance.
It Turns savings into investment. Circular flow of income => helps the
Insurance/investment/savings => Protects family against unfortunate
Income inequality falls in areas that have more developed financial
intermediaries (banks, insurance companies).
In the 80s, countries that focused on providing easy financial services to
small businessmen became large economies today be it Japan, South
Korea or USA.
If all of the government subsidy/benefit payments are done via
netbanking/e-transfer then Rs.1 lakh crore rupee will be saved per year
in terms of manpower-time-paperwork-leakages. [As per Mckinsey
If there are no formal channels to save money (like Bank), then
low income households are more likely to fall victim to fraudulent
schemes like Saradha chit fund in Bengal.
IF everyone has bank account=> lowers the transaction costs,
paperwork and time. (Compared to counting currency notes,
maintaining records, manually recovering money vs cheque drop
box and so on.)
Economic well-being of the poor people also ensures social
harmony, they’ll not fall into brainwashing by
Secessionist/Extremist elements in the society.
Serves to further the agenda of “Women Empowerment”.
A traditional bank branch has high cost of operation – office rent,
staff salary, security guard, light bill, telephone bill etc. Even an
ultra-small branch will cost Rs 20-22 lakh per year.
In rural area, most people will get No frills account / Basic savings
and deposits account= bank can hardly make any profit to make.
Traditional bank branches have fixed working hours and bank
holidays. If a poor labourer wants to access his account, he’ll have
to waste 2-3 hours which directly affects his wage.
Most villagers need loans less than Rs.5 lakh. In this type of small
loans, bank’s paperwork, loan default risk is high compared to the
Service charges will come down.
There may not be any requirement of minimum balance which
directly implies that the customer will not be forced to
maintain a minimum balance in their account.
Competition that will arise as a result of these banks will
benefit the industry and society. (Eg RBI Rate Cut benefit)
Payments bank will ensure more money comes into banking
Payment banks may make handling cash a lot easier.
DUPLICATION OF EFFORT:
When the Nachiket Mor committee was set up back in 2013 and when it
submitted its findings in January, 2014, Mr Modi was not in power.
-On 15th August 2014, PM Modi launched the
Pradhan Mantri Jan Dhan Yojna (PMJDY) for
-Under this scheme, everyone in the nation was to
get a basic bank account with an ATM card, life and
-Thus, the basic purpose of the Payment banks was
fulfilled as a result of PMJDY.
- As a result, the scope of expansion of business for
these banks has become limited from the start.
ACCEPTANCE BY THE MASSES:
The big commercial government banks (SBI,
PNB, UBI etc) are much trusted by the society
today. These new payment banks will find it
difficult to earn the level of trust that the
government sector banks command today.
COMPETITION FROM EXISTING BANKS:
As per RBI guidelines, 25% of all branches
opened in a year should be in rural areas. For
newer banks this quotation has been modified
into “unbanked rural areas”. Which means,
there is a good chance that the target audience
of these banks has already received the access
to basic banking facilities.
Since payment banks are allowed to function as Business
Collaboration Agents (BCA) for big banks, they can co-ordinate
their efforts along with the bigger banks with the help of tie-ups
and achieve the goal of significantly improving financial
penetration in the country.
Some of them have already tied up with existing licence holders.
- SBI, the country's largest lender, will take as much as 30 percent
in RIL's proposed bank.
- Bharti Airtel, India's largest telecom operator, plans to give 19.9
percent stake in the bank to Kotak Mahindra Bank Ltd.
- Aditya Birla Nuvo Limited has tied up with Idea Cellular which
will have 49 per cent stake in the joint venture.
“Payment banks will change the way people think, change the
way they keep the money, where they keep their money, the way
they pay.” - Mr Arun Jaitley
New Payment banks needs to introduce new products or new
applications, so that instead of cash, people start carrying out
more transactions electronically.
Globally, that has been the trend. However, in India, although the
number of users of credit and debit cards have increased yet these
have been limited penetration on account of costs involved for
merchants or establishments which accept these cards.
Mobile phone platforms still has lot of opportunity to penetrate
rural India with alternate methods for transactions.
1. These banks would target those masses who cannot afford to
visit a branch for carrying out transactions (Eg: Daily wage
workers) by providing them basic banking facilities through
mobile platforms and appointing BCAs to carry out basic
2. They will leverage the huge volume of transactions for gaining
3. They will face challenges like any other venture but if successful,
the Payment Banks promise to change the banking scenario in
India and will allow the government to achieve its goal of
financial Inclusion. They will also offer competition to the
existing banks and more competition is good for the economy as