The concept of payments banks came just weeks after the unprecedented success of the Pradhan Mantri Jan Dhan Yojana under which 5.52 crore new bank accounts were opened in the first week of introducing the account. The idea of payments banks was first announced by our finance minister, Arun Jaitley, in his maiden budget speech. The Reserve Bank of India (RBI) has started giving approvals for launching payments banks in India. The apex bank has actually given ‘in-principle’ licenses to 11 entities to start payments banks. These include Aditya Birla Nuvo, Airtel, FINO Paytech, Reliance Industries, Paytm and Vodafone.
Additional Reading: JAM (Jan Dhan-Aadhaar-Mobile): Will The Idea Stick?
So, what are payments banks? These are just like any other banks, only they will operate on a smaller scale and will sell products that don’t have credit risk. In other words, they will not sell products such as Loans and Credit Cards.
Why payments banks now?
Financial inclusion has been the focus for RBI for quite some time now. Payments banks is an attempt to make sure that all sections of society, including people living in remote and rural areas, have access to banking facilities. Payments banks are likely to increase the number of people in the banking system. It will focus on fulfilling the financial vacuum felt by small business owners and people from low-income groups including migrant workers and labourers.
Who can become a payments bank?
The Reserve Bank of India (RBI) has fixed a minimum paid-up capital of Rs. 100 crore as an initial capital requirement for payments banks. Note that this is about Rs. 500 crore for commercial banks. So, anyone from a mobile phone service provider to a non-banking financial company or even a supermarket retail chain can apply for a payments bank’s license if they fulfill the minimum eligibility criteria. RBI is working on specific guidelines for payments banks that will make it mandatory for them to meet cash reserve requirements. They will be able to invest in only highly liquid and safe investments such as debt securities. Promoters’ holding in payments banks must be at least 40% for the first five years which can then be gradually reduced to 26% over 12 years if so desired by the promoters.
What services can they offer?
Payments banks can accept deposits up to Rs. 1 lakh, offer remittance services, mobile payments, transfers and provide net banking facilities. For all accounts held by the payments banks, the banks will have to pay an annual interest to the account holder. While RBI is yet to define the quantum of interest rate payable by payment banks to their customers, these banks might offer higher interest rates compared to commercial banks.
Additional Reading: BankBazaar Launches Paperless Applications For Fixed Deposits
So, what will be the possible impact on the Indian banking system?
The first thing that payments banks will add to the industry is competition. Not that there is a lack of competition in the banking industry but it is more about players from different sectors setting up these payment banks bringing their own marketing ideas on board. Also, the more the competition, the better the services and products.
Coming to the second important impact, since payments banks are set up by players from different industries, they can bring in their own customers to the banking sector. Take Airtel for instance. Airtel has over 270 million customers. Now that it has set up its payments bank, it can woo all its customers to bring their money to this bank. In fact, it is already doing this by offering interest at the rate of 7.25% on its Savings Account. Also, payments banks will focus on having a widespread network with easy access points in rural areas and hinterland of the country. So, their reach is expected to be better than commercial banks that follow the branch banking system. So, payments banks will certainly help bring more people into the banking system.
Another point is that consumers would be free to open both savings bank accounts and current bank accounts with payment banks. With this, payment banks are likely to attract both retail as well as business customers. Consider the India Post Payments Bank. This payments bank is looking to offer door-step banking. The bank will charge a nominal fee of up to Rs. 35 for this. This facility will be available for transactions that are less than Rs. 10,000. Facilities such as this are likely to help financial inclusion to a large extent.
Additional Reading: India Post Gets Payments Bank License
Payments banks will also help financial inclusion by offering payment services to migrant workers and low-income households that shy away from banking. Workers living in cities and away from their rural homes will be able to send money directly to payments banks located in their village. These payments banks are more likely to be accessible by their immediate family members when compared to commercial banks.
With increasing competition in the core banking services especially in semi-urban and rural sectors, traditional banks have to offer superior customer service and competitive products to stay ahead. All this competition among banks is likely to benefit the customers. They will have to be provided with quality products, prompt service and convenient access to financial services.
Payments banks have the ability to change the face of rural India in the coming years. It all depends on how they position themselves and how good their products will be. Still think commercial banks are safer? Maybe. But don’t forget to compare financial products across banks before you choose one. This includes Fixed Deposits.