Payment Banks in India

By: Anshul Dwivedi & Anant Sirohi

Indian Institute of Technology, Roorkee

Table of Contents

Introduction
- What is a Payment Bank?
- Features
- How do they earn?

Birth of the Concept

- The Nachiket Mor Committee.
- Financial Inclusion

Benefits
Challenges
Growth
Impact on the Society
Conclusion

In Recent News
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
10) Paytm
11) Sun Pharma.

What is a Payment Bank

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
providing
(i) Small savings accounts
(ii) Payments/remittance services
To migrant labour workforce, low income households,
small businesses, other unorganised sector entities and
other users

Features of Payment
Banks

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
fixed deposits.
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.

How do they Earn?

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.

How do they Earn?

Continued

These payments banks are expected to play on

volumes as they are likely to romp in to
theirmillions 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
governments 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 banks.

Birth of the Concept

The Payment Banks came into existence as a result of the

Nachiket Mor Committee.

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 2013.

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
Financial Inclusion is a drive by the government to
bring everyone in the nation under the ambit of
basic Financial Services.
It has 4 basic pillars:
BANKING: Savings & payment (through ATM,
cheques, e-transfer etc.)
CREDIT: Loans @affordable interest rates.
INVESTMENT: Mutual funds, Pension plans, Child
investment plans etc.
INSURANCE: Life Insurance and non-life (general)
insurance.

Why we need Financial

Inclusion?

It Turns savings into investment. Circular flow of income =>

helps the economy.

Insurance/investment/savings
unfortunate circumstances.

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 research.]

=>

Protects

family

against

Continued

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, theyll not fall into brainwashing by
Secessionist/Extremist elements in the society.

Traditional Branch in Rural India

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, hell have to waste 2-3 hours which
directly affects his wage.

Benefits they offer

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 system.

Payment banks may make handling cash a lot easier.

Challenges they Face

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 financial
scheme.
-Under this scheme, everyone in the
nation was to get a basic bank
account with an ATM card, life and
accident insurance.
-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

Continued

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.

Growth

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

existinglicence 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.

Impact on the Society

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.

Conclusion
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
activities.
2. They will leverage the huge volume of transactions
for gaining profit.
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

Thank You!!