Payments Banks in India

Payment banks

Last week, Airtel Bharti has launched its payment bank service, Airtel Payments Bank, in Rajasthan on a pilot basis and has  claimed to have  opened nearly 10,000  accounts in rural and semi-urban areas within two days of operation. Going forward, lots of discussion will be going on about what a payment bank is and what it does.  Let's see a few points regarding what are payments banks, what they do and what are their challenges.

At a time when both the Indian government and the RBI were working towards a financially inclusive India, by bringing various measures such as Jan Dhan Yojana, there were certain challenges too. Chiefly, cost incurred by Commercial banks to open and maintain a branch in rural areas weren't making sense economically and in spite of running rural branches and fair efforts by those banks to bring unbanked population into banking, India is too big country to see those efforts bearing fruits. A World Bank Gallup global finder survey 2014 reports that financial inclusion in India stands at 53%, while in China it is 79%. Jan Dhan Yojana scheme did bring in more people within the ambit of banking but it is widely believed that India offers immense scope to reach out to the unbanked. Government and RBI (headed by former RBI Governor Shri Raghuram Rajan) mooted the idea of introducing differentiated banks like small banks,  payments bank etc that will stay nimble and also be effective in catering the needs of the unbanked.

Payment banks(PB) are being introduced to offer basic banking operations like opening and maintaining a savings/current account and creating a secured technologically advanced remittance services by migrant workforce, low income households,  small businesses etc.

Deposits yes but no lending:

As per RBI guidelines, a payment bank can only offer deposit services by way of savings and current deposit accounts(no term deposits) and cannot offer lending products.

Fully digitized services: 

Late entry into banking services offers payments banks a lead in technology with RBI mandating that all payments bank branches must be fully digitized from the beginning. Regular features like ATM and debit cards,  mobile banking and net banking will be offered.

Remittance services: 

Payments banks can offer all kind of remittance services like NEFT, IMPS, UPI etc to its customers. This is widely believed to bring down the cost of remittances in the long term as the volume goes up. 

Simplified KYC: 

RBI has offered some relaxations to Payments banks by permitting these banks to open accounts under eKYC mode and doesn't mandate the physical presence of the customer. Recently, RBI has further stated that the KYC compliant customers, who already avail telecom services of the payment bank's telecom company, needn't go through KYC formalities again for opening an account in the payments bank.

Name:

To differentiate themselves from commercial banks, the payments banks are required to mention "Payments Bank" prominently as part of their name.

Branch mix: 

To give more focus to financial services in rural areas, RBI has instructed that all payments banks should have at least 25% of their branches in rural areas.

No foreign exchange services:

As expected, a payment bank cannot offer foreign exchange services of any kind to its customers though it can engage in foreign exchange business for proprietary reasons like hedging.

Deposits cap:

To begin with, RBI has capped the deposits and the maximum deposit in a payments bank account cannot exceed Rs. 1 lacs.  A payments bank account holder,  through a written consent, can remit to his/her payments bank account provided both banks have entered into an agreement for the same.

Agency services: 

Payments banks are required to submit to RBI a list of financial products they intend to offer. The payments bank can offer agency services for mutual fund investments and simple insurance products.

Specific investments only: 

To secure the interest of the depositors, RBI has mandated that apart from investing for sake of maintaining the reserve ratios applicable for all commercial banks, the payments bank can invest only in specified government securities and treasury bills with maturity up to one year.

Now, the challenges:

No lending: A no for lending activity means payments bank are to only depend on low-yield government securities for earnings unlike their commercial bank counterparts  who can earn by lending

No term deposits: Strictly open for demand deposits by way of savings a current account means all the deposits available in the bank are floating funds and has to be repaid on demand.  It will be a challenge to build and maintain a good deposit base in absence of term deposits.

Branch mix: A minimum of 25% branches being in rural areas brings a  challenge of opening and maintaining branches in non-viable areas for sake of being regulatory compliant.

Conclusion: 

Despite various challenges, payments banks can be a game changer by not only playing a big part in financial inclusion drive but also by making existing commercial banks redraw their strategies to build and keep their deposits base intact.