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The current Modi government has been constantly stressing on financial inclusion through initiatives like ‘Pradhan Mantri Jan Dhan Yojana’ to cover the whole country under the ambit of banking. Another step in line with it is the introduction of Payment banks in India.  The RBI in August 2015  granted ‘in principle’ approval for payment banks to 11 entities, including big names like Reliance Industries, Dilip Sanghvi, Department of Posts, Aditya Birla Nuvo and Tech Mahindra, as also Paytm, Airtel and Vodafone.

But what are these payment banks?

Payment banks are new stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches.

 

What they can and can’t do?

-They can’t offer loans or issue cresit cards but can raise deposits of upto Rs.1 lakh, and pay interest on these balances just like a savings bank account does.

-They can enable transfers and remittances through a mobile phone.

-They can offer services such as automatic payments of bills, and purchases in cashless,  cheque-less transactions through a phone.

-They can issue debit cards and ATM cards usable on ATM networks of all banks.

-They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.

-They can provide forex cards to travellers, usable again as a debit or ATM card all over India.

-They can offer forex services at charges lower than banks.

-They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’

Here is how they can affect the way your transact!

Lower transaction costsWhile payment banks are expected to complement the existing banking system, competition will push banks to up the bar. Given that many of the approved entities have deep pockets, you can expect transaction costs to go down.  Today, fee structures are similar amongst all banks, but payment banks could change the scene.

 Better service standards-Competition from payment banks, which are expected to be more nimble-footed and hence in a better position to be responsive to changing customer needs, is likely to drive existing banks to provide better services. Bureaucratic functioning means customers are short-changed. For instance, some banks insist on cheque payment for issuing a demand draft despite account holders being long-time customers.

Bigger role for technology-Some entities like Vodafone M-pesa, Airtel Money and Fino PayTech that have received the payment bank approval, have a track record of providing mobile-based as well as technology-intensive payment processing services.

Innovation-Since they have to compete with established banks, payment banks will have to innovate to differentiate themselves and stay in the race.

Wider network-Some of the players who have been allowed to set up payment banks have a strong presence—physical or digital—in the space. For instance, India Post, Paytm, Fino PayTech and Cholamandalam Distribution Services command a huge customer base.

Eligibility Criteria for Payment banks:-

The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.

The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

 Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.

 Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

Other conditions :

  1. The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms.
  2. The bank should have a high powered Customer Grievances Cell to handle customer complaints.

Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

Why are they going to be a game-changer?

India’s 937 million mobile subscribers substantially outnumber those with bank accounts, even after accounting for individuals using more than one mobile connection. This is the business opportunity that telecom operators such as Bharti Airtel and Vodafone, retailers such as the Future Group, several payment facilitators such as Oxigen and One97, and large conglomerates like Reliance Industries and Aditya Birla group, are looking to tap.

It’s a step to redefine banking in India. The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking. It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. The innovation is also expected to accelerate India’s journey into a cashless economy.

India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing. With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

The 11 Payment banks will hire around 150 senior executives. They are also expected to recruit about 370 mid-level executives and more than a 1,000 junior-level staff in the next coming months.

What has the experience been in other countries?

Payment technologies have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives.

In Kenya, over $1 billion money transfers happen through M-Pesa every month with nearly 13 million customers. In Tanzania, 5 million people do transactions worth $1.5 billion.

Both Safaricom and Vodacom, the mobile operators offering it in Kenya and Tanzania, earn about 20% of revenues from it.

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