Payment Banks- A Revolutionary Change in Indian Banking System

Posted in Finance Articles, Total Reads: 782 , Published on 01 November 2015

The Indian Banking System is going through a revolutionary phase with the introduction of payments banks in India with the Reserve Bank of India finalizing the norms and regulations for its implementation in the Indian market. For the first time in the history of banking sector, the RBI has announced a set of differentiated banking licenses for the 11 applicants who have applied for the set-up of payment banks apart from the one commercial category licenses of universal banking. A payment bank is a bank whose banking services have been striped-down from the Universal banks to only use mobile phones for availing its services instead of traditional bank branches.

The main idea for the introduction of payments banks and small banks in India was given by our Finance Minister Mr. Arun Jaitley in his first maiden budget speech of this year. Although, the guidelines for its introduction in the Indian Banking system came after the unprecedented success of the Pradhan Mantri’s Jan Dhan Yojana scheme which is aimed at opening of 5.52 crore new bank accounts to bring about Rs. 4,268 crore of deposits till the very first week of October, 2015.

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The main idea behind the introduction of Payment banks was financial inclusion of all sections of the society and the people living in the remote and rural areas so that they can have access to the basic banking facilities. This idea was initiated to increase the number of people in the banking system to include people like small business owners, low income groups including migrants and labourers in order to fulfil the vacuum created in the financial system.

Payment banks like any other commercial bank offers the core banking services such as cash remittances and demand deposits to its customers. Apart from that, the customers are also allowed to open both savings as well as current bank accounts with the payment banks. It also offers basic payment services to migrant’s workers and lower-income groups by having a widespread network in the rural areas as well as remote locations of the country. The migrant’s workers or the labourers working far away from their home land can easily transfer their money to their families in the remote and rural parts of the country with the help of payment banks.

The major difference between a payment bank and a commercial universal bank is that payment banks are not allowed to offer loans to its customers but they are allowed to raise deposits up to Rs. 1 lakhs and pay interest of at least 4% on these deposits like a normal savings bank account does. They can offer services such as ATMs and debit cards which can be used on all banks ATMs, automatic payment of bills, purchases in cashless, cheque less transactions through a phone etc. They also provide forex services and forex cards at a lower cost than a normal bank and provides card acceptance mechanism to popular third- parties such as the “Apple Pay”. Apart from these mentioned services, a customer have to approach either a nationalized, public, private or co-operative banks for availing more services as payment banks are limited to core banking operations.

The Reserve Bank of India has set many guidelines for the Payments Banks such as minimum initial investment payment in the form of paid-up capital requirement of Rs. 100 crore, promoters holding of at least 40% in first 5 years of operations which can be reduced afterwards to 26% etc. Anyone can apply for a payment bank licenses if they are fulfilling all the eligibility criteria as per the mentioned RBI’s norms and guidelines.

The impact of introduction and development of payments banks can be easily seen in the financial sector of India after two or three years down the line. Many billionaires and blue-chip companies have applied for the licenses for the payments banks, out of which only 11 have got licenses for the same which shows that payment banks are going to be the future of banking system in the coming years. It is very popular way of banking in many developing countries like Kenya etc.

As any economy grows, the needs, wants or services desired by the customers becomes complex. Payments banks caters to a niche segment of the Indian markets and brings about those changes in its services as per the changing needs of the customer. The new payment banks is a mix of large companies which includes telecom leaders and new-age technology companies which brings about the optimal amount of scale, technology and incremental expertise in the existing banking solutions and services. Therefore, the future of banking segment is going to be changed dramatically five years down the line.

The introduction of these niche banks will bring about a major new and innovative changes in the business models of the existing banking intuitions. Payments banks which caters services like deposits mobilisation, payments of utility bills, mobile recharge, transfers, ticketing etc. are going to compete with the existing universal banks which also provide these services in addition to corporate financing and loans. In order to gain leadership and maintain their market share, they will continuously bring about innovative changes in their business models. Apart from that, many universal banks are also considering joint-ventures and tie-ups with these payment banks and small banks in order to survive and succeed in the market space.

The main objective of payment banks is the financial inclusion of the untapped and undeserved people of the rural areas and lower-income groups which are not included by the rural branches, priority- lending segments of universal banks and other rural & co-operative banks so that they can provide low-cost services to these people with the help of technology because it is truly prevalent in the today’s market that “mobile reaches everywhere”. The Indian domestic remittances market is expected to be growing and currently estimated to be about Rs. 800-900 billion. So with the help of payment banks, a big chunk of this market can be easily tapped through the payment banks.

In the coming future, the banking transactions of most of the population of India is going to be digitalised as the payment banks are focusing towards mobile and digital wallets for any remittances, payments for bills, purchases etc. at a lower- transactional cost as RBI has approved the licenses for payment banks.

Payments banks can entirely change the banking structure for the commercial and universal banks if they become successful in the future by reducing the Statutory Liquidity Ratio burden on them. Since, payment banks allows only deposits not lending of money, it would result them to compulsorily invest in the government securities and government’s G-Sec requirement will be absorbed by them which in turn will reduce the burden on the commercial banks.

Payment banks will also help to a great extent to tap the black money. Since, Payment banks encourage digital payments which will lead to create of digital footprints for the digital cash which can be easily tapped by the tax authorities. Thus, reducing the black money from the predominant Indian cash economy.

Payment banks also plays a significant role while implementing the government’s direct benefit scheme which involves direct payment of subsidies on health, education and gas to the beneficiary’s accounts. It also reduces the burden on the government of India as the payment banks are licensed by the RBI and government of India. It does not allow it to lend to its customers and thus, decreasing the probability of bankruptcy of these banks and increased probability of it maintaining the capital adequacy ratio and other cash reserves as per the RBI’s guidelines.

The development of payment banks are going the entirely change the structure of the banking system into a three-tier banking system as suggested by McKinsey in the Pune Retreat. The top-tier will comprise of large banks including some of the large public sector banks. The second-tier would be of State-linked banks and the third-tier would comprise of policy banks and payment banks. It’s going to change the banking system in a positive way in the future years to come.

This article has been authored by Deepa Yadav from SIMS







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