Payment Banking: Road toward Financial Inclusion

Prime Minister Narendra Modi during his maiden speech from Red Fort, Delhi on the occasion of 67th Independence Day expressed his deep concern on various issues which are deteriorating the image of India on globe.  One of the issues he raised was related to inefficient Indian Banking system. Inefficient not because of its functioning, rather, because of its inability in widen its reach. 

India is home to 1.25 billion people, of which only 35 percent are registered with banks. During his speech, he spoke about opening of bank accounts for remaining 65 percent people (mainly weaker section of society). To achieve this, he launched ‘Pradhan Mantri Jan Dhan Yojna’ to support poor open bank account which are embodied with a debit facility and an insurance cover of Rs. 1 lakh which provide support to the families during tough time. Earlier Finance Minister Arun Jaitely also talks on the same tone for opening at least two bank accounts per family during his maiden Union Budget. On the other hand, Reserve Bank of India also undertaking various measures to reach out with bank account to very last family of society and to assist this it has granted licences to IDFC and Bandhan Financial Services to set up full fledge banking operation in month of April. This exhibit both Central Government and Central Bank are on same page when it comes to opening bank accounts for weaker section of this country.

I see ‘PAYMENT BANKING’ as a silver line in cloudy sky, which has the capability, if implemented properly, of bringing most of the unbanked families, if not all, under the ambit of Banking System.  And to achieve this goal, RBI has drafted guideline for ‘Payment banks’, a step toward strengthening and widening the reach of Indian Banking System.

Payment Banks are the banking entities allowed to accept deposit maximum of Rs 50,000. They function in same fashion as a normal bank except the lending part. These banks are not allowed to extend loans which eliminate the risk of Non Performing Assets or any other kind of default, hence securing the interest of depositor. So the question arises, how these payment banks will make money if they are not allowed to lend? Actually, these banks can invest in Government securities and high rated corporate bonds which provide them risk free returns, hence, securing the interest of payment banks as well. Basically, target audience for “Payment banks” would be the poor people and small businessmen in semi urban and rural area. And to reach out to these areas, RBI is planning to grant licence to telecom companies, Micro finance institutes (MFIs), Non Banking Finance Companies (NBFCs) etc because of their already existing infrastructure and wide reach.

There are telecom companies like Airtel and Vodafone India, already offer payment instruments like Airtel Money and M-Pesa. However, these companies cannot allow cash out transactions, charge certain amount on every transaction you make and cannot even provide any interest on the deposited amount and that is the reason these instruments have limited reach. While payment banking will caters all the flaws of payment instrument by telecom companies.

Government’s move of opening bank is fuelled by payment banking concept from RBI which will provide thrust to financial inclusion. Though draft from RBI doesn’t allow the licence entity to set up bank to lend but these banks have to maintain SLR, CRR and will enable customer to withdraw from any location.

Indeed, payment bank concept once become functional would be a great step toward financial inclusion and weed out the money lenders who charge very high interest rate to unbanked section of society. Additionally, it will bring unbanked 65 percent of population under the ambit of financial system which in turn strengthen the system and aided in achieving the goal set by government.