The Reserve Bank of India (RBI), India’s central bank has always been known to be quite cautious in issuing banking licenses. But RBI is now propagating differentiated banking licenses, reflecting a new line of thinking. RBI had released guidelines for licensing and setting up of ‘Payments Banks’ in India. This has been done with the aim of reformatting India’s financial inclusion space. Payments Banks would help cover the unbanked and underbanked areas and increase banking penetration in the country.
In a nutshell:
- Payments banks can accept deposits, issue ATM and debit cards as well
- The balance amount in the payments bank account should not exceed over Rs.100,000
- Payments bank will support international remittance through personal/current account
- They can setup branches, business correspondents and distribute mutual funds, insurance and pension products
- They can act as business correspondent for another bank
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 as quotes by RBI in the official guidelines. To cite an example, the foreign direct investment (FDI) cap for telco-sponsored payment banks has been proposed by RBI at 74%.
This recent initiative opens banking to non-banking players like supermarket stores, telecom operators, etc. This would eventually help such non-banking players in strengthening their core competencies while gaining the comfort and security by officially being a bank. The Payments Bank account can be a mobile account linked virtually to every unbanked citizen. This can be made possible via technology driven operations like eKYC which would use the national citizen ID scheme, ‘Aadhar’.
Payments Banks will be allowed to issue ATM and debit cards but not credit cards. They can also distribute financial products like mutual fund units and insurance products. There are already companies in the payments space, like prepaid payment issuers and non-banking finance companies (NBFC), who would be applying for the new licenses. Some examples include ItzCash card, FINO PayTech, Oxigen Services, Citrus Payment Solutions, etc.
“We’re interested and our board members are studying the new directives of RBI. We will undertake a decision soon,” said George Alexander Muthoot, managing director, Muthoot Finance to LiveMint.
“The differential banking will be able to provide more people access to formal financial products. For instance, the payments bank will have to give the standard interest rate, if not more, on deposits,” said Vishal Narnolia, banking analyst at SMC Global Securities Ltd to LiveMint.
As compared to full service commercial banks, regulatory norms for Payments Banks would not be that strict as these banks would assume reduced risks. Moreover, Payments Banks would drive the use of rural access points rather than brick-and-mortar branches of commercial banks. This can be an attractive business case for players looking to seek the license. This would help bring unorganized remittances and payment systems into the organized sector.
Payments Banks would be able to generate revenues in 3 ways:
- Interest from deposits on SLR (statutory liquidity ratio)
- Fee from products like mutual funds or insurance
- Transaction fees on payments
These revenue streams should be sufficient to push companies to launch and provide innovative and low-cost products.
A company hoping to become a Payments Bank can target success only by incentivizing the usage of such accounts for savings and day-to-day transactions. This can be made possible through avenues such as mobile payment technology, banking correspondent network, etc. Understanding customer payment needs, transaction history and local payment patterns would also be crucial to ensuring that Payments Banks achieve the purpose that they have been established for.
The licenses have yet to be issued and there is still speculation as to how the new format of payment systems would work. But there’s no doubt that this is indeed a massive opportunity for non-banking players. Targeting financial inclusion for such a wide population is itself a massive task but is something that multiple players in the market can handle provided they work in cohesion. Now that the regulatory environment is opening doors for new innovation, the coming year would show how the next evolution in India’s payment ecosystem begins.