Niche banking

Permitting ‘payments banks’ is a significant step towards financial inclusion

The release of draft guidelines for the licensing of a new category of ‘payments banks’ by the Reserve Bank of India is an important step in a country where over half the population does not possess functional bank accounts. A payments bank’s activities are limited to accepting demand deposits and providing cash withdrawal and remittance services. It cannot lend and has to invest its deposit monies mostly in government securities. But there is no doubt payments banks can speed up the process of financial inclusion. For instance, they could provide just what migrant labourers want: a secure avenue to park their wage earnings and a facility to send money back home.

The most obvious candidates for payments banks are telecom operators, many of whom are already offering the facility to make remittances through their mobile platforms. Airtel Money, for example, has almost two million users. But this is still only around 1 per cent of the parent company’s total mobile connections in India. The potential for expansion is huge, given the large customer base and distribution channel of each operator. Operators are now required to tie up with banks, with whom customers can open no-frills accounts to be able to send money or withdraw cash. But on receiving payments bank licences, the operators can themselves start taking deposits and pay/earn interest on these. And with each mobile recharge outlet being a potential ‘branch’ or business correspondent, the deposit-taking and money transfer operations of telecom firms could even rival those of regular banks. Kenya’s M-Pesa — the world’s biggest mobile payments provider — has roughly 20 million users, much more than the eight million account holders of the country’s No 1 lender, Equity Bank.

The move to licence payments banks is an acknowledgement of the scope for niche banking in India. You don’t need all banks to do the same thing; in fact, technology already permits financial inclusion to be achieved in ways other than through the opening of more brick and mortar branches in remote locations. What matters eventually is that the delivery of financial services is economical — mobile firms charge about 1 per cent against the 5 per cent for sending money through India Post — while ensuring customer protection and no risk to financial stability. The latter concern is largely addressed by the stipulation that depositor monies be invested in government bonds below one-year maturity. The ultimate objective should be to enable every Indian to have a safe and secure bank account. Such an account seeded with a unique Aadhaar identity number will also provide the required platform for the Government to route all subsidies and welfare payments to the intended beneficiaries and plug the massive leakages in the system. If we can make this happen, then there will be true financial inclusion.