By Abhijit Roy
India’s financial system took a significant leap forward when the RBI gave an in-principle approval to 11 entities, including India Post and private companies, to set up payment banks. With 155,015 post offices across the country, of which 139,144 are in the rural areas, India Post will take banking services to every nook and corner of the country.
The existing commercial banks have the choice to tie up with payment banks to offer their non-risky products beyond urban/semi-urban India. With an extended financial reach, it will be easier to implement the Central and state welfare schemes, including the Paradhan Mantri Jan Dhan Yojana, pension and insurance plans aimed at financial inclusion.
The push towards financial inclusion started with the nationalisation of 14 commercial banks in July 1969 through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. Then a second round came in 1980, involving six more commercial banks. With a view to economically mainstreaming rural areas, the Indira Gandhi government established regional rural banks by means of an ordinance in 1975.
But even 45 years later, all these attempts have had little success in expanding banking coverage to the desired extent and scale: only 7 per cent of India�s villages have a branch of a rural or commercial bank. The policymakers seem now to have finally understood that banking inclusion cannot be just one among many businesses of a bank: it has to be the core business.
Payment banks were first suggested by an expert committee set up under Nachiket Mor in 2013 to take banking to far-flung, neglected areas. They will be the safest since 75 per cent of their capital will be lent to governments, which do not normally default.
These banks will offer small savings accounts, payment and remittance services and benefit in particular the migrant labour, low-income households, small businesses and the unorganised sector. They will also take deposits (up to Rs 1 lakh per customer), issue cheques and drafts, and even offer mutual funds and insurance but will not be allowed to lend money on their own.
All that a person needs to avail banking services is a mobile phone with the Internet. The growing popularity of e-commerce and online payments has revolutionised the way Indians buy and sell things, or pay their water/electricity bills. To cater to a furiously growing market, it is important the financial sector is allowed to spread itself.
Though RBI Governor Raghuram Rajan maintains that payment banks will complement the traditional banking sector rather than being its competitors, competition is inevitable. In the end it will be the survival of the smartest.
High-end customers may opt for private banks, while government institutions may possibly be saddled with the social responsibility agenda, and struggle to stay in business unless allowed operational autonomy and professional decision-making.
Therefore payments banks require managing low-value, high-volume transactions � all this with a lean workforce and high-end technology � while remaining Basel III-compliant.
