Payment banks can act as a vehicle for inclusive banking; but there are regulatory and technological concerns
The issuance of an in-principle approval to 11 applicants to start payments banks is a major landmark in the history of banking in India. For the first time we will have a new form of bank with unique features. The payments banks would only be taking in demand deposits up to ₹1 lakh from a customer, which clearly indicates the intention of reaching out to the lower income groups.
Further, 75 per cent of the funds have to be deployed in government paper up to 1 year maturity and the balance in deposits with commercial banks.
The model per se is quite straight forward and clean as the bank pays maybe 4 per cent on every ₹100 collected and could earn a return of up to 6.5-7 per cent depending on the deployment.
A spread of 3 per cent looks very attractive for any promoter of these banks. There is no credit risk or problems with capital adequacy or NPAs and hence is a perfect inclusive banking model.
A curious mix
There are different kinds of entities which have obtained approval, which is interesting. A depository, postal department, telecom companies, IT based firms and others provide a right blend to the players in this market. This is the first time that we have such a model being implemented and hence the outcome cannot be conjectured. But there are several possibilities.
The first is that for this model to work well every bank has to have several branches or contact points so as to cover a larger geography and population. As the routes chosen are not known, a kiosk selling telecom cards could be an example or a fully internet or mobile based model could also be used.
But every applicant will have to have a scalable model that can start functioning across the country to create business. Given that the targets will be the lower income groups, to obtain a sizeable quantum of funds, the numbers to be included have to be high. Prima facie it looks like that most of these entities do have a large number of touch points of a different nature ranging from a mobile application to a brick and mortar branch.
Second, when it comes to the postal department, there have to be changes in laws to enable a post office to do banking. While this could be a formality that can be overcome by creating a fresh entity, the interesting part of the story begins when the payments banking operations are commenced.
Post Offices are the agency which already collects small savings which also includes savings accounts. As of November 2014, outstanding savings bank accounts with post offices were Rs. 45,000 crore which conventionally would have been transferred to the state governments. There was no earning for the post office as it was a pass through vehicle being a government department.
But now with the postal bank having the potential to earn an income, how will the old savings accounts and the new ones be differentiated? This has to be worked out with the government. If they get the existing deposits, then they need to have a treasury to invest the same, and such skills have to be acquired as it do not reside with them.
Overlap and more
Third, there is a case of cannibalisation of either payments banks by commercial banks and post offices or the other way round. The successful Jan Dhan Scheme implemented by commercial banks has garnered as many as 175 million accounts with an average balance of just ₹1,200, with 45 per cent being zero balance.
These accounts are being used largely for various cash transfers and hence a large part of these balances. In this case how do the new banks convince people to open such accounts and maintain a positive balance?
Commercial banks have been able to absorb this cost as they are already large.
A large workforce will be required to talk to potential account holders, and this is where the models used by these new PBs will matter. Will those people selling telecom recharge cards for telecom companies double up as bank agents, and more importantly will the regulation permit the same?
Fourth, the use of technology is vital. These applicants will presumably have different approaches. The postal bank holds the biggest advantage of already having around 1.5 lakh offices. An NBFC will similarly have such branches. But they would need to connect all the offices and set up a treasury to deploy these funds. Others will have to start afresh.
Fifth, there are regulatory issues which presumably have already been addressed by the RBI. For instance can telecom selling agents become staff for collecting deposits? We cannot have unqualified staff dealing with customers as there should be protection against mis-selling.
Therefore, the RBI would have to set up a new cell to monitor these banks — which will be a logistical issue given the geographical spread.
The concept of new payments bank is compelling as it opens another route for inclusive banking. While time will tell how successful this model will be in incremental terms, the RBI on its part has given permission to probably the best players who are capable of making this a reality.
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