All you need to know about the new age Bank – Payment Banks

Payment Banks is a brain child concept of the Reserve Bank of India (RBI) which is aiming at a banking ecosystem in which the entire 1.25 Billion population of India is a part of. In this post I have discussed about the entire payment bank concept.

The Reserve Bank of India

Indian Currency

Payment Banks (What are they; what they can and cannot do)

  • Accept deposits up to Rs 1, 00,000.
  • Can issue Debit Cards but no Credit Cards
  • It can only invest in government papers.
  • They cannot lend money.
  • It can provide services like mutual funds and insurance schemes.
  • It can provide Internet Banking facilities.
  • It can provide remittance services across borders
  • It can provide services like utility bill payment, recharges, etc.…

Financial Inclusion It is the delivery of financial services to the poor unbanked sector of the population at affordable costs . According to the government survey more that 50% of the rural population have no access to the banking system, hence need to depend on various sources for lending and keeping their money for security.

 

The objectives of the RBI to start Payment Banks

  • Financial Inclusion of the entire population of India
  • Providing safe trusted remittance services to migrant workers in India.
  • To get 90% of the small business entrepreneurs population into the banking ecosystem.

This is to be done (by the entities) by providing a robust secure and hassle free technology driven banking system.

 

Committee for Comprehensive Financial Services for Small Businesses and Low Income Households A committee was set up by the RBI governor Raghuram Rajan headed by Nachiket Mor. The committee gave a report that most of the Indian population is not connected to the banking system in anyway and Payment Banks could help in bridging the gap by connecting them through a technology driven safe environment.

 

RBI’s main intention towards starting Payment Banks

  • The penetration of banks in India is very low. As large banks find it difficult & not viable  to provide services to remote rural areas for little or no deposits, they find it better to invest in upgrading their infrastructure in urban areas where they provide last mile connectivity to get good bank accounts which can turn profitable (i.e. loans, insurance, etc…) which increases their chances to get better returns on their investment.
System to be followed by Payment Banks in India

Payment Banks will act as a bridge between Big Banks and the Unbanked Rural Sector

  • We cannot blame the large banks for them. They have to run the show in a profitable manner. But this doesn’t give rural public the luxury of using a bank. But payment banks can create small branches of their bank which is completely technologically driven and by appointing a few staff members and high penetration of smart phones, these banks can connect to them very easily and in a viable manner.

 

But these banks don’t provide loans

Big banks don’t give loans to rural masses, because they don’t have a valid proof that they would pay back the loans on time.  Payment banks are likely change this scenario. For example, Bharti Airtel, one of the 11 entities to be awarded the payment banking license has tied up with Kotak Mahindra Bank. Airtel currently has a customer base of 220 million, of which lets assume 165 million to be residing in rural parts of India. Of the 165 million around 150 million people never had a bank account. They if connected to the bank run by Airtel they get an ATM card and a proof to the nation that he may not be a defaulter (i.e. Through bank statements; if he has invested in insurance or mutual funds his timely payment can be a proof to the banks to provide small loans). Airtel can get them on board by giving sops like cashback /free data, etc… And get them connected to the payment system. If anybody wants to apply for a loan they may direct him/her to Kotak Mahindra Bank, which provides loans on the basis of his transaction with Airtel’s Payment Banks. This serves the mission of RBI’s financial inclusion policy.

 

Entities that have received licenses for setting up Payment Banks

Payment Bank license holders
Aditya Birla Nuvo Limited
Airtel M Commerce Services Limited
Cholamandalam Distribution Service Limited
Department of Posts
Fino PayTech Limited
National Security Depository Limited
Reliance Industries Limited
Dilip Shantilal Shanghvi (Sun Pharma)
Vijay Shekhar Sharma (Paytm)
Tech Mahindra Limited
Vodafone m-pesa Limited

 

11 entities who have got the licenses for opening Payment Banks

11 entities who have received  licenses to open payment banks in India.

List of applicants for the Payment Bank Licenses 41 entities had applied for a payment bank licenses for which I have given a brief portfolio of which business they are into. Source for the names of the entities was published on the official RBI website. Click here to see the list

 

Basis on which RBI granted licenses to entities The guidelines were published on the official RBI Website As we know RBI issues licenses to 11 out of the 41 entities. They were selected on the following basis.

  • It should be capable in investing in technological infrastructure so they need to maintain a minimum capital of Rs 100 crores.
  • The submitted business plans by the entities was to be verified by a strong committee of four people namely Shri Nachiket Mor, Ms Roopa Kudva, Shri Deepak Phatak and Ms Shubhalakshmi Panse who were guided by various other people.
  • They must have 25% of their branches in rural unbanked sector.
  • The bank must be well networked from the start of its operations which must be well secured by the help of a strong technology network.
  • It must have a strong customer care cell which must be in the local languages such that it caters the entire local masses.

Some other criteria were set up by the RBI to select the 11 entities that were granted the payment licenses.  

 

Joint Ventures

Some of the large companies have formed joint venture with the 11 entities for setting up the payment banks in India, which are as follows

Payment Bank license holders Joint Ventures
Aditya Birla Nuvo Limited Idea Cellular Limited
Airtel M Commerce Services Limited Kotak Mahindra Bank
Cholamandalam Distribution Service Limited
Department of Posts Many banks ready to tie up like Barclays Bank, Citigroup, HSBC, etc.…
Fino PayTech Limited Investment Corporation of India (ICICI Bank)
National Security Depository Limited 11 partners, namely Deutsche Bank, Citibank, etc.…
Reliance Industries Limited State Bank of India
Dilip Shantilal Shanghvi (Sun Pharma) Telenor & Infrastructure Development Finance Company (IDFC Bank)
Vijay Shekhar Sharma (Paytm) Bank of Maharastra
Tech Mahindra Limited International Finance Corporation (In Talks) and Mahindra Finance
Vodafone m-pesa Limited

 

Why are companies forming a Joint Venture with the 11 entities?

I think people reading this post know about the fall of Nokia. Why did they fail in spite of having a great market share? They did not adopt the change in the demand of touch screen phones and good android ecosystem. They fell to such an extent that they had to sell off their mobile businesses for $7.5 billion to Microsoft. I still remember what the Nokia chief said at the press conference announcing takeover by Microsoft over the Nokia’s mobile business  at the end of the speech  “we didn’t do anything wrong,  but somehow, we lost”. It moved my heart.

Coming back to the topic, if large banks and major telecom companies don’t join these payment banks then they would lose a great opportunity to connect to major rural population which can turn profitable to all in the ecosystem. It is a win-win situation for all.

 

Post Bank

This name can be termed to the post offices after they start their payment bank operations. India Post was founded in the year 1771 and has over 1.5 Lac post offices of which over 85% of the post offices are located in the rural areas. They can set up a payment bank very easily because

  • They have a great network of post office catering over 6000 people per post office in the rural areas. So they fulfill the criteria of setting up a fully connected network as a bank.
  • They fulfill the criteria of having more than 25% of the branches in unbanked rural areas as most of the post offices are in rural India. It becomes easy for them to cater the needs of the rural public.
  • They already have services like savings bank accounts, recurring deposits, fixed deposits, insurance, etc.… for the general public. So setting up systems to maintain them is not an issue for them at all.
  • The only place where the post office network lack is technology. They don’t have many ATMs neither their data is synchronized to the servers properly. Our honorable Telecom Minister Ravi Shankar Prasad has said that over 40 companies are ready to tie up with post bank to set up the technology driven payment bank system.

India Post has received licenses to open payment bank in India   Rural India may benefit the most of the Post Bank because

  • They can provide door to door cash point through its postman service. It can also help the illiterate population as the postman can help them in understanding the system well at their doorstep such that they don’t need to leave their work and run behind to get the benefits.
  • They will be not hesitant to connect to the Post Bank as it is not a new entrant in the market and trust building becomes simple.
  • Most of the old aged rural population receives pension which can be transferred to their accounts and they are away from the hassle of collecting it every month.

I will write about India Post, its services and its future as a payment bank and logistics giant in my next post.

 

Hurdles for Payment Banks in India

I have listed out some hurdles that payment banks may suffer in setting up the bank and running them to make it a profitable for themselves.

  • India is one of the few nations which still believe in transaction through cash. More than 80% of the transaction is still done in cash. Ecommerce players and mobile wallets dealers offer cash on delivery scheme. This mindset has to be changed.
  • Huge amount of Investment in setting up the technology driven system which may require years to ripe the benefits of the investment
  • Stiff Competition between the entities to gain market share for which entities have to give large discounts and spend money on advertising. The entities have to adopt a strategy which differentiates them from the others in their niche (Payment Bank Sector).
  • They have to pump money for establishment of the bank in the initial three years as they cannot use the IPO route to fund their bank.
  • They have to create good services of the products they offer as there is stiff competition in India for each and every product whether it is Insurance, Remittance or Mutual Funds.
  • The bank’s performance will be regularly evaluated such that it complies by the RBI norms of maintaining cash reserve, cash flow, and many outlets of its bank in rural areas, etc…

This is a new venture by the Reserve Bank of India to have all people in the banking ecosystem. I wish the Reserve Bank of India and all the 11 entities all the best for their efforts to make payment banks a success.

 

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