BY G SRINIVASAN
The country’s central bank deserves unstinted praise for issuing forth a differentiated bank licence on August 19 to eleven payments banks across the country. This has the potential to bring a sea-change in the commercial banking scenario in the country with the man in the street getting access to banking services with no cost or hidden add-on charges. The eleven entities include business conglomerates such as Reliance Industries Ltd and Aditya Birla Nuvo Ltd along with telecom firms like Bharati Airtel Ltd and Vodafone Plc. India Post, granted in-principle approval, has a pan-India network – 1.55 lakh post offices and nearly five lakh employees – that no traditional bank can claim with pride. The decisions to grant 11 entities payments bank licences follows the seminal recommendation of the report of the Committee on Comprehensive Financial Services for Small Business and Low Income Households submitted by a Committee set up in 2013 under the chairmanship of the Board Member, RBI, Nachiket Mor.
Pushing financial inclusion
The fundamental rationale behind the advent of the new entities is to push financial inclusion and push various popular schemes such as the Pradhan Mantri Jan Dhan Yojana and insurance schemes that have been largely designed as social welfare ones to millions of people left out of the mainstream. In the bargain, it will offer small savings accounts and let payments and remittance services to the marginalised, ill-served sections of the society by the main banking system, especially the migrant workforce in urban conurbations, low-income households in rural and semi-rural areas, small businesses and the vast swathe of the unorganised sector that dots the landscape of the economy.
It is small wonder that the RBI has conceded that it is an experiment – the latest in a long series of bids to take banks to the unbanked and under-privileged. Though people at the bottom of the pyramid had been obliquely denied access to banking services because of the complex formalities entailed in enlisting them for the small accounts they may hold, there were no serious attempts in the past to provide them a whiff of relief by the authorities. So, all sorts of nefarious forces were at work nibbling at the fringes with the poor people more often than not at the harsh mercy of money lenders, middle-men, non-banking finance companies and loutish touts.
There were times when the relatively modest wage-earners toiling in metro cities and sending remittances to their impoverished family back in the villages ended up forking out commissions to middlemen to get their remittances across without failure. But the truth is that these reprehensible practices do prevail even now as the formal banking channel tests the patience of the mostly illiterate workforce by taking protracted processing time in transfers, depriving them of half-a-day’s hard wages. The end-result is that not only such transfers get done by informal channels but in the process the banking system forfeits deposits of small amounts from legions of modest savers. It no doubt cost the economy as the tiny amount from sizeable numbers could be a considerable liability (deposit) for the banking system for its credit and advance business. It is in this context that Union Finance Minister Arun Jaitley aptly characterised the RBI move to grant payments banks licences to 11 entities as “significant and important.” “Payments banks will ensure more money comes into the banking system”. Unless more money flows in and out of the formal financial system, the stakeholders in the economy suffer and suffer grievously for greasing the wheels of the economy from moving.
Benefit of digital technology
The nitty-gritty of the RBI announcement is that subject to meeting certain stipulations within an 18-month span, the 11 entities would be given licences to set up these exclusive banks that can accept deposits upto one lakh of rupees per account, issue ATM and debit cards, offer payments and remittance services and function as business correspondents (BCs) for other banks. They are not allowed to undertake lending activities and will have to invest 75 per cent of their deposits in government securities. They are likely to make their earnings on user charges for services rather than on the spread of interest rates between loans and deposits. Though big public sector banks can weather the competition of payments banks in mobilization of deposits particularly in rural and hinterland areas, analysts apprehend some jolt on small and medium-rung public sector banks as incremental deposit growth and market share would see some impact from payments banks.
Interestingly, while some universal banks have ushered in innovations such as fund transfer through social media like Facebook, Twitter and WhatsApp, they have hardly reached the larger sections. With payments banks in place, the huge number of customers with no access to such tech-savvy products would be able to get the benefit of the digital channels and digital technology for regular banking services. Services like disbursing utility bills, booking train tickets and funds transfers could be a facile exercise with banks too being compelled to alter their processes and make them hassle-free once payments banks demonstrate the module and model, using only a mobile phone. More broadly for customers with conventional bank accounts, particularly for retired people afraid to carry cash with them as they move about, a payments bank can be an additional one through which they can carry out all their smaller transactions and remittances digitally, by totally avoiding handling cash! Trash the cash and carry the cell (not even a card to swipe) may be the new norm to save even middle-class people from the myriad worries of moving about with ease and without weight!
With the probability of the apex bank announcing a considerable number of small finance bank licences for meeting the credit requirements of a large number of small entrepreneurs, the competitive intensity in the banking industry is bound to undergo a tectonic shift to the lasting benefits of customers. Banks have to better pull up the socks and deliver satisfactory results to retain the confidence and faith of their clientele.
If they fail to live up to the expectations, they would be driven out of the playing field before long by the inexorably efficient market forces that will determine who will survive and thrive and who will die.