Benefits of Payment Banks

Before nationalization, there were distinct roles implicitly defined and demarcated for development banks and commercial banks wherein the former were to meet capital requirement and the latter for working capital purpose. In the race of increasing the balance sheet size, commercial banks also entered into infrastructure and project financing. The consequences-- banking business increased but banking coverage remained proportionately stagnant as banks shifted their focus from retail banking to wholesale banking. Even today, 35% of India's population do not enjoy banking facilities. Ironically, India has more mobile users than bank accounts. Time has come to en-cash on this situation.

The main concern  of the government/RBI is financial inclusion. PM Jan Dhan Yozna was a mile stone in this direction. Payment Banks, embodying their strength, opportunities and challenges, are a step forward. Payment banks can do everything a regular bank can - accept deposits other than FD (day-end balance maximum one lac rupee per account), pay bills, remit funds, issue cheque books, draft, issue ATM/debit cards etc; but one thing they cannot do is lend money or issue credit cards. However, they can invest their funds in short term government securities and also deploy maximum of 25% of deposit funds in current and fixed deposits with other scheduled commercial banks.  Payment Banks can become business correspondents of universal banks. They can also distribute mutual funds and insurance products.

RBI did not want to give general banking licenses to corporates lest the position would have been same- take deposits and lend to corporates. Financial inclusion would have taken a back stage. However, the strength of the corporates can best be utilized for financial inclusion through the mechanism of Payment Banks.

Let's analyze how the payment banks will be beneficial to the nation.

1. Payment Banks will  depend more  on alternate  delivery channels like mobile and internet. Though bank branches, ATMs and door-to-door service will still be needed for some services like opening of accounts, payment of cash etc. However, for peer to peer payment, bill payment and fund remittances, mobile will play a leading role. Mobile banking will create platform  for cashless banking, there will be less need of debit cards and ATMs. Nation will save expenditure on this infrastructure.

2. Bank charges will come down since Payment Banks establishment cost will be much less than the regular banks. Commercial banks charge heavily on issuing cheque books, drafts, fund remittances etc.

3. Customers will get higher rate of interest on their saving deposits since Payment Banks will extend higher rate 5 to 7% as compared to customary  4% given by public sector banks.

4. Payment Banks will be safer than the commercial banks since their asset default rate will be zero as their main borrower will be government  and scheduled banks(since they cannot lend, they will park their funds in short term government securities and/or keep deposits with scheduled banks). Today average stressed assets of banking sector in India is 11%. Every loan default of a bank is a cause of concern to the depositors.

5. These banks will transform social welfare and subsidy scheme of the government. India Post with 1.5 lakh existing network will play a big role. Subsidy will be routed directly through accounts with regular or payment banks, this will eliminate corruption on this count.

6. Once financial inclusion is achieved and mobile is used for banking transactions, government can effectively ban cash transactions on many items. This will have double benefit; one, it will eliminate black money  from the system and second, nation will save  on printing of notes.

7. Government will be benefitted as it is the biggest borrower in the market; there will now be more lenders (to buy government securities), government will get money at cheaper rate for completing their welfare schemes.

RBI is now considering giving licenses to Small Banks which will focus giving loans to small borrower and not the big corporates. This will be  step forward towards completion of financial inclusion.

Very soon, we shall witness metamorphosis of the banking system in India. This is the requirement of the time and I impressed upon this change in my article on "New Banking Paradigm". When everyone else is changing, we have to change lest we shall be outdated with no one to care for us.

(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

Tilak Gulati is Assistant General Manager at UCO Bank. 
Author:  www.itstrgulati.blogspot.in