A payment bank is a differentiated bank that undertakes only certain restricted banking functions on a small scale without involving credit risk. Its activities include acceptance of deposits (up to Rs 1 lakh/individual), payments and remittance services; facilitate money transfers, sell insurance, mutual funds; internet banking and function as business correspondent of other banks. They can issue ATM/debit cards, but not credit cards.
As the situation on both financial inclusion and financial depth the situation is poor and uneven on regional and sectoral basis, Nachiket Mor committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommended the setting up of Payment Banks.
Thus Payment Banks were set up with the objective of providing financial services to the unbanked masses (small business, migrant labour etc.) and to expedite financial inclusion.
Payment Banks are better poised to achieve financial inclusion as they offer following advantages:
• 100% security to hard earned savings: As the deposits made under it are covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) funds with payment banks are completely secure.
• Better reach: As even Mobile Service Providers have been allotted licenses to start Payment Banks, this would expand banking services to the remotest corner of the country
• Low Cost of Operation: With the help of Business Correspondents or Franchise Banking System, Payment Banks would provide low cost services to the customers located in the Remote Areas.
• Minimal Asset Liabilities Management (ALM): ALM would be minimum as as deposits mobilised will be mostly invested in secure instruments like government securities.
• Seamless KYC compliance: As most of the Payment Banks licensees have been allotted to Mobile Service Providers, who would have already met the requirement previously itself while obtaining a mobile phone connection, the process would be seamless.
• Low risk profile: Zero credit risk as they don’t sanction loans; Minimal market risk as they investments are in government securities/Tbills; Operational Risk can be minimized by use of technology
• Focus on niche segment: As it’s main focus is to mobilise savings this one product one segment would be beneficial with minimum need for marketing.
Thus with the following advantages over previous financial inclusion strategies (No-frills Accounts, RRBs, Local Area Banks etc.) and on taking steps to improve internet penetration, Payment Banks apart from aiding in financial inclusion, the spread of banking will also make the poor financially literate and help fight poverty. It would also ensure that more money comes into banking system and even increase the reach of big commercial banks.
