Daily Editorial – Financial Inclusion and Payment Banks in India

• Financial inclusion and payment banks in India

1. Context
2. Financial Inclusion in India
3. Need for financial inclusion
4. Challenges to financial inclusion in India
5. Payments banks
6. Role of payment banks in financial inclusion
7. Challenges in front of payment banks

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Context

Airtel Payments Bank started operations on 23 November and seven more payments banks are expected to roll out over the next few months.

Airtel has chosen Rajasthan as its starting point. The pilot phase has 10,000 Airtel retail outlets operating as banking points. In the first phase itself, the Airtel project will double access to banking in the state.

Financial Inclusion in India

Financial Inclusion is a key enabler to economic, social and transaction security of a country, thereby driving inclusive growth.

World Bank Index Survey (2012) states that only 35% of Indian adults had access to a formal bank account and 8% borrowed from a formal financial institution in last 12 months.

Need for financial inclusion

• Financial system provides an avenue to the poor for bringing their savings into the formal financial system.
• It provides an avenue to remit money to their families in villages.
• It also saves the villagers from the trap of usurious money lenders
• Provision of banking and financial services to the rural hinterland would be an enabler for inclusive growth.
• FI helps in tackling inequality.
• Direct cash transfers to beneficiary bank accounts, instead of physical cash payments against subsidies will become possible.
• Helpful in implementation of social security schemes, such as old age pensions, window pensions
• Financial Inclusion stimulates economic growth by increasing the rate of capital accumulation.
• Financial Inclusion helps in growth of organized sector.
• FI enhances the probability that an individual starts a business, increases industrial competition, and promotes growth of firms.
• Financial Inclusion also helps in reducing crime like robbery and theft.
• Better access to credit by the poor enables them to pull themselves out of poverty
• Greater financial inclusion, by providing individuals, households, and small firms with greater access to financial risk-managing tools can enhance resilience and stability of the real economy.

Challenges to financial inclusion in India

• Absence of proper legal documents with population.
• Bank branches are not located at nearby places in rural areas, which makes it difficult for women and old ages to avail the banking facilities.
• Low level of financial literacy and low confidence about banking services and low awareness among the villagers
• Financial literacy and credit counselling which are important aspects of financial inclusion have largely been ignored by banks.
• Excluded sectionfinds informal sector such as the money lenders more user-friendly and accessible
• Presence of limited number of financial services players has also impeded the progress of financial inclusion.
• It has been observed that financial inclusion campaigns launched by the government have been limited in their approach in terms of reach and coverage.

Payments banks

Payment banks are non-full service banks, whose main objective is to accelerate financial inclusion.

These new type of niche bank was proposed in the NachiketMor Committee Report on ‘Comprehensive Financial Services for Small Businesses and Low Income Households’.

These banks will provide products and services like accepting deposits and remittances, but cannot extend loans.

They can hold a balance of up to Rs. 1 lakh and can open and operate branches and ATM’s.

Payments banks are permitted to act as a business correspondent for another bank.

Distribute simple, non-risk sharing financial products like mutual fund units and insurance – but not provide loans.

Role of payment banks in financial inclusion

RBI Governor RaghuramRajan has said that PBs will “revolutionise banking” in India, without posing a competitive threat to existing banks.

• The payment banks are expected to complement the core banking sector by improving last-mile connectivity services and help push financial inclusion
• The new payments banks will expand penetration of the banking sector in rural areas and will focus on small savers in underserved (largely rural) markets
• Payment banks are required to have at least 25 per cent of physical access points including BCs, ATMs and other networks in rural centers.
• It will help in expanding the reach of banking services to those living in the hinterlands.
• The setting up of Payments Banks will further help in financial inclusion by providing small savings accounts, payments and remittance services at rural areas.
• Through these payment banks, RBI aims to bring the vast unbanked population under digital economy.
• The m-wallet service offered by payment banks relies on mobile technology and encourages cash-less banking.
• The Payments banks are also likely to bring down the cost of sending remittances.

Challenges in front of payment banks

While benefits of payment banks are immense, but these benefits would not be availed without solving the following challenges:-

• Being new and untested, the business models of these new banks are unclear, even to operators.
• The success of this model will be based upon the speed and efficiency of RBI, with which it is going to solve the problems arising.
• New banks are expected to depend heavily on technology and digital means to reduce costs of operations and increase ease of transactions.
• Given the digital divide present in India it would be difficult to use the technological means effectively.
• As the Indians are more habitual of using cash for transactions, behavioral change would be challenging for PB’s to achieve.
• Profitability of payments banks is expected to be highly sensitive to transaction volumes and gaining critical mass of customers.

Payment banks can revolutionize India’s banking system by providing the poor and needy with access to banking services and bringing them into mainstream, but many challenges are present to make these banks functional and effective, RBI and government must come up with the timely updated guidelines and regulations to help these banks becoming successful.