Economy Updates – Sep-2015

Payment Banks

  • Recently RBI awarded payment bank license to 11 entities including business heavy weights like Reliance Industries, Aditya Birla Nuvo, Tech Mahindra, Vodafone, Airtel. All are betting big for this new concept called payment bank.

What is Payment Banks ?

  • Payment Bank is a new type of bank which is expected to reach customers mainly through their mobile phones rather than traditional bank branches.

What is the objective of the Payment Banks ?

  • The objective of setting up of payments banks is to increase the depth of financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and users.

Features of Payment Banks

  • Payments Bank license allows companies to collect deposits (initially up to Rs 1 lakh per individual).
  • Customers will earn interest on their savings account balance.
  • Payment Banks will provide products and services like accepting deposits and remittances. They can enable transfers and remittances through a mobile phone.
  • They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.
  • As per the RBI guidelines, the payment bank cannot undertake lending activities and hence they cannot extend loans.
  • Payment Banks can issue ATM/debit cards but cannot issue credit cards.

Is it a game changer ?

  • This is for the first time in the history of India’s banking sector that RBI is giving out differentiated licenses for specific activities. The move is seen as a major step in pushing financial inclusion in the country.
  • It’s a step to redefine banking in India. The Reserve Bank expects payment banks to target India’s migrant labourers, Low income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.
  • It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen. Payment banks will essentially rely on technology to reach payment services to all customers, using mobiles as the vehicle of banking. Mobiles go even where humans don’t.
  • Banking costs will come down due to intense competition caused because of entry of payment banks. At present, efficient private bank like HDFC Bank, ICICI Bank and Axis Bank make huge profits from their low-cost current and savings bank accounts, but a big chunk of this will move to payment banks, who may offer higher savings bank rates of 5-7 percent.
  • India’s domestic remittance market is estimated to be about Rs. 800-900 billion through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries accounts.

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Financial Management