THE decision of the Reserve Bank of India earlier this month to allow 11 entities to set up payments banks is being seen by many as a game-changer for the Indian banking sector. The central bank had earlier this year decided to offer banking licences to entities that adhere to certain norms.

It had also decided to allow new categories of banks including payments and small banks. In pursuit of this policy, the Reserve Bank of India (RBI) has given permission to 11 entities including companies owned by billionaire businessmen such as Mukesh Ambani (Reliance Industries), Dilip Shanghvi (Sun Pharmaceuticals), Sunil Mittal (Bharti Airtel), Kumar Mangalam Birla (Aditya Birla Nuvo) and Anand Mahindra (Tech Mahindra).

British telecom major Vodafone, which is among the top-three mobile phone operators in India, also won a licence for a payments bank. And India Post, the tottering postal department, also secured a licence, enabling it to perhaps breathe life into a dying institution.

The new class of payment banks can offer only limited services to customers. “Payment banks are an add-on to the universal banks rather than competitors,” declared Raghuram Rajan, the RBI governor. “They will be feeders into the universal bank.”

According to him, India did not benefit from the mobile payment revolution in a big way, unlike Kenya or Uganda. The move to start payment banks would also force universal banks to get into payment services, he said. The new crop of banks will target consumers who have so far not been covered by universal banks — migrant workers, low-income households and tiny businesses, he added.

Indeed, it is to the credit of Rajan that he has pushed ahead with the scheme to allow differentiated banks in the country. It was just two years ago that the RBI floated a policy discussion paper on the banking structure in India and called for differentiated licensing to meet the needs for niche banking.

Reforms in India, especially in the financial services sector, move at a glacial pace with committees and expert panels bringing out voluminous reports to justify the changes. But in this case, Rajan succeeded in steering the proposal to set up payments banks in a record time.

The new category of banks will offer restricted services. They can accept deposits, facilitate payments and remittances, engage in internet banking, function as correspondent banks and also collect deposits of up to Rs100,000 per individual. They can also sell insurance and mutual funds, facilitate money transfers and issue debit and ATM cards, but not credit cards.

Finance minister Arun Jailtey expects payments banks to reach out to people in rural areas. Large universal banks, which find it difficult to penetrate remote areas, can enter into tie-ups with these banks (who can act as correspondent banks) and offer services to the unbanked population in rural areas.

“It will change the way people think, the way they keep the money, where they keep their money, and the way they pay,” said Jaitley. “Using banks for all transactions will become a habit for the people. This in itself will be a big game-changer as far as Indian habits and the economy are concerned.”

MANY of the new players, who do not have much experience in finance and banking, are tying up with existing banks. Reliance Industries Ltd (RIL) — which plans to roll-out its 4G services later this year through its subsidiary, Reliance Jio — wants to push digitisation of payments. It has entered into a partnership with the State Bank of India, the country’s largest commercial bank, and a public sector behemoth.

Reliance will be the promoter of the new payments bank, but SBI will be a joint venture partner with a 30pc stake in the new bank. “The payments bank is integral to RIL’s digital initiative in a rapidly converging world of telecom, internet, commerce, media and financial services,” said Mukesh Ambani, RIL chairman and managing director.

According to Arundhati Bhattacharya, chairman, SBI, the joint venture is the first-of-its-kind public-private partnership. “SBI’s vast experience in structuring financial products for different customer segments will be combined with the digital access provided by RIL in completing the most efficient, simple and affordable delivery model with utmost focus on financial inclusion,” she added.

Bharti Airtel — the largest mobile service provider, with a customer base exceeding 230m — is tying up with Kotak Mahindra Bank, a private sector lender, which will take a nearly 20pc stake in the new entity. Aditya Birla Nuvo will partner Idea Cellular, which is also part of the Aditya Birla group.

The new banks will have phenomenal reach thanks to the vast clientele and branch network of the various partners. Vodafone — which has had a huge success with its M-Pesa services in Africa and even in Afghanistan — has a customer base of more than 185m. Its payment bank will transform the payments business in rural and semi-urban areas.

India Posts, which has more than 155,000 post offices across the country, is also expected to expand financial coverage in rural areas. The postal department plans to tie-up with state-owned telecom major BSNL, though it is keeping its options open and might also look at partnering a private operator.

Among the companies that have got the RBI’s approval is PayTM, a mobile payments start-up. Chinese internet giant Alibaba had earlier in the year acquired a 25pc stake in One97 Communications, PayTM’s parent.

Despite the massive expansion of the banking sector in India in recent years, the country remains a largely unbanked economy. Large sections of the population — especially the poor and those living in rural areas — do not have bank accounts. Consequently, cash continues to dominate the economy, especially for the poor.

The government, as part of its war against the black economy, wants to encourage plastic money and more importantly digital transfers. The new payments bank, with many leading telecoms players, will hopefully ensure this transformation.

Published in Dawn, Economic & Business, August 31st, 2015

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