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In this article, we would discuss about payments banks in
detail.
India will get its first chain of payments banks soon as the
Reserve Bank of India (RBI) cleared in-principle licences for 11 applicants
(out of 41 firms and individuals) on August 19. The Finance Minister Arun
Jaitley said that these banks would not only change the banking of habits of
people but also be a “game changer” for the economy.
PPIs to Payments
Banks
The concept of payments banks (PBs) was developed by the
Committee on Comprehensive Financial Services for Small Businesses and Low
Income Households that was set up in 2013 and headed by Nachiket Mor (Director,
Central Board, RBI). The committee came up with the concept of vertically differentiated
banking systems – specialised institutions providing services that revolve
around the three built blocks of banking, namely payments, deposits and
credits. Payments banks was one of the five systems enlisted.
Taking example from Kenya’s
M-Pesa model, the committee recommended that PBs should be formed replacing
Prepaid Payment Instrument (PPI) Issuers as the latter is not wholly
customer-friendly. PPIs (like Paytm, Airtel Money, Oxigen, Mobikwik, etc.) that
are also know called digital/mobile wallets are like prepaid SIM cards – they
can be recharged with an amount and used to carry transactions like settling
utility or shopping bills, booking movie tickets, among others. You can load
money in these instruments by cash/direct bank transfers or via credit cards. They’re
regulated by RBI under Payment and Settlements Act of 2007.
Problems with PPIs
–
As per RBI guidelines, only a maximum of
Rs.50000 can be stored in mobile wallets.
–
Money loaded into such instruments earns you
zero interest. Hence, from the financial inclusion point of view, it is not
very useful for poor people and small businessmen who wish to save their money.
–
Money loaded cannot be withdrawn or transferred
to any bank account; user has to spend it.
–
For every transaction 0.5% is levied as
commission.
–
Most importantly, the unused balance of money is
maintained in an escrow account in a bank i.e. a separate, third-party account in
any of the scheduled banks to hold money that belongs to the prepaid instrument
user. Thus, when the user conducts a transaction using the digital wallet, the
PPI issuer takes out money from the escrow account. This is called the nested
payment model, which according to the Nachiket committee carried ‘contagion or
interconnected risk’. In other words, if there is a crisis in an organisation
(here the bank that holds the escrow account) or even a rumour of one, then it
will adversely affect other organisations in the market (here the prepaid
instrument firm), thereby causing instability in the economy. Further, the money
held by PPIs have no deposit insurance unlike conventional bank deposits.
Hence, the introduction of payments banks. It is a modification of the concept of a
full-service bank and only provides select services. It can collect deposits
and provide remittances but cannot lend credit/loans. Existing PPIs besides
other entities and individuals are eligible to get payments banks licence. The
target audience are small businessmen and low income groups. PBs will offer
services through their own network of access points, business correspondents,
among others.
Till date RBI has given in-principle licences to 11
entities, which are as follows.
1. Aditya Birla Nuvo: It is part of the Aditya
Birla Group owned by Kumar Mangalam Birla. Its presence in the financial sector
includes asset management, private equity, non-banking financial services, etc.
The telecom division, Idea Cellular, has a mobile wallet service called Idea
Money.
2.
Airtel M Commerce Services: This is part of
Bharti Airtel with mobile wallet service called Airtel Money. It has tied up
with Kotak Mahindra Bank, which will have 19% stake in the joint venture.
3. Cholamandalam Distribution Services: It is a
subsidiary of Cholamandalam Investment and Finance Company (Chola), the
financial services part of Chennai-based Murugappa Group. In the financial
services field, Chola already has over 534 branches and offers services across
India. It manages assets worth Rs.25,000 crore.
4. Department of Posts: It is considered to be one
of the world’s largest postal network. Out of 1.5 lakh offices, 90% is in rural
areas. This is its biggest advantage over other entities.
5. Fino PayTech: It is a business and banking
technology platform employs the largest network of business correspondents, who
help banks extend services to rural customers without easy access to bank
branches. The firm is backed by private equity firms like Blackstone and the World
Bank’s IFC. ICICI Bank also owns a stake in the company.
6. National Securities Depository Ltd.: It is
India’s first and major depository, which handles most of the securities owned
and settled electronically in the nation’s capital market. It is promoted by
IDBI Bank, the Unit Trust of India and the National Stock Exchange. Eleven
public and private banks own stakes in NSDL including State Bank of India,
Deutsche Bank AG, HDFC Bank and Citibank.
7. Reliance Industries (RIL): Not only does it have
India’s richest businessman Mukesh Ambani at the helm, but has also tied up
with the country’s largest public sector lender SBI to set up a PB.
8. Dilip Shantilal Shanghvi: He owns Sun
Pharmaceuticals and has a personal investment firm Dilip Shanghvi Family and
Associates (DSA). He has tied up with IDFC (an NBFC) and Telenor, a Norwegian
telecom company.
9. Vijay Shekhar Sharma: Founder of India’s largest
mobile payments company, Paytm, he has investors including the Chinese
e-commerce giant Alibaba. Recently it reached the 100-million user mark and has
around 75 million transactions every month. The PB license will enable it to provide
a wide scope of financial services to Paytm users.
10. Tech Mahindra: Part of the $16.5 billion Mahindra
group, this IT firm has operations in automobiles, financial services, retail
and real estate, among others. Its mobile wallet service is called MoboMoney,
which operates a “tap and pay” system.
11. Vodafone M-Pesa: Two years ago Vodafone launched
M-Pesa, its money transfer service. It has over 90,000 agents, it is providing
rural people with convenient ways of transferring money and make payments in a
safe set up.
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