Payment Banks: Threat or Ally for Financial Inclusion?

Payment Banks: Threat or Ally for Financial Inclusion?

Question: Financial inclusion is a worthy social objective. Are payment banks threats to regular ones or are they potential partners in the business of financial inclusion? Provide a critical analysis.

RBI and SBI have taken opposite stands on whether payment banks will promote financial inclusion

Pros

- Payment banks can be allies to regular banks

- They can provide banking to the unbanked in remote areas where there are no branches

- They will provide last mile connectivity

- Universal banks can fulfil the functions of payment banks so there will not be any unhealthy competition

Cons

- Payment banks could lead to intensification of competition to deposits sphere and cut into their margins

- Payment banks cannot offer loans unlike universal banks and they are allowed to raise savings deposits

- As a result of this, they could poach customers from commercial banks which would lose a massive number of deposits in a relatively short time

The Bottomline

- Payment banks are not entering the market to provide last mile connectivity

- Big players like Birlas, Reliance and Pay TM are seeking to gain a large share of low cost despite in urban areas to make rural operations viable

- Cost structures of universal banks will be higher than payment banks because the latter will opt for minimal branches and maximised customer reach through mobile technology

- Payment banks are a direct threat to PSU or nationalised banks which are both short of capital and in debt

- Since payment banks cannot lend to customers, investment of deposits are in government bills with lower than one year maturity, meaning they will be able to offer higher rates on savings deposit but not long term FDs

- They are also saved from maintaining SLR and priority sector lending

- As there is an INR 1 lakh limit on deposits, many will move out of cash payment requirements using mobile networks of payment banks run by the larger telcos

- This means banks will suffer an outflow of low cost savings and idle deposits to payment banks

Facts and Stats

- In principle approval has been given to 11 payment banks by the RBI and this includes big companies like Airtel

- Profit remains the motive of the big players in the telecom sector.