On 19 th August 2015, Reserve Bank Governor Dr. Raghuram Rajan flapped his wings and set off what could turn out to be a revolutionary storm in the Indian banking system a storm bigger than the one created when private banks were first given licenses in the 1990s.Eleven private parties were given licenses to set up “payment banks”.
What is a ‘payments bank’?
This is a bank which can receive deposits and provide remittances (make payments) but cannot give loans to people. They will have to rely mostly on fees from remittances and services such as utility payments or mobile topups. This type of bank is targeted at low income households small businesses, and other unorganized sector entities. These payment banks are supposed to work in coordination with Scheduled banks (Normal Banks)
So how do the transactions happen through payment banks?
The payment banks have a network of retail partners in every location. A customer (for ex.) who is in a city and who wants to send money to his family in the village goes to one of these retail outlets (Kirana Stores) ,then the merchant opens a mobile wallet for him and tops it up with the cash he deposits. The retailer then uses the customer’s wallet (given to him
by the payment bank) credentials to transfer the money to the bank account in the village where his family lives. This can be done only with the customer’s knowledge. When the transaction is initiated, a one time password (OTP) is sent to the customer’s mobile. Using the OTP, the money is transferred to the bank account and once the transfer is completed, both the customer and the recipient receive a confirmation on their mobiles.
How is the payments bank (ExAirtel Mcommerce service, Oxigen wallet, Paytm wallet) going to help people in tie up with Scheduled banks?
The answer is earlier Oxigen (a payment bank) could only put cash in the wallet. But to withdraw cash, the money had to first be transferred to a bank account. As a payments bank, players like Oxigen will now be able to offer direct cash withdrawals and interest on the money kept with them.
Payments bank is the need of the hour in India because:
India has growing appetite for domestic remittances (Payments), hence this service needs to be handled by a bank which is totally dedicated to remittances. A Crisil report projects that the Rs. 80,000 crore to Rs. 90,000 crore domestic remittances market will grow at 11% to 13% CAGR in the next few years.
Objective of these banks Financial Inclusion:
It could be uneconomical for traditional banks to open branches in every village but the mobile phone coverage is a promising low cost platform for taking basic banking services to every rural citizen. Hence, what will be critical to the success of payments banks is their ability to identify the right regions to expand and set up a network in — such as areas with limited access to mainstream banks and where a large chunk of money is coming from urban remittances.
Now the question that arises is how safe is the money deposited in a payment bank?
The answer lies in the guidelines given by RBI,apart from maintaining cash reserve ratio (CRR) with the RBI, a payments bank will be required to invest 75% of its deposits in government securities and treasury bills. Moreover not more than 25% can be held in current and fixed deposits with the scheduled commercial banks. As of now Airtel has partnered with
Kotak Mahindra Bank to set up a payments bank, Reliance Industries with SBI and Oxigen with RBL Bank. Scheduled banks can hold up to 30% equity in a payments bank. With Payment banks, poor citizens who transact only in cash will take their first step into formal banking, Thus it is reasonable to say that the era of the consumer is finally at hand.
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