The Reserve Bank of India earlier this week gave in-principal nod to 11 entities, including Reliance Industries, Bharti Airtel and Vodafone, to set up non-lending payments banks.
Here are five ways the niche banks will change the banking space in India -
- MORE COMPETITION FOR UNIVERSAL BANKS: Payments banks will be a new category of banks which will focus on deposit mobilisation and payments or transaction services like payment of utility bills, mobile recharge, remittances, ticketing etc. The current lot of universal banks can do these transactions too, but their focus on corporate and retail loans keeps them away. But now with payments banks, they are likely to feel threatened. They are now protecting their territory by launching innovative new products.
- ACHIEVE FINANCIAL INCLUSION OBJECTIVES: Despite making it mandatory for universal banks to open rural branches and priority sector lending, along with other forms of banks like co-operative banks, regional rural banks, almost half of the population is still unbanked. The payments bank, a stripped down version, can help address the problem as regulatory requirement for capital is also relaxed and they can use technology to offer low-cost solutions.
- ENCOURAGE DIGITAL PAYMENTS: Most of the payments bank candidates came with a background of mobile wallets. They have been offering a closed or a semi-closed wallet with a tie-up with licensed bank to offer small payments like paying utility bills, mobile recharge, taxi payments, remittances etc. With RBI now licensing them to start a bank, they will be able to offer the same or more such services at lower costs.
- REDUCE STATUTORY LIQUIDITY RATIO (SLR) BURDEN ON COMMERCIAL BANKS: Unlike in the west, there is a heavy burden on Indian banks to park 21.50 per cent of their funds or deposits in SLR. The limit is too high and restricts banks' ability to lend to the productive sectors of the economy. While this gives the government a ready market for borrowing, this encourages lazy banking. With payments banks, this scenario would change if they become successful. By definition, payments banks are allowed to accept deposits, but not lend. They have to compulsorily invest in government securities. If payments bank becomes successful and large, the government's G-sec requirement will be absorbed by them, removing the burden on commercial banks.
- CHECK ON BLACK MONEY: India is predominantly a cash economy. This creates a major hurdle for government or regulators to catch the offenders. The digital cash will create electronic footprints, which will help the tax authorities go after the evaders.