Will RBI succeed in its financial inclusion plan?

Vodafone's mobile money transfer service, M-Pesa, began as an experiment in Kenya in 2007. Today, M-Pesa transfers cash via mobile phones in a host of under-banked countries such as Afghanistan and Tanzania.

The Reserve Bank of India (RBI) wants to replicate this model in India. It has given licences to 11 entities for opening payments banks to widen the financial inclusion net and bring small payments like remittances, utility bills, mobile recharge, cab fare, ticketing, etc, under the digital umbrella.

Regional rural banks and co-operative banks have been present in rural and semi-urban areas for decades. Still, half the country's population does not have access to a bank. The heavy reliance on cash in the system is also creating headache as it encourages black money. This is where payments banks will come in. These new lenders are not allowed to lend but can accept deposits up to Rs 1 lakh and park these in government securities, making a margin of three to four per cent.

State Bank of India chief Arundhati Bhattacharya, whose bank has joined hands with Reliance Industries to set up a payments bank, says this is an experiment to deepen the penetration of banking services and encourage digital transactions.

The diverse background of selected players - from Sun Pharmaceutical promoter Dilip Sanghvi to IT firm Tech Mahindra - hints at the experimental nature of the licenses under the RBI's differentiated banking approach. Clearly, RBI Governor Raghuram Rajan would want to see the most successful likely model in the future. India Post, for instance, has the widest network in pooling savings while FINO PayTech is probably the only one with experience of serving the poorest of the poor as a banking correspondent of state-run banks. But not everyone is convinced. "We are shocked to find amongst the selected players some who have done little work in the financial inclusion space, the key objective in the guidelines," says Pramod Saxena, Chairman of Oxigen Services, a payments solutions provider.

Without doubt, the new lenders will bring competition to universal banks. Their success would be judged by how well they facilitate the last-mile access in unbanked areas. They will also be judged on how they use technology to enable payments of high-volume but low-margin transactions like an electricity bill or mobile recharge. Above all, they must keep costs low as they are barred from lending.

If this experiment succeeds, the banking system would be the biggest beneficiary. "Today, many cash transactions dont leave any footprints, which makes it difficult to trace or tax them. Electronic footprints will provide a better tool to gauge such transactions," says Bhattacharya. Clearly, a lot is riding on the payments bank. The time starts now.