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Will 'Payment banks' fulfill PM Modi's digital dream

By Manu Kaushik     January 17, 2017

Kamal Kaushik has been running a mobile shop in Jaipur's Shastri Nagar area for over 15 years. After Prime Minister Narendra Modi announced demonetisation of high-value currency notes on November 8, his business was hit. Daily sales dipped from Rs 20,000 to Rs 12,000. In late November, when Airtel launched its payments bank - the first such bank in the country - in Rajasthan, he got a leg-up. His outlet can also act as a branch of the new bank.

Now, he can offer something extra to his customers, who are still cautious about spending money on phone recharges and mobile devices. The account opening is free and quick. Customers pay him cash, the amount is deposited into their savings accounts, and they can spend as much as they want to. The amount earns 7.25 per cent interest. Airtel has sweetened the offer further by giving free calling minutes for every rupee deposited in the account.

Kaushik says while he operates the Paytm merchant account, too, the Airtel account gives more benefits. For instance, he gets a 0.15 per cent fee for every cash transaction - deposits and withdrawals - done by the customer. Also, there is no cost for transferring money from the Airtel merchant account to his Vijaya Bank account. "The Paytm transfer is free for the time being. In a few weeks, it is going to cost something," he says, adding that he has opened close to 150 accounts till date.

'Payments banks' is the latest buzzword in banking circles, the next big thing, something that has the potential of giving wings to the government's ambitious financial inclusion targets. The Reserve Bank of India, or RBI, has given 11 entities approval in principle to open these banks. So far, Airtel has launched in four states - Rajasthan, Andhra Pradesh, Telangana and Karnataka. It plans to roll out the service in 29 states over the next few days.

The idea behind these new-age banks is revolutionary - to provide financial services to the remotest corners of the country, something that the traditional banking model has failed to do. According to the RBI, the country had 2,15,039 ATMs as of June last year. The number of bank branches was even less - close to 1.3 lakh. As a result, a vast majority of the country is still unbanked and relies on informal credit that comes at a high cost. Telecom services, on the other hand, have near universal penetration - the total subscriber base is one billion-plus. The plan is to ride piggyback on the distribution network of telecom providers/retailers to provide banking services to those in lower income groups. Airtel alone, for example, has 1.5 million retail outlets that can double up as bank branches. Seamless connectivity ensures a person can transact at any outlet associated with his bank in any corner of the country.

The services of payments banks can also be accessed on feature phones via USSD (quick codes such as *400#) and IVR (interactive voice response) options in 12 languages. This is a big plus as the number of smartphone users in India is only about 35 per cent of the total mobile ownership.

For now, these banks are expected to offer plain vanilla services such cash withdrawal and deposit. Customers can also use payments bank accounts to pay utility bills and buy train/bus tickets, etc, apart from online fund transfers. Airtel has tied up one million merchants for now; it aims to reach the three million figure by January-end.

Shashi Arora, CEO and MD, Airtel Payments Bank, says, "The purpose is to increase financial inclusion. There are over 233 million unbanked people in India."

Airtel says its strength lies in its strong retail network and customer base. At present, it has over 250 million subscribers, of which more than 90 per cent use the pre-paid service and frequently visit the retailer network for top-ups. "Almost 80-85 per cent of India's population has SIM cards but not necessarily a banking relationship," says Arora.

However, there are some concerns as well. The RBI has capped the deposit limit at `1 lakh to ensure that payments bank don't start servicing the urban/affluent customers whose banking needs have already been met. Also, to reduce risk, it has not given them permission to lend.

While the ease of access makes payments banks a strong competition to existing banks and mobile wallets, their long-term viability is still under question as the business model is yet to develop. At present, the banks can invest at least 75 per cent deposits in statutory liquidity ratio government securities or treasury bills with maturity of up to one year. These are low-income generating securities. Besides, these banks can earn a fee on cash withdrawal by customers and online fund transfers between them and other banks. For cash withdrawals, Airtel is charging 0.65 per cent, of which 0.15 per cent goes to the retailer (retailers earn 0.15 per cent from cash deposits too). Experts say payments banks will have to look beyond core banking to generate income.

Sucharita Mukherjee, CEO, IFMR Holdings, says payments bank can do a lot more after they build a customer base. For instance, she says, insurance penetration in India is just 2-3 per cent. This can be a great opportunity. "The opportunities are huge. They can sell mutual funds, insurance and pension schemes. Over a period of time, the data with these banks will also be valuable," she says.

Airtel's Arora says that they will get into referral lending tie-ups with other banks and non-banking financial companies at some point. "We are also looking at bancassurance," he says.

It seems the next big thing in banking has gone off to a good start, though it is too early to say if it will be as successful as is being hoped. In the last decade, microfinance institutions were deemed as the new frontier of financial inclusion. The high interest rates and poor lending practices led to their fall. In a highly competitive market, the payments banks are prone to misselling of products. The regulator has to keep a close watch so that they don't indulge in forced selling of products that consumers may not need.~

@manukaushik


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