Open Forum

New Delhi, 2 September 2015

Payment Banks

TOWARDS FINANCIAL INCLUSION

By Dhurjati Mukherjee

The announcement of in-principle approval of 11 payment banks by the Reserve Bank of India (RBI) is expected to pave the way for financial inclusion through a combination of branches and digital platforms. It goes without saying that this step was very much needed more so because the large unbanked areas had to be covered and save the economically weaker sections from unscrupulous persons and chit fund scams. However, the road ahead is full of uncertainties and only time will tell about their performance.

While the private sector banks may not be in any way affected because of their strong technology base, the small and medium public sector banks may feel an impact in the realm of deposit growth, specially in rural and semi-urban areas. Added to this is the huge pile of bad debts, which cannot be tackled effectively. This along with increasing costs, their profitability and ability to grow has been badly affected.     

The license for India Post will greatly help in spreading out to the villages with their huge network, spanning 139,000 post offices. It is expected that these have the wherewithal and capacity to do effective business in rural areas. Moreover, since payment banks are allowed to take deposits up to Rs 1 lakh, there would obviously be a tendency to shift the post offices from public sector banks. Thus, India post is expected to get huge customers in the not-too-distant future.

Reports indicate that post offices could potentially cannibalize public sector banks’ Casa share (current account and savings account) in rural markets, which makes up around 90 per cent of the Casa deposits, according to a Nomura Global Markets Research note of August. One may be reminded of the fact that when interest rates were quite high in post offices a few years back, most pensioners and retired persons were keeping their money there. Thus the trust in post offices may help India Post to get more and more business in the coming years.       

A significant entrant is the Bandhan group that has already started commercial operations with 501 branches across 21 States and Rs 1.43 crore accounts. According to its managing director & CEO, Chandra Sekhar Ghosh, the Bank will stay away from corporate credit and concentrate on credit to micro, small and medium enterprises. “Our bank would like to take the money from both rural and semi-urban segment but we promise to give the money back in the form of credit to the rural and semi-urban sector also”, he stated at the recent inauguration of the bank in Kolkata.

Experts believe that Bandhan would be able to significantly gain market share from regional rural banks and cooperative banks due to its strong microfinance network. A challenge before the Bank would be able to offer cheaper loan to customers more or less around SBI’s base rate of 9.7 per cent though its interest rate is higher than nationalized banks to attract more customers.

Efficiency would play a crucial role in the functioning of these payment banks. These will provide products and services like accepting deposits and remittances, but cannot extend loans. These will offer services through own network of access points, business correspondents or networks provided by others. Being new, some of these would obviously be customer-friendly and dedicated to rural customers and help them in all possible ways.

The question of financial inclusion is intrinsically linked to the setting up of such banks. In fact, such a decision should have been taken long ago. It is significant to mention here that no less than Prime Minister Modi himself has only recently asked the RBI to prepare a 20-year road map on financial inclusion and asked banks to particularly look at the Eastern region of the country for fresh lending opportunities. This focus has abundant natural resources that had been relatively ignored by banks. 

There can be no doubt that India Post, Bandhan Bank and many others would help galvanise financial inclusion to the far corners of rural India. A section believe that instead of giving licenses to the large corporate houses more licenses to micro finance institutions or those that established Community Service Centres (CSCs) like Sahaj e-Village or even those with strong rural networks should have been preferred.   

The launch of the Mudra Bank (in April this year) with a credit guarantee corpus of Rs 3000 crore was also a significant step to help bottom-of-the pyramid entrepreneurs who find it difficult to access the formal credit system. Under Pradhan Mantri Mudra Yojana, micro entrepreneurs will be sanctioned loans ranging from Rs 50,000 to Rs 10 lakh. It has been  emphasized that there is need to focus on these 5.77 crores self-employed people who use around Rs 11 lakh crores with an average per unit debt of merely Rs 17,000 to employ 12 crore Indians. 

Keeping in view the basic objective before the government to reach out to the unbanked areas and bringing in its fold the economically weaker sections and the lower income groups who reside in the rural and semi urban areas, it appears that the present approach of giving licenses to may not have been correct. The large corporate entities would use the deposits and invest in urban areas and that obviously would not serve the Prime Minister’s Jan Dhan programme.  

It is pertinent to mention that at a recent conference in Lucknow, General Manager of NABARD, A K Singh observed that it has been making efforts to spread awareness regarding financial literacy so that economic activities increase and transaction takes place in the accounts. Singh said his organization has taken initiatives by providing livelihood and income generating opportunities through host of products such as building rural infrastructure, providing capacity building, organizing exposure visits, facilitation SHGs, farmers’ clubs, farmer producer organizations and promoting entrepreneurship through loan-cum-grant products. 

The fraud that has been carried by chit funds in rural areas of Bengal, Bihar, Jharkhand, Assam, Odisha etc. can only be tackled effectively through a banking network in the rural areas of these States. If such payment banks had been set up much earlier, the damage would have been avoided and the hard earned money of the poor could have been saved.  

Banking, as is generally agreed, is the key to development of an area or region as schools help in educating the community. Thus banks have the capacity to transform the villages and go a long way in upgrading the livelihoods of the rural population. Entrepreneurs and, of course, the farming community would obviously be greatly benefitted through the setting up of such payment banks and the results are expected to be definitely positive.

One is reminded of late President APJ Abdul Kalam, who visualized transforming rural India very much along Gandhian lines and put forth certain unique suggestions for providing urban facilities in rural areas though his scheme called PURA, initiated to Providing Urban amenities in Rural Areas, wherein it enhances the development in villages with all basic facilities like schools, roads, lighting, water, communication, health, employment and income in order to arrest migration. Payment banks success rate would be keenly watched.---INFA

(Copyright, India News and Feature Alliance)