All you wanted to know about. Payments Bank

How would it be if your neighbourhood supermarket or even your mobile phone doubled up as a bank? Well, that is precisely what the Reserve Bank of India (RBI) is pushing for, in its efforts to get more people into the banking system. Last week, the RBI issued guidelines for a new category of ‘payment banks’ which can provide payment services to migrant workers, low-income households and small businesses, among others.

Payment banks are entities that allow you to only open savings and current accounts. But doesn’t a normal bank allow you to do that even now? Yeah, but the difference is a payments bank can be a mobile service provider, supermarket chain or a non-banking finance company.

Payment banks make handling cash a lot easier. For example, you can transfer money using your mobile phone to another bank or to another mobile phone holder and also receive amounts through your device. Or you can transfer the amount to point-of-sale terminals at large retailers and take out cash.

The ‘payments bank’ will pay an interest rate on these accounts, though the rates are not specified by the RBI. Existing mobile money services offered by operators pay an interest of 4 per cent on balances held. You can maintain a maximum balance of ₹1 lakh. These deposits are covered by the DICGC (deposit insurance), so your money is safe up to this limit. So if a payments bank can open accounts, pay interest and transfer cash, in what way is it different from the old-fashioned bank? Well, it cannot give out loans.

The RBI has stipulated that every payments bank must have an equity capital of ₹100 crore to start off and maintain a capital adequacy of 15 per cent. Apart from these, it will need to meet cash reserve requirements and needs to invest in specific securities to meet the statutory liquidity ratio. All these amounts are to be invested in government securities or treasury bills. Promoter’s holding must be at least 40 per cent for the first five years, and eventually reduced to 26 per cent over 12 years.

India has 91 crore mobile subscribers, of which nearly 79 crore are active users. In rural areas there are 38 crore mobile users. So, the reach of mobile phones is pretty extensive. For example, Bharti Airtel, with 20 crore subscribers, has nearly the same number of customers as SBI!

So, whether it is a contractor seeking to pay workers who hail from another state or the government looking to transfer wages or even subsidies to the poor, the possibilities are huge for financial inclusion through this route. The RBI has asked payment banks to invest extensively in technology so that all transactions go through seamlessly.

Of course, there might be some issues to confront. For example, how much will payment banks charge for transactions so that they are profitable? Also, will low income households, who are the main targets of payment banks, accept reduced amounts post charges? Of course, competition can dramatically reduce transaction costs over time.

The Centre has tried out every trick in the book to drive financial inclusion. The payments bank seems the most workable of the lot. It’s an idea whose time has come.

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