FINANCIAL INCLUSION Vs. PAYMENT BANKS
CMA Dr. P. Siva Rama Prasad
The Reserve Bank of India’s latest initiative of introducing ‘Payment Banks’ finds resonance with Economist Adam Smith’s Theory* of employing Division of Labour to exponentially increase productivity. The new Business Model adopted will create a revolutionary trend in the Indian Banking Industry and will accelerate Government’s Mission of improving Financial Literacy and achieving Total Financial Inclusion (TFI), both vital for a country’s Economic Development.
*An important early (1776) description of processes was that of Economist Adam Smith in his famous example of a PIN Factory. Smith described the production of a PIN in the following way:
”One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head: to make the head requires two or three distinct operations: to put it on is a particular business, to whiten the pins is another ... and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which in some manufactories are all performed by distinct hands, though in others the same man will sometime perform two or three of them.”
Smith also first recognized how the output could be increased through the use of labor division. Previously, in a society where production was dominated by handcrafted goods, one man would perform all the activities required during the production process, while Smith described how the work was divided into a set of simple tasks, which would be performed by specialized workers. The result of labor division in Smith’s example resulted in productivity increasing by 24,000 percent (sic), i.e. that the same number of workers made 240 times as many pins as they had been producing before the introduction of labor division.
Lack of awareness of the structured Financial System and an unregulated or disorganised Rural Banking System, prevented most rural population from depositing their savings in banks. The introduction of Payment Banks in the rural, semi urban, and interior pockets will change this scenario, usage of and access to the system will help people understand it’s functioning and help in channelizing the savings of the people in these areas. It will also give government access to funds for development activities.
The Government of India and the Reserve Bank of India have implemented various Business Models to achieve TFI i.e., No-frills Accounts, Business Correspondents, Business Facilitators, Local Area Banks, Regional Rural Banks, and setting up of Rural Branches of Commercial Banks. However, their contribution has been negligible. Payment Banks are better poised to aid achieve TFI, their strength lies in the use of Technology and the Low Operational Cost it would entail in contrast with the Bricks–and-Mortar Banking Model.
Payment Banks will offer the following Advantages
Presently, currency circulation is less in urban areas due to the use of Debit/Credit Cards and Internet/Mobile Banking compared to rural and semi urban areas. With Payment Banks using Technology-mobile phones and bio-metric system (Aadhar Card enabled bank accounts)-the use of currency circulation in these areas too will decrease drastically. Payment of utility bills, tax payments, and small business transactions will change to Wire Transactions. This will help fight the problem of forged notes and reduce the import of paper for printing currency.
A Narrow Banking Model
Attracting deposits for lending is one of the core activities of the Commercial Banking system. However, mobilising deposits and investing them in safe mode-in treasury bills, government securities-is called Narrow Banking. Since Payment Banks are mandated to invest their mobilised funds in government securities, these maybe classified under the ‘Narrow Banking Model’. This is the safest model as there is no Credit Risk involved, and the Spreads are high due to the mobilisation of low-cost deposits.
The Maximum Deposit to be mobilised by Payment Banks has been capped at Rs.1,00,000/-. The maximum deposits guarantee covered by DICGC is also Rs.1,00,000-this means depositors’ funds with payment banks are Completely Secure. This is one of the USPs that will attract Savings Bank Accounts to Payment Banks-most customers in the Rural Areas seek complete security for their hard earned savings funds. The activation of these Banks across the country will also lead to the decline of Chit Funds, and other unauthorized institutions that exploit Rural Population.
The Operational Cost for these banks is less compared to Conventional Banking system. Further the use of latest Technology will increase the Spread of their business operations. In addition to Spreads, as these banks are authorised to sell other financial products such as Life Insurance, General Insurance and Mutual Funds like SIPs, etc. Presently Life and General Insurance penetration levels are low in India when compared to other countries. Payment Banks will increase the penetration level of these products. Moreover the fee-based income through Cross Selling will add to their Bottom-Line.
One Segment One Product
Payment banks are authorised to mobilise Savings Bank accounts upto Rs.1,00,000/- from salaried employees, petty vendors, agriculturists, landless laborers and small scales. This one product approach will be hugely beneficial as marketing skills required to sell this product is minimal. Further, this niche segment is not fully tapped by Commercial Banks. The differential service provided by the Payment Banks to the customer will result in high profitability.
In India, Mobile Usage is increasing and people-including rural population is well informed about its usage and functionalities. Mobile Service Providers have been allotted licenses to start Payment Banks. These providers using latest technology will reach the customers in the Nnook and corner of the country easily incurring least cost of operations.
Low Cost of Operations
Brick and Mortar Banking is a Capital-intensive Business Model and Commercial Banks would find it difficult to open branches in the unbanked and far-flung areas as incremental cost would exceed incremental benefit. With the help of Business Correspondents or Franchise Banking System, Payment Banks will provide Low Cost services to the Customers located in the Remote Areas.
For Example, assume that a customer is buying a Top-up for his Mobile for Rs.20/- in a remote village in India. A petty shop (Buddy Shop) owner in a village is getting commission on selling the top-up without any paper work. Operational Process of credit to a Savings Bank Account is similar to a top-up. Similar process will be adopted by payment banks to deposit credits to a SB account and for payments Bio-metric System. In Conventional Banking System (at present RRBs located in villages and unbanked areas) Paper Work like Pay-in-slips, Withdrawal form, Cheques etc. for receiving cash and payment of
deposit through bank branch channels is essential. Payment Banks will focus on Paperless Banking.
Asset Liabilities Management (ALM)
ALM mismatch will be minimal in Payment Banks as deposits mobilised will be mostly invested in secure instruments like government securities. As these banks do not have any Credit Lending activity, Liquidity Risk will not arise. The RBI’s Monetary Policy will not affect Payment Banks due to these reasons. Due to Low Operational Cost and Spreads these banks can offer Higher Rate of Interest to Savings Bank deposit accounts when compared to Commercial Banks. As a result attrition or migration of SB Accounts from Commercial Banks to Payment Banks will occur. This poses a huge challenge for the former.
Out of the Eleven Payment Bank Licences issued by RBI, most of them have been allotted to Mobile Service Providers. When a customer wants to open an account with the payment banks of the mobile service providers, obtaining KYC becomes seamless as most of these Companies would have complied with the KYC Guidelines for providing the Mobile Phone, DTH or Landline Service. Hence, these providers can open an account to all their existing customers by default. Those who wish to use the account can begin operations without the hassle of documentation, photograph, address proof and identity proof.
The Last Mile Bridge
From time to time the Government of India, and State Governments offer various subsidies and benefits to the people, particularly the social security schemes. These benefits will directly be credited to the beneficiaries through Payment Banks.
Implementation of Basel III
Three main risks in the Banking Industry are Credit Risk, Market Risk, and Operational Risk-Banks have to provide Capital Adequacy Norms i.e., a minimum of 9% to cover these risks. As Payment Banks will not sanction any Credit or Loans to the Public, Credit Risk for these banks is zero. As for Market Risk, most of its investments will be either Treasury Bills or Government Securities and hence this risk is also minimal. And as the regulator will monitor their performance closely in the initial stages, Compliance Risk is also less. However, there is some Operational Risk related to the implementation, usage and adaptation of Technology. The Overall Risk Profile for Payment Banks is very less when compared to the Conventional Banking System in India. Hence, the CRAR or
CAR for Payment Banks is less and they need not bother about the implementation of Basel III accord in full before 31st March, 2019.
In most of Commercial Banks, CASA Deposits Share in the Total Liabilities (Deposits) is in the range of 40% to 50%, where the Cost of CASA Deposits Ranges from 0% to 4%. Once Payment Banks start operations, CASA Deposits will shift from Commercial Banks and this will lead to an increase in the Commercial Banks Treasury Borrowing to Bridge ALM Mismatches. As a result Spreads will thin further. To overcome this problem, Commercial Banks need to provide excellent customer service and develop Technology
Oriented Products to retain existing customers in not only Metro and Urban areas but also in Semi-urban and Rural areas.
Also due to the limited Services offered by the Payment Banks, Innovation and Strategic Thinking in increasing the Market Share of Low Cost Deposits is possible and it will create further challenges to Commercial Banks in the coming days.
The author has nearly 30 Years of experience in Banking Service and 6 Years of Insurance Experience (SBI General). He is a Fellow Member of Institute of Cost Accountants of India, Kolkata,Institute of Company Secretaries of India, New Delhi,Indian Institute of Banking and Finance, Mumbai, Insurance Institute of India, Mumbai (Life & General),All India Management Associate, New Delhi