Mind the gap

India has over 900 million mobile connections. The speed with which these rolled out stands in contrast with the painful progress on the financial inclusion front where, after so many decades of trying, more than half the population has no access to banking services. Naturally perhaps, the question has arisen whether the success of India’s mobile revolution can be harnessed to provide access to banking services for the poor. Enter, the idea of ‘narrow banks’ – that is, those who can only take deposits for the purposes of withdrawal and remittances but not for lending — and you have the birth of a new concept called payments bank.

The RBI’s final guidelines for payments banks will confer restricted or differentiated licences to these new entities to accept deposits up to ₹1 lakh per account. Such niche banks can provide payment and remittance services through various channels such as internet, mobile banking and business correspondents, but cannot lend money or issue credit cards. The final guidelines are an improvement over the previous draft, making the deal a little sweeter for new aspirants. Under the new guidelines, these niche banks are required to invest 75 per cent of their deposits in government securities, as opposed to the 100 per cent proposed earlier. The balance 25 per cent, which can be parked with commercial banks, will go some way in providing better returns and flexibility in managing liquidity. Also there is no requirement to open at least 25 per cent of the branches in unbanked rural areas. Niche banks have been permitted to earn fee income by distributing simple financial products such as mutual funds and insurance.

In theory, payments bank offers huge potential to mobile operators for expansion, given the strong synergies with services they already provide. It is no accident that Kenya’s M-Pesa — the world’s biggest mobile payments provider — notched up about 20 million users, considerably more than the eight million account holders of the country’s No 1 lender, Equity Bank. By providing a host of new services to their existing customers, mobile operators stand to gain from increased engagement with customers. Currently under the mobile wallet service, withdrawal of cash is allowed only if the player is tied up with a bank. As a payments bank, these players can offer withdrawal and remittances, without paying commission to banks. Given the growing use of mobile wallet services in the country, it will be welcome if telecom firms rival regular banks in money transfer operations. Aside from telecom firms, IndiaPost, with its extensive network across the country, seems ideally positioned to enter the fray. The network of banks and banking correspondents being spotty, there is an opportunity for those with the necessary infrastructure and geographical reach to provide the delivery of financial services in a manner that is efficient and cost-effective.

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