Payments banks will serve as 'feeder' for universal banks: RBI Governor

The newly announced payments banks will complement the traditional banking sector rather than compete with it, said Raghuram Rajan, Governor of the Reserve Bank of India (RBI).

On Wednesday, RBI gave an in-principle approval to 11 entities, including large conglomerates in the energy, telecom and finance sector. Reliance Industries, Tech Mahindra and Aditya Birla Nuvo along with telecom companies like Airtel and Vodafone, are among the 11 entities which got approval to launch payments banks.

“Payments banks are an add-on to the banks rather than competitors,” said Rajan, adding that the committee that reviewed the licences was of the view that a number of different types of firms should be licensed to see what model works in this segment.

“Payments banks will be feeders into the universal banks... Payments banks can't do some things universal banks can do,” Rajan said at the second annual SBI banking conference.

In addition, he said that he doesn’t see payments banks transition into universal banks.

Small finance banks

Small finance banks, which are still to be licensed, may have an easier path to transition into universal banks, the RBI Governor said.

He added that payments banks will also help increase the utility of new bank accounts opened under the Prime Minister's Jan Dhan Yojana.

According to Fitch Ratings, the focus of payments banks on smaller deposit holders and mobile banking will add to competitive pressures for public banks, and could potentially pose risks to their market share over the long term.