New Payments Banks to Change Indian Consumer Behavior

By Dezan Shira & Associates
Editor: Kimberely Gabil

Earlier this year, the Reserve Bank of India (RBI) granted preliminary approval for the formation of payments banks. The payments banks represent a new bank category in India. Although many foreign investors remain unaware of the development, the new banks are expected to change Indian consumer behavior in the short-term, before helping many low-income Indians improve their financial standing in the long-term. These changes serve as a powerful incentive for companies that make and sell products in India.

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What Are Payments Banks?

Payments banks are special category banks that are licensed to receive deposits and provide remittances. The targeted audience for payments banks is low-income households, migrant workers and small businesses. The intention of these banks is to foster financial inclusion by providing small savings accounts for payments and remittances to low-income households, migrant workers, small businesses and unorganized sector entities.

Payments banks are subject to the following conditions:

• Payments banks are granted the same privileges and rights as the scheduled banks of India;
• They have to keep a Cash Reserve Ratio (CCR) like any other scheduled bank;
• The minimum entry capital for the banks is Rupees 500 million;
• Payment banks must deposit balance revenue in approved Statutory Liquidity Ratio (SLR) securities with a duration of not more than three months;
• Payments banks can issue ATM/debit cards;
• Payments banks cannot provide loans or credit cards;
• Payments banks are restricted to holding a maximum of Rupees 50,000 per customer.

As a step towards financial inclusion, the RBI has granted licenses to mobile firms, supermarket chains and others to cater to individuals and small business that do not have bank accounts. The RBI has provided ‘in-principle’ approval to eleven entities out of 41 applicants: Aditya Birla Nuvo Ltd, Airtel M Commerce Services Ltd, Cholamandalam Distribution Services Ltd, the Department of Posts, Fino PayTech Ltd, National Securities Depository Ltd, Reliance Industries Ltd, Dilip Shantilal Shanghvi, Vijay Shekhar Sharma, Tech Mahindra Ltd and Vodafone m-pesa Ltd.

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A Game Changer

Payments banks will redefine banking in India. Specifically, it will pave the way for ‘cash-less’ banking.

Many consumers that do not have bank accounts will now be able to take steps towards formal banking with payments banks accounts. This is particularly the case for residents in rural areas that do not have physical access to a local bank – payments banks account holders will be able to manage money through mobile banking.

Mobile banking will perform the same role as a debit card, averting unnecessary cash payments. Many Indian consumers that obtain accounts with payments banks will be able to engage in financial transactions that could not be completed through cash payment.

The emergence of payments banks are expected to lower the cost of bank transactions across the industry. In fact, RBI officials have stated that it expects payments banks to use innovative technology to continuously lower the cost of banking transactions. Lower transactions costs will enfranchise low-income consumers to engage in transactions they would not previously be able to afford.

In addition to allowing off-grid consumers to engage in cashless and affordable financial transactions, payments banks are expected to increase access to the government’s social welfare and subsidy schemes. This will allow many individuals and small business to increase their capital. India Post, which received preliminary approval for a payments bank from the RBI, is expected to play an important role in this development: the postal service maintains offices across the country, including remote areas that banks have not been able to penetrate.

India is primarily a cash economy. The introduction of payments banks, however, will allow many Indians to engage in formal bank transactions, and increase their access to government welfare programs. Businesses that cannot entertain cash payments or penetrate rural markets may now be able to access new markets and business opportunities as a result of India’s proposed payments banks.

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