You must be reading in the newspapers about all the big players like Reliance, Tech Mahindra, Bharti Airtel, Videocon, Kishore Biyani, Dilip Sanghvi etc. are queuing up for Payment Banks license. But what exactly are Payment Banks?
Payment Banks is a Brainchild of Nachiket Mor. Committee which was setup last year by RBI. The Committee aims to assist in widening the financial inclusion mission by bringing Small Businesses and Low Income Households into the ambit of financial services.
Latest News (19-Aug-2015) : RBI granted in-principle nod to 11 companies out of the 42 applications it had received for payments bank licence. Name of the applicants that have received nods are – 1) National Securities Depository Limited (NSDL), 2) Reliance Industries, 3) Aditya Birla Nuvo, 4) Airtel M Commerce, 5) Department of Posts, 6) Fino Paytech, 7) Tech Mahindra, 8) Vodafone m-pesa, 9) Cholamandalam Distribution services, 10) Paytm and 11) Sun Pharma.
Nachiket Mor. Committee analyzed the process of Pre-paid Instruments and reviewed the issues with the Pre-paid Instruments provider.
Pre-paid Instruments are just like pre-paid SIM cards; you recharge them with the desired amount and use it to perform various transactions such as shopping, paying bills, booking tickets etc. Funds are added into the Pre-paid instrument by the direct bank transfer or from the credit card of the holder.
Issues with Pre-paid instruments
- The money added in the Pre-paid instruments does not earn any interest. So the small businessman and poor people did not like PPI.
- Once money added to the PPI, it cannot be transferred back to bank or any other PPI, holder has to spend it.
- Money added in the PPI is not as safe as in bank account.
Further, every transaction through the PPI attracts a fee of 0.5% as commission and the maximum limit of the money which can be added to the PPI Rs.1 lakh (earlier Rs.50,000).
After reviewing the above drawbacks, Nachiket Mor. Committee suggested that RBI should stop giving license to open PPI and give license of “Payment Banks” in place of PPI.
Payment Banks Meaning
Payment Banks means “Digital Wallet or Mobile Currency” which can be used to book movie tickets, pay utility bills, do shopping etc. Doesn’t it sound similar to PPI or what existing banks offer? But here is the difference, the payment banks could be supermarket chain, mobile service provider, non-banking financial companies, post offices, agri/dairy type cooperatives etc.
Payment Banks is based on the concept of PPI that is to load cash into mobile and use it to do various transactions such as transferring money using your mobile to another mobile phone holder or to another bank account or to point-of-sale terminals at large retailer and take out cash.
Need for Payment Banks erupted because India has around 94 crore mobile subscribers which is approx. 75% of the population of 125 crore but if we see the number of bank accounts this figure comes down to 60 crore that is around 50% of the population. Most of the unbanked people lives in the rural area and are poor people or small businessman. So from financial inclusion point of view, this model (PPI) seems to be sound concept.
Features of Payment Banks
- Payments Banks can accept demand deposits (only current account and savings accounts) with a ceiling limit of Rs.1 lakh per customer.
- Payment Banks will pay interest at the rate notified by the RBI.
- Payment Banks can issue Debit Cards but not credit cards.
- Payment Banks cannot engage in lending services i.e. they cannot give loans, thus phasing out the fear of NPA.
- The Deposit up to Rs.1 lakh is insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation), same as in bank accounts.
- Payment banks cannot involve in any credit risk and can only invest in less than one year G-Secs or treasury bills.
- Payment Banks will charge a fee as commission. This will be the sole earning for the banks.
- Payment bank will also have to maintain CRR (Cash reserve ratio) just like other Scheduled commercial banks (SBI, PNB, BoB, Dena, ICICI etc).
Payment Banks Structure
- RBI in its draft guidelines has stipulated the minimum equity capital of Rs.100 crore and minimum capital adequacy of 15%.
- The leverage ratio shall not be less than 5% i.e. liabilities should not exceeds 20 times of its net worth.
- Promoters holding shall not be less than 40% for the first five years and 30% for the 10 years and 26% for the 12 years from the commencement of the business of the payment banks.
- Commercial Banks could have Payment Banks as their subsidiary.
So the major difference between the payment banks, PPI and Commercial banks are:
|System||Can give loans?||Can accept deposits?||Can make payments?||Can offer interest on deposits?|
|Commercial Banks (SBI, PNB)||Yes||Yes||Yes||Yes|
|Payment Network Operator (Visa, MasterCard)||No||No||Yes||No|
Will payments banks be successful in India?
The answer to this question is M-Pesa.
- M-Pesa abbreviated from ‘M’ for mobile and ‘pesa’ is Swahili for money.
- M-Pesa is more like PPI rather than Payment banks as it does not give interest on the money deposited.
- M-Pesa was launched in 2006 by the Vodafond with the aid of the Kenya’s local mobile company called Safaricom and IBM.
- Currently, both Vodafone and Safaricome earn around 20% of their revenues from M-Pesa.
- The monthly value of transaction through M-Pesa is over $1 billion.
- Today more than 75% of Kenya’s population uses it and more than 25% of the GDP of Kenya routed through M-Pesa.
- M-Shwari, a separate segment of the M-Pesa also offers interest at the rate of 2-5% on M-Pesa balance.
How M-Pesa Works?
- You go to the M-Pesa outlet which could be grocery store, shopping center, petrol pump, general store etc.
- Give them cash and ask them to add it to your M-Pesa account.
- Now, you hold money in your mobile and there is no need to carry cash.
- M-Pesa apart from normal usage like paying bills, buying tickets also facilitates transfer of money between two person, international remittances etc.
- You can even take loan from Microfinance Institute via M-Pesa and pay them later via same account.
So, if the concept of Payment Banks becomes runaway in Kenya, it could also succeed in India.