TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Payment Banks and Financial Inclusion
News: Airtel Payments Bank started operations on 23 November and seven more private sector participants are expected to start operations in the same segment in the coming months. It will be interesting to see how these non-banking private sector players such as Airtel, Reliance Industries, Paytm, Fino, India Post, Aditya Birla Group, National Securities Depository Ltd and Vodafone—will perform.
What are Payment Banks
Payments Banks are banks with the following features:
- They will provide a limited range of products such as acceptance of demand deposits and remittances of funds.
- They will not perform the function of lending money in the form of loans.
- These banks will have a wide network of access points particularly in remote areas.
- They will supplement their own network with business correspondents and even depend on network provided by others.
- Technology will be extensively used to add value.
Features and Functions of Payment Banks
- Payment banks cannot offer loans but can raise deposits of up to Rs. 1 lakh and pay interest on these balances just like a savings bank account.
- These banks can enable transfers and remittances through a mobile phone.
- They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.
- They can issue debit cards and ATM cards usable on ATM networks of all banks.
- They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.
- They can provide forex cards to travellers, usable as a debit or ATM card all over India and offer forex services at charges lower than banks.
- They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
Benefits and Impact of Payment Banks
The benefits arising from these payment banks are as follows:
- They are expected to use innovative technology-based banking.
- These banks will be highly instrumental in expanding the reach and usage of basic financial services across the country.
- With the scale of operations, there will be a significant leap forward in the number of access points, especially in rural areas. Example: In the pilot phase, Airtel will have 10,000 retail outlets operating as banking points.
- The new banks will gradually move towards providing additional financial services other than the basic services mentioned above.
- Payments bank can also take up the role of a business correspondent for another bank and act as a distributor of financial products.
- With the extensive use of technology, basic banking is set to undergo major changes, as the new banks are expected to depend heavily on technology and digital means to reduce costs of operations and increase ease of transactions.
Impact on Existing Banks
- Payment banks will also add pressure on the existing banks since the use of technology and the existing infrastructure make it easier for companies such as Airtel to open more accounts and increase their customer base.
- The existing banks will also face competition in terms of deposit rates offered. Upcoming banks are offering interest as high as 7.25% on savings deposits.
Areas of Caution
Two areas where a cautious approach needs to be adopted are the understanding of the business model as well as the objective of financial inclusion that they seek to achieve.
- The business models of these new banks are unclear and as a result three out of the 11 approved candidates have also dropped out of the race.
- The existing players have been very cautious with their plans due to ambiguity on many operational fronts.
- Reserve Bank of India (RBI) has just issued operational guidelines in October and Airtel has now started a pilot phase in one state only and there are no details on the plans of the other seven interested companies.
- There is no doubt that financial inclusion will increase due to the emergence of payment banks but it is difficult to estimate the impact the new banks will have on reaching out to the financially excluded.
- RBI can initiate an independent survey to study the financial behaviour of those outside the formal system and understand the impact of new banks on the ground. The RBI should begin by tracking data on active agents and active accounts from all banks; payments banks will then be a part of this framework.
Role and Responsibility of RBI
- Responsiveness the RBI in resolving technical and other glitches that will arise as operations begin.
- It is important for the RBI to keep focus on the core objective of financial inclusion.
- RBI has to ensure efficient monitoring for customer protection.
- Supervision and regulation are highly essential in the success of payment banks.
Payment technologies have proved hugely popular in other developing countries such as Kenya which is the most cited success story. Other than Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives. Admittedly, what the RBI is thinking of are an entirely different breed of banks — with higher capital and greater access to technology. It is time that RBI succeeds in garnering genuine interest among eligible promoters.
Connecting the dots
- Payment Banks are the next big thing for the government’s success in financial inclusion. Comment. Highlight the hurdles in the way of their success and their integration with the existing banking system.
General Studies 2
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
- Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes
General Studies 4
- Attitude: its influence and relation with thought and behaviour; moral and political attitudes; social influence and persuasion.
Towards a behavioural change- Demonetisation effect
- Change is the most consistent of all the time. And as ordinary it sounds, the extraordinary results it produces.
- Together with it joins Modernity which is about breaking stereotypes that govern individual and institutional habits.
- Today, technology has come to be the main driving force of change. From the steam engine to the electric bulb and internet, technology has defined the evolution of the human mind and civilisation.
- Hence, it is imperative for India to keep up with change in order to garner benefits of new technological inventions and utilisations.
Demonetisation- Transformative change is in making
- Recently, the demonetisation of high value currency notes have created ripples in entire economy as well as lives of citizens.
- Demonetisation will cut off money channels to terrorists and extremist elements, weed out counterfeit currency and drive out black money in its short term objectives.
- But the long term changes and gains demand bringing in behavioural change at all levels of society.
- The demonetisation act can be called as a part of ‘cultural revolution’ wherein the people will be coming across various platforms of transactions which will push cash-less economy.
- Other such examples of cultural and behavioural changes that has been encouraged in public life is ranging from attending office on time, keeping working and living environments clean, accountability, transparency, technology adoption, innovation, etc.
- Though economists are busy estimating the extent to which economic growth will be hit because of the ongoing drive to replace high-value banknotes, there has been a lot of discussion on whether the government can use the current situation to push India towards a cashless future.
- Hence, instead of debating constantly on currency to GDP vis-à-vis other economies, there should be emergence of awareness amongst people how to use technology at their benefit.
Unsettling the established institutional culture
- The demonetisation drive has highlighted one thing clearly that the citizens should be prepared for an economy which has least cash transactions. This of course requires major attitudinal and behavioural change.
- Since independence, not many major restructural reforms have taken place which impact all the citizens together.
- No doubt, India has come a long way since independence in terms of growth and development but the period has equally been marred with serious incidences of corruption, opportunism, nepotism etc.
- The newly elected majority government seems in a mode to ‘unsettle the settled’ and create a base for a behavioural change.
- Also, it can be termed as a multi-pronged and comprehensive strategy to cleanse the system of all ills that have worked against the interests of the poor, the common man and the middle class.
- The new initiatives will be a messenger of a modern India on the lines of advanced countries, where financial payments and transactions will not require currency but technology will become a tool in the hands of common people.
- Additionally, targeted behavioural modification will eventually result in the elimination of black money leading to increased revenues to Central and state governments that ultimately benefits the common man.
The beneficiaries and behavioural change
- The citizens are being made conversant with respect to the digital medium for transacting through the use of digital wallets, payment banking and plastic money.
- E-wallets like PayTM and Freecharge are reporting a huge spurt in digital payments with increased views, transactions and their profits.
- Also, banks are reporting a jump in demand from small merchants for point-of-sale terminals and card swipe machines. This shows that small trader is adapting itself to modern payment options.
- For example, as per a newspaper report, an HDFC bank official says that demand for card swipe machines has risen to 5,000 daily from 5000 a month. This is a 30 fold increase. The same report states that such demand is from smaller players like kirana stores, vegetable vendors and stationery marts.
- The real estate has seen a dip in prices as expected and here, cash transactions will be now a thing of past!
- In addition, the infrastructure companies are going to benefit from decreasing interest rates and thereby increasing their potential to invest. NHAI (highways), IRFC (railways) and NTPC (power), who are authorised to raise money through tax-free bonds, are expecting to raise money much more cheaply as bond yields have crashed post-demonetisation. Hence, the right kind of investment is being mobilised.
- The Hawala transactions have also taken a hit as hawala rates (which generate dollars for rupee payments in India) have soared, making underinvoicing of imports to evade duties near impossible.
- Lastly, the common people are adapting themselves to these radical change more faster than expected. People are using plastic money, internet banking and e-wallets and spending less cash in their transactions.
No doubt, the economy is going to suffer in short term due to cash crunch as Indian economy was dependent on cash. But, the long term gains are perceived to be immense which are beneficial to citizens and country in future.
Behavioural change is the hardest to acquire but it is not impossible. The citizens have welcomed the move as they know that black money, corruption, financing terrorist activities etc. are harming them in the end. And hence they have supported their elected government in this move.
India can hope for a better tomorrow by adjusting to some friction in present.
Connecting the dots:
- Demonetisation will spur a long term behavioural change amongst its citizens but they will have to pay a short term price for it too. Do you agree? Substantiate