Banking For Unbanked

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It’s a quiet revolution in the making which could ensure financial inclusion for India’s unbanked millions and curb the flow of black money. The Reserve Bank authorized Payments Banks are going on stream with this great promise held out but there is disquiet over the manner in which it is being done. BY T. N. ASHOK

Call it the new revolution in banking: “Stripped down” banks or Payments Banks that will reach customers through their mobile phones rather than from brick and mortar branches. The drivers of this revolution will be largely private entities, nine of 11 granted licences by the Reserve Bank are companies like Airtel, Vodafone, Reliance, Tech Mahindra and so on (the government entities are India Post and NSDL).

So why has the Reserve Bank of India (RBI) set up these Payments Banks? The new banks are not in the business of lending money but they will offer savings accounts (with interest) and provide remittance services to migrant labour, low-income households and small businesses at low transaction cost. The broader idea is financial inclusion, to bring into the banking system poorer citizens (many in rural areas) who currently do only cash transactions and are “unbanked” (an internal RBI report put their numbers at 41% of the population).

“Stripped down” banking also renders possible “Assisted E-Commerce”, particularly in rural or semi urban areas where internet access maybe limited or not there at all; people may even lack of knowledge about how to use payment banks for making cashless transactions. This is where Assisted E-Commerce comes in. Operators of Payments Banks familiarize the neighbourhood grocer or pharmacy store owner with the Internet, train them to use Internet platforms including intelligent electronic processing for all transactions. This newly imbibed knowledge is used to help local customers.

So a migrant worker from say Jharkhand or Bihar working on a Metro Project in Delhi or Chennai, can remit money to his family instantly through the Assisted E-Commerce route. For the grocer or pharmacist or any other shopkeeper, it‘s a way of increasing his earnings as he gets a commission from the Payment Bank for each transaction.

Sunil, a canteen helper in Delhi, sends money home to his family in Mathura every month through the Assisted E-Commerce route. “I can’t waste my time and take the pain of visiting a bank,” he says. “Also a bank has incorporated a lot of norms in transferring the money. Services like that of Payworld have come to our rescue.”

Payworld is an online company specializing in recharges, reservations and utility payments. Its chief operating officer Praveen Dhabhai says: “Digital payments so far have performed a need gap function, making it convenient for individuals to send money to their family, make payments, book tickets and many other things.”

Payworld is targeting the unbanked, the non-tech savvy who use these platforms with a retailer helping them and also providing cash in facility. Payworld’s services are multilingual and generally considered convenient and safe. Such institutions are also working towards a situation where millions of new digital commerce users will be using services like “Digital Wallet”.

The drivers of this revolution will be largely private entities, nine of 11 granted licences by the Reserve Bank are companies like Airtel, Vodafone, Reliance, Tech Mahindra and so on

It comprises an electronic infrastructure, the software that runs it and a device which could be a smartphone or computer. All commercial transactions, even small purchases, are done through these devices. The Digital Wallet could also be proof of identity as it would store the holder’s driving licence or passport, maybe health cards and insurance details. It will eliminate the need to carry a physical wallet containing cash and other items.

Beyond all this, is the money involved: The cash remittance/transaction market is worth Rs. 900 billion (90,000 crore) and growing. The government is losing out on taxes. But moving to a cashless economy will be slow and difficult. Even though consumers in the metros are increasingly using credit/debit cards/mobile wallet for commercial transactions, things outside the metros leave much to be desired. Whether it is the corner shop or a consumer electronics showroom, an apparel store or a hospital, transactions in small town India are still in cash.

The large flow of cash facilitates the growth of black money. Finance Minister Arun Jaitley in his budget speech, had said he would incentivize credit or debit card transactions, and dis-incentivize cash transactions. It’s quite apparent that Digital Wallets (some call it mobile wallets) have been inspired by the government’s intentions.

The hitch is regulating this market because 41% of the population in the country is still unbanked (40% in urban areas, 61% in rural areas). The rate is higher in the north-eastern (63%) and eastern regions (59%).

An unbanked population means people are losing out on government social welfare measures including and especially, the direct benefit transfer scheme where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

There’s an element of disquiet here. The nine private and two government entities given licences by the RBI to run Payments Banks, appear to lack domain expertise. The government could easily have relied on the scores of credible microfinance organizations that have been working in this area for so many years. Instead, the grouse is, the RBI opted for a bunch of “well-heeled and influential corporates”.

Ajay Shah, who heads the Macro/Finance Group at NIPFP in New Delhi, is not clear why RBI chose the Banking Regulation Act 1949 to license Payments Banks when there has existed since 2007, the Payments and Settlement Systems Act. He also faults the RBI with classifying them as banks since they do not have any lending activities. In its defence, the RBI said that an external evaluation committee chose the 11. It said the committee determined the procedure and assessed each of the applications. Shah points out that this is “not due process of law”.

The “in-principle” approval granted to payments banks is valid for 18 months, during which time the applicants have to comply with all the requirements under the guidelines and fulfil the other conditions stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of “in-principle” approval, the Reserve Bank considers granting them a licence to begin functioning.

The silver lining is that the industry believes there will be successive rounds of licensing which will ensure entry of microfinance companies. There is talk of the RBI “making these licences available on tap”. But industry reckons this could take at least two years (during which time the 11 licensed players will have first mover advantage over everybody else).

Praveen Dhabhai of Payworld remains optimistic: “We hope that very soon a system of On Tap clearances for such licences would be introduced by the RBI and the government and that would be of great benefit to the unbanked populations in the country. It would also be in keeping with the finance ministry’s thinking of having cashless transactions across the country.”

The “in-principle” approval granted to payments banks is valid for 18 months, during which time the applicants have to comply with all the requirements under the guidelines and fulfil the other conditions stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of “in-principle” approval, the Reserve Bank considers granting them a licence to begin functioning

Summary

  • Low cost Payments Banks could be the key to financial inclusion for India’s unbanked millions and help eliminate black money
  • Payments Banks will operate largely through the mobile phone network but will have to build trust with their customers
  • There is disquiet over the RBI’s selection of 11 applicants to operate payments banks, microfinance firms have been ignored
  • E-COMMERCE IN INDIA

    At a compounded annual growth rate of 57%, the Indian e-commerce market is growing the fastest in the Asia-Pacific Region. It was worth about $3.8 billion in 2009, rising to $12.6 billion in 2013 with about 70% of it travel related. The e-retail segment was worth $2.3 billion.

    Leading Indian investment bank Avendus Capital in its Digital India report, estimated the e-commerce market in 2011 at Rs 28,500 crore ($6.3 billion) with online travel making up 87% of this market). The e-commerce figures are expected to hit Rs 54,800 Crore ($12.2 billion) this year.

    The Indian e-retailing industry is estimated at Rs 3,600 crore ($800 mn) in 2011 with growth expected to hit Rs 53,000 crore ($11.8 billion) in 2015.

    According to Google India, there were 35 million online shoppers in 2014 with the numbers expected to cross 100 million by 2016 end. Electronics and apparel are the biggest categories in terms of sales.

    India is experiencing tremendous growth in the use of Internet as well as mobile. There are just under a billion cell phone connections in India and the country adds around 6 million new cell phones every month in usage. Although the number of Internet users is still low in comparison to the US or the UK – at 243.2 million - 65% of all new Internet users in India experience their first Internet surfing activity via the mobile. The industry consensus is that growth is at an inflection point.

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