Payment Banks could Fast-track our Financial Inclusion Journey

Context: Technology and reach of Payment Banks (PBs) place them well to help meet the goal of financial inclusion, but they need regulatory enablers in order to effectively achieve their objectives.

Financial inclusion in India:

• It encompasses opening bank accounts, access to credit, insurance and micro-investment products in a simple and safe way.
• Governments efforts: The JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion. Four of every five Indian adults have a registered bank account.

Challenges to financial inclusion:

• Limited usage: Since newly banked primarily use the account for money transfer or benefit withdrawals.
• Incomplete last-mile inclusion: of nearly 500 million underbanked and underserved Indians.

Payment Banks (PBs): a vehicle for financial inclusion

• Background: Licensed as ‘vertically differentiated banking systems’ by the Reserve Bank of India (RBI) on the recommendation of ‘Nachiket Mor committee on financial inclusion.
• Advantages over other traditional banks (including SFBs): They are digital, have access to a large customer base, and operate at about a tenth of traditional banks’ cost of service.
• Associated concerns:
  • Limited deposit-taking permission: Only up to ?1 lakh, limiting their profit-making potential and expansion capacity. (undermines accessibility for self-help groups and MSMEs)
  • The financial viability of rural Banking Correspondents (BCs).
• Suggested structural interventions to realize full potential:
  • Enhance the deposit limit: to ?5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
  • Offer differentiated current account: to MSMEs, helping the informal economy.
  • Ensuring financially viable BCs: PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.
  • Evolving new micro-lending models: through their BC networks and mobile apps, to serve thin credit consumers.
  • Combining technology and reach of PBs and trust legacy of traditional players:
    • PBs could co-originate loans with traditional institutions so that capital requirements are shared.
    • They can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument.