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Payment banks to revolutionise Indian banking industry

Payment banks to revolutionise Indian banking industry

Ravi Capoor, Former CEO, IBEF

Nov 09, 2015 4:44 PM

With the Reserve Bank of India (RBI) issuing in-principle approval to 11 entities to open payments banks in the country in August 2015, it is expected that the move will widen the reach of banking services in the country and revolutionise the Indian banking industry. The payment banks are permitted to do limited banking services - for instance, they can accept deposits, issue debit cards and offer payments and remittance services, but can't lend. It is expected that the payment banks will target financially excluded customers like migrant workers, low-income households and small businesses, thus supporting the financial inclusion drive of the Government of India from the Pradhan Mantri Jan-Dhan Yojana (PMJDY).

Companies and individuals like Aditya Birla Nuvo Ltd; Airtel M Commerce Services Ltd, Cholamandalam Distribution Services Ltd, Department of Posts, FINO PayTech Ltd, National Securities Depository Ltd (NSDL), Reliance Industries Ltd (RIL), Tech Mahindra Ltd, Vodafone m-pesa Ltd, Dilip Shanghvi, founder of Sun Pharmaceutical Industries Ltd and Vijay Shekhar Sharma, CEO of One97 Communications that runs Paytm have received the in-principle approval from RBI.

According to a recent IDC report, worldwide mobile payments will account for US$ 1 trillion in value in 2017, registering an increase of 124 per cent from the less than US$ 500 billion expected in 2015. Reportedly, mobile wallets have already surpassed credit cards in terms of the number of users in India. In fact, according to The World Bank, RBI’s move is expected to expand penetration of the banking sector in rural areas of the country. At the same time, the entry of new players is likely to increase competition in the Indian banking industry, lower remittance costs and extend the formal market for remittances, thus pushing the sector towards the next phase of growth. India is already the world’s largest for global remittances and payment banks are expected to push the envelope even further. However, the success of these banks will depend on low-cost technology and high volume of transactions so that charges are reasonable and profitable at the same time.

Overall, the payments banks are expected to bring in additional funds into the Indian banking circuit and being a support system to the big banks in extending their rural reach.

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