The recent move by the RBI to give licenses to eleven private parties to set up "payment banks" has raised a few eyebrows. Payment banks are basically banks which provide almost all banking facilities like taking deposits, pay bills, issue cheques, drafts etc except it cannot lend to anyone apart from the government. Companies like Vodafone, Airtel, Aditya Birla group, India Post, Paytm and Tech Mahindra among others have got these licenses. But how does these banks affect the regular banking setup?
First and foremost, these banks will provide last mile connectivity as they do not require bank branches for transaction. Thus penetration of these banks in rural areas will be comparatively more than regular banks, as most of these transactions will take place through mobile phones. Though physical branches will be required for opening of accounts but payment banks will mostly rely on technology to reach to the customer.
Secondly, payment banks, with their zero balance accounts and low fee for banking services will create competition for both public sector and private banks which make us pay through our noses for banking services. The proliferation of payment banks will thus reduce the cost of banking services resulting in a considerable loss of customers by regular banks.
Thirdly, the payment banks can be very useful in implementing the Direct-Benefit-Transfer schemes where subsidies can be directly transferred to accounts. Payment Banks, along with the Aadhar Card and Jan Dhan Yojana scheme will enable direct cash subsidy to the poor, without the problem of fake recipients arising. This is a very important step taken in the direction of Financial Inclusion and subsidy reforms.
Fourthly, these banks will offer better return rates to depositors and the 4 percent for savings account norm will be a thing of the past. Higher return rates will attract more customers and subsequently may cause the banks to lose customers.
Lastly, the government will be one of the biggest beneficiaries of the move as they will get access to cheap funds. Currently, banks are major investor in government bonds. But since payment banks can lend only to the government, they can invest in short-term bills or T-bills of upto one year's maturity. Short term rates will come down and government will be able to borrow cheaply.
Though, it is quite evident that the ease of banking and lucrative interest rates offered by payment banks may cause some portion of the customer base of regular banks to shift to payment banks, it does not mean the banks will run out of business. They can still give loans to public and private entities and a considerable amount of their profits comes from these loans. A competitive atmosphere, will actually be beneficial for the public and make some public sector banks to come out of their sleep and take note of the current situation.
First and foremost, these banks will provide last mile connectivity as they do not require bank branches for transaction. Thus penetration of these banks in rural areas will be comparatively more than regular banks, as most of these transactions will take place through mobile phones. Though physical branches will be required for opening of accounts but payment banks will mostly rely on technology to reach to the customer.
Secondly, payment banks, with their zero balance accounts and low fee for banking services will create competition for both public sector and private banks which make us pay through our noses for banking services. The proliferation of payment banks will thus reduce the cost of banking services resulting in a considerable loss of customers by regular banks.
Thirdly, the payment banks can be very useful in implementing the Direct-Benefit-Transfer schemes where subsidies can be directly transferred to accounts. Payment Banks, along with the Aadhar Card and Jan Dhan Yojana scheme will enable direct cash subsidy to the poor, without the problem of fake recipients arising. This is a very important step taken in the direction of Financial Inclusion and subsidy reforms.
Fourthly, these banks will offer better return rates to depositors and the 4 percent for savings account norm will be a thing of the past. Higher return rates will attract more customers and subsequently may cause the banks to lose customers.
Lastly, the government will be one of the biggest beneficiaries of the move as they will get access to cheap funds. Currently, banks are major investor in government bonds. But since payment banks can lend only to the government, they can invest in short-term bills or T-bills of upto one year's maturity. Short term rates will come down and government will be able to borrow cheaply.
Though, it is quite evident that the ease of banking and lucrative interest rates offered by payment banks may cause some portion of the customer base of regular banks to shift to payment banks, it does not mean the banks will run out of business. They can still give loans to public and private entities and a considerable amount of their profits comes from these loans. A competitive atmosphere, will actually be beneficial for the public and make some public sector banks to come out of their sleep and take note of the current situation.
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