The Reserve Bank of India gave ‘in principle’ approval to 11 companies to form what we call a payments bank. Let us have a criticial analysis for the same from IAS Coaching point of view.
Idea behind payments bank –
- As of 2017, 37 per cent of the Indian adult population remain excluded from the formal financial system; 21 per cent of those included do not actively use their bank accounts.
- The USP of payments bank was the fact that people could open a bank account almost at their doorsteps with the help of an agent, could make transactions using their phones and had the facility to make deposits of up to ₹1 lakh.
Reality check –
- India’s first payments bank being charged with opening accounts without requisite approvals and custom consent as well as reporting losses for 2016-17.
- There is little awareness about the model among last mile consumers and dearth of incentives among last mile agents to promote the product and services of a payment bank.
Lack of incentives –
- The agents report a severe lack of administrative and technical support from the payment banks. They are said to be receiving limited training on the features of the product, terms and conditions and its benefits.
- In terms of the levels of awareness, both the last mile customers and the agents seemed to know little about the product and did not have an understanding of the uses of the product, leading to low consumer awareness and subsequent low demand for the product.
- It is also said that the agents were not provided with adequate incentives to promote the product and the monetary commission provided per transaction was too low in cost and too high in effort.
What should be done?
- Payment banks need to intensify their efforts and try different approaches. Insights from the field suggest lack of demand for the product, primarily due to lack of awareness.
- There is significant potential for the product to expand into rural areas, given the low density of bank branches and ATMs in these geographies. So, payment banks need to heavily invest in marketing, especially in rural areas, and compensate agents substantially.
- Payment banks need to explain the features and uses of the product to their agents such that they can effectively transfer this knowledge to the consumer. Currently, agents themselves do not seem sufficiently familiar with the product features.
- To truly empower retail agents, there needs to be more involvement by payment banks throughout every part of the process; first, through a more comprehensive on-boarding strategy that goes beyond simply downloading the application for a retail agent and instead helps them to create an effective pitch for their customers.
- Next, it is crucial to have systems in place for times when retail agents require technical support through dedicated customer service lines, regular issue-based training, and an immediate and personal contact with an area manager who pays regular visits to the retail outlets.
Payment banks must take a holistic approach, investing heavily in agent training and handholding their agents in the short run to reap longer-term benefits. Agents, in turn, must also provide continued support to customers in terms of assisting them in the uses of the product and resolving problems. A one-time introduction is not likely to be enough for this new product, and customers would need to be gently eased into using it.
What is Payments Bank?
- Capital requirement: The minimum paid-up equity capital for payments banks is Rs. 100 crore.
- The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
- Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
- Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
Question: Payments bank is an idea who has failed to yield the desired objective of financial inclusion. What are the reasons behind it? What should be done to make it a success?