India’s financial inclusion mission has got a fresh burst of energy, as the experiment with a different kind of banking kicked off. Airtel Payments Bank started operations on 23 November and seven more payments banks are expected to roll out over the next few months. All these are expected to use innovative technology-based banking to expand the reach and usage of basic financial services across the country. While the Pradhan Mantri Jan-Dhan Yojana (PMJDY) has provided one big push to inclusion over the last two years, all said and done, the services are being extended under government mandate. Private participants have now been given a stake in this mission, and it will be interesting to see how these non-banks—Airtel, Reliance Industries, Paytm, Fino, India Post, Aditya Birla Group, National Securities Depository Ltd and Vodafone—take on this role.
The first obvious impact will be the scale of operations. Airtel has chosen Rajasthan as its starting point. The pilot phase has 10,000 Airtel retail outlets operating as banking points. In the first phase itself, the Airtel project will double access to banking in the state. According to data from the Reserve Bank of India (RBI), Rajasthan had 6,687 bank branches as of June; while a full picture of the business correspondent network state-wise is not available, the number of PMJDY “bank mitras” is 3,769, according to the finance ministry. With the other payments banks coming in, we can expect a significant leap forward in the number of access points, especially in rural areas. India is set for a real transformation, not just in terms of access to banking but more significantly, in the manner of banking —it will not be business as usual.
As per payments banks guidelines, the banks cannot offer credit. While initially, the new banks may begin with basic banking operations, over time, other financial services can be expected as a payments bank is permitted to act as a business correspondent for another bank, be a distributor of financial products such as mutual funds, insurance and pensions and also conduct foreign exchange transactions with prior permission and approvals in place.
Even basic banking is set for disruption, as the new banks are expected to depend heavily on technology and digital means to reduce costs of operations and increase ease of transactions. The disruption is already apparent. For instance, as existing Airtel customers can have the same account number as their mobile number, opening an account is simple and can be done online. Where the know-your-customer (KYC) details of existing subscribers are in line with RBI guidelines, they can be shared for opening accounts remotely. Existing Airtel services have been put to use for transactions—the Airtel Money app, its own Unstructured Supplementary Service Data (USSD) channel, etc.
Other participants can be expected to leverage their own customer bases, agent networks and channels. There is significant competition ahead for existing banks, as the bonanza offered by the new bank is a high 7.25% interest rate on savings deposits. This comes at a time when all banks are reducing their deposit rates and it can be a significant draw for even those who have accounts in other banks currently.
Amidst all the excitement, there are two caveats that must be highlighted; the first has to do with the business models of these new banks and the second with financial inclusion, the fundamental rationale for these new banks.
Being new and untested, the business models of these new banks are unclear, even to operators. Three of the 11 approved candidates dropped out, and the remaining have been cautious with their plans in the absence of clarity on many operational fronts. With the RBI issuing operational guidelines in October, only Airtel has now started a pilot phase in one state, and there are as yet no details on the plans of the other seven.
Meanwhile, there have been many changes since the in-principle approvals were given last year—banks are getting on board the Unified Payment Interface, the ceiling tariff on USSD has been lowered to help increase transactions on basic phones and demonetization is set to have an impact on customer priorities as well as growth.
All in all, while payments banks are the new kids on the block, they will have to be quick on their feet. Since this is a first-time model, there will be many queries to the regulator as well, and success will depend on how responsive the RBI is in resolving glitches that will arise as operations begin.
For the RBI, it is important to keep the spotlight on the rationale behind the payments banks—expanding financial inclusion. It is clear that, with these new banks and their aggressive strategies, banking access will increase. However, it is difficult to estimate the impact the new banks will have on reaching out to the financially excluded. For this, RBI must initiate an independent survey that will monitor the financial behaviour of those outside the formal system—such a survey will over time give a clear idea of the impact of new banks on the ground. The RBI should begin by tracking data on active agents and active accounts from all banks; payments banks will then be a part of this framework.
The RBI has another crucial responsibility: ensuring customer protection. While moving in uncharted territory, there is a lot riding on the new banks—efficient monitoring, supervision and nimble regulation can make all the difference in taking India to a new level of inclusion.
Sumita Kale is with the Indicus Centre for Financial Inclusion.