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When I wrote a piece (http://goo.gl/SiFxI2 ) about the Nachiket Mor committee report recommending the setting up of payments banks in January this year, I honestly did not think that six months later we’d be looking at draft guidelines for such banks. But here we are! On 17 July 2014, the Reserve Bank of India (RBI) released the draft guidelines for payments and small banks (http://goo.gl/4P7FuT ) and will receive feedback on them until 28 August 2014.

A payments bank is half a bank. Or a bank that tightly focuses on just one part of the business. It is a bank that only makes payments possible and takes deposits, but it cannot lend the money it accepts as deposits. Mobile companies are already quasi-payment banks because you use them to transfer money and keep deposits. Many payment gateways are already quasi-payment banks that have been hemmed in by existing regulations to tie up with a bank. A bank is needed for the cash-out. The concept of payments banks frees such entities from this forced marriage to a bank and allows them to focus tightly on work they have already proved they are good at—servicing very low-value transactions and deposits using technology at a low cost. Something traditional banks have not been able to do.

The payments bank model is robust because the key risk in a traditional bank comes from its lending activity and leverage. Payments banks will have to invest 100% of their deposits in government securities (G-secs). The subtext of taking away loans from these banks is that now politicians will not be able to arm-twist banks into lending to their cronies. Ever since the State Bank of India Act was amended to throw out the bank’s chairman R.K. Talwar, (read about that here: http://goo.gl/WjFPjH ) in 1976, Indian bank chiefs have learnt to come to heel when politicians call.

A look at the list of who can become a payments bank throws up some surprises. Along with the expected entities such as mobile phone firms, non-banking financial companies (NBFCs) and corporate business correspondents, there are also supermarket chains and a provision to allow banks to take a stake in a payments bank. Mobile companies such as Bharti Airtel and Vodafone are already there in the mobile money space with Airtel Money and m-pesa, respectively. Payment gateways such as Fino, Oxicash and Eko have already set up a bottom-of-the-pyramid payment system. But including supermarket chains on the list shows that somebody is clearly thinking outside the 3-6-3 banking box. For those who don’t know, lazy banking is called 3-6-3—borrow at 3%, lend at 6% and play golf at 3pm.

Payments banks will go beyond just being fee-for facilitators of payments across the country. They are best placed to take tiny deposits from millions of people. A service that till now fly-by-night operators provided through Ponzi schemes and unregistered chit funds. A high-tech payment system will have the ability to fill this huge demand need. Abhishek Sinha, co-founder and CEO of Eko, a financial transactions company, told me that since process efficiencies have been learnt the hard way by companies like Eko, they are best placed to offer what the bottom of the pyramid needs—a 10 deposit. He says that traditional banking will never be able to service such a low-value deposit, the servicing of which has to be on a branchless and 100% electronic format.

While the prospective applicants get their business plans in place, there are three issues that need further thought by RBI. One, since you have ring-fenced risk by limiting the banks to work on the liability side only and not the credit side, by asking payments banks to invest 100% of their money in G-secs, why restrict their size to 20 times the net worth? This means that a 100 crore net worth can sustain a 2,000 crore deposit base. In informal conversations, bankers tell me that this limit can be relaxed with no loss of stability or hike in risk.

Two, payments banks can invest only in G-secs with a one-year tenor. It seems the Mor committee recommended only a three-month G-sec as eligible security; RBI has extended it to a year. Preventing them from investing in longer-tenor bonds may be aimed at reducing the interest rate fluctuation risk, but surely a graded approach may work? Up to 75% of deposits going to one-year G-secs and the rest to longer-tenor government bonds could be a possible solution.

Three, it looks like these banks will not be allowed to sell third-party financial products. Why not? Once the highway is built, why not use it? They should be allowed after they meet the regulatory requirements of “seller beware" (I hear RBI is putting the final touches to the seller beware regulation).

The overall buzz that I pick up is of excitement of a tightly controlled market opening up. Some people call it an example of genuine liberation and reform, something that has the potential to unlock the value at the bottom of the pyramid. Other RBI watchers are happily stunned at the guidelines—this is as drastic as not launching a Mars rocket, but putting a man there! But the pushback from old banks has begun: the most-repeated argument is that these banks will not be viable, they will fail, the economics doesn’t work. In the candid voice of an old industry veteran in finance: bar one or two, most other existing banks are not really “in the money". It’s not as if they know how to stay solvent themselves that they can push back on payments banks. In fact, this is a win-all. The new banks will force the old ones to get more efficient and get over lazy banking and those outside the banking footprint will get included. But watch the giant bank pushback on payments banks as it unveils over the next month.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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