4 min read.Updated: 07 Jan 2021, 09:03 PM ISTSubhash Sheoratan Mundra
Their technology and reach place them well to help meet that goal but they need regulatory enablers to get on with the effort
You and me are part of a digital and inclusive India. We save, spend, invest and insure ourselves digitally. You might also be reading this article digitally. But what about Kamla, who lives in a far-off village? In a truly inclusive and digitally-powered ecosystem, I would imagine the following: Kamla borrows a small amount from her bank branch, which is really a village kirana store, and uses the money to buy her wholesale stock from a local farmer. She travels to the city to sell her vegetables, for which she bought a sachet insurance from the same kirana branch. Retail customers in the city scan and pay on her phone’s QR. On her way back, she deposits some of the earnings in her account at the kirana branch to repay the loan, while part of it goes into her savings, which she uses to periodically invest in a micro mutual fund or pay her insurance premium. No unfamiliar, complicated procedures, manual forms, or theft of cash, but simple and safe banking. Looks far-fetched? Not really. We now have the technology, reach and institutional support to realize this dream. We just need to connect the three dots. Payments banks (PBs) do that.
In the past few decades, India has seen dramatic and drastic changes in its banking infrastructure towards financial inclusion. Interventions, especially the JAM trinity—Jan Dhan accounts, Aadhaar and Mobile phones—have accelerated digital and financial inclusion. Four of every five Indian adults have a registered bank account . However, for newly-banked segments, usage is primarily limited to money transfers or benefit withdrawals. Financial inclusion is not only about opening accounts. It encompasses access to credit, insurance and micro-investment products in a simple and safe way. The dream would be incomplete without the last-mile inclusion of nearly 500 million underbanked and underserved Indians like Kamla. This remains a challenge for ‘weaker sections and low-income groups’. For instance, only 16% of micro, small and medium enterprises (MSMEs) have access to formal credit amid an estimated debt demand of ₹69.3 trillion.
In 2014, the Committee on Comprehensive Financial Services for Small Businesses and Low-income Households chaired by Nachiket Mor recommended setting up “high technology—low cost" banking models to accelerate financial inclusion to the last mile. Subsequently, the Reserve Bank of India laid down the framework and licensed ‘vertically differentiated banking systems’, such as Payments Bank (PBs) and Small Finance Banks (SFBs).
SFBs have grown profitably thanks to the yield spread between deposits and lending. Most of them started off as micro finance institutions with a ready asset base, and after converting into SFBs, they have got a better liability franchise but continue to operate in niche geographies. On the other hand, PBs have shown strong growth in revenues, while operating at a larger scale than SFBs. The high-tech PB model has shown more rigour than the cost-heavy branch-based SFB model in terms of its impact on inclusion.
Looking at the progress of these models, we can say that both PBs and SFBs have shown progress in achieving their objectives. But if we intend to make a real move ahead on the inclusion front, PBs will have to play a larger role. They are digital, have access to a large customer base, and operate at about a tenth of traditional banks’ cost of servicing.
However, to realize their full potential, they need certain structural interventions:
1) Liabilities: PBs can take deposits only up to ₹1 lakh, which limits their ability to augment profit that can be further deployed to enhance efficiencies. Also, for a few segments, such as self-help groups and MSMEs, the savings account limit blocks the adoption of highly-accessible bank accounts. Since the model has matured, it would be prudent to enhance the deposit limit to ₹5 lakh and benchmark it to Deposit Insurance and Credit Guarantee Corporation limits.
Also, MSMEs are rapidly formalizing, an outcome of policy reforms. PBs could offer a differentiated current account, with limits adequate for small business needs. This would enable them to impact the informal economy for the better.
Further, Banking Correspondents (BCs) are a critical link in driving financial inclusion. However, the financial viability of rural BCs is a key issue. PBs could offer low-value and simple fixed or recurring deposit products and sell to consumers through their BC distribution network, thus improving their viability.
2) Assets: Currently, there is no national-level lender with the risk appetite for thin-credit consumers. PBs can evolve new micro-lending models through their BC networks and mobile apps and create an alternate credit score for these consumers. However, for them to profitably provide credit to underserved customers, micro-lending and the enhancement of their liability franchise need to go together. This has the potential of moving a large number of micro-enterprises into the formal economy.
Allowing micro-lending by PBs could be a starting point. Thereafter, regulators may consider a transition path for them to become SFBs, or even Universal Banks.
3) PBs have an edge in technology and reach, while traditional players have a trust legacy. For collective impact on inclusion, two options can be evaluated with safeguards in place.
One, PBs could co-originate loans with traditional institutions so that capital requirements are shared. Two, they can originate credit and allow it to mature, or securitize and turn it into a market-linked instrument. This could accelerate credit formalization.
We must remind ourselves that there is no one-size-fits-all solution to achieve complete financial inclusion for the diversified needs of our people. Policymakers have worked for years on a framework to financially support the country’s weaker sections. The time to harness those efforts has come. An enabling framework needs to be in place. Payments Banks, in particular, have the potential to bridge India’s financial inclusion gaps.
Subhash Sheoratan Mundra is former deputy governor of the Reserve Bank of India and independent director of Airtel Payments Bank.
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