How m-Finance can bring about an economic revolution - Moneycontrol.com

Moneycontrol Bureau

On Thursday, the Reserve Bank of India (RBI) came out with a set of draft guidelines proposing to allow setting up “payments banks” and “small banks”.

After soliciting comments from the public and interested stakeholders till August end, the central bank will issue final guidelines that will allow creation of such banks.

The RBI defines “payments banks” as institutions that will be allowed to accept deposits and facilitate withdrawals but they will not be allowed to lend money (deposits will have to be invested in government securities) while “small banks” will also lend up to a small amount.

Under the draft guidelines, the central bank proposes to allow a wide number of firms such as supermarkets and telecom companies to set up payment banks while non-banking financial companies (NBFCs) and microfinance institutions can set up small banks.

Also read: RBI releases draft guidelines on payments, small banks

The move to allow telecom firms to set up payment banks is significant, considering the reach these companies have.

Over 900 million of India’s nearly 1.23 billion population owns a mobile phone while only 40 percent of Indians have access to formal banking services.

As a result, with a significant unbanked population ready to be brought under the banking fold, the time is ripe for telecom companies to make a push for such services, which will result in much greater financial inclusion.

“Telecom companies will lap up the idea because they already have the infrastructure to reach the customers through their mobile networks,” Saurabh Tripathi, partner at Boston Consulting Group, told Mint .

Tripathi added that payment banks can reach out to the bottom of the pyramid in a much better way compared to banks -- in a country where only 75,000 of its 6 lakh villages have a formal branch or bank agent.

Thanks to their technological advances, low-cost structure and with know-your-customer compliances having already taken place, mobile phone companies have an untapped market that should not only result in a potentially lucrative business model, but also change the face of banking in the country.

The RBI yesterday said both payment banks and small banks should have minimum capital of Rs 100 crore, with 40 percent of equity coming from promoters – an easy hurdle for about all mobile phone companies to cross.

This is one of the many out-of-the-box ideas Raghuram Rajan has considered or undertaken since he was appointed RBI governor.

The Nachiket Mor committee that proposed setting up such payment banks had also proposed issuing a free bank account for every Indian by 2016 via the Aadhar network.

Rajan also recently cleared licences for two new banks for the first time in a decade and created a unique foreign currency deposit scheme for NRIs to combat the depreciating rupee – a move that fetched USD 34 billion.

But if the telecom industry has a similar success with banking as it did with its core business, Rajan’s payments bank move could bring about a most radical change that is must-needed in the economy hallmarked by slow decisions.