- Ensuring financial inclusion and spreading the banking net is one of the prime objectives of the state today. The formal banking sector in India had a limited outreach and hence, a limited percentage of population in India is under the banking net.
- Hence, various committees instituted by the Government of India, especially the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households recommended differentiated bank licenses for enhanced financial inclusion.
Concept of Differentiated Bank Licenses
- There can be 2 approaches to banking licenses-
- Universal banking license- a single type of banking license for full and equal access to both payments and settlements system and deposit insurance cover
- Differentiated banking license- banking licenses whereby banks can cover their niche banking areas and/or smaller geographical areas.
Rationale behind differentiated bank licenses-
- The existing banks are unable to provide 100% financial inclusion. Banks with limited products and services such as payment banks may find it viable to conduct operations in geographically wide and remote areas.
- Different skill sets for different services and banks have certain niche areas. It maybe difficult for a bank dealing mainly with corporate clients to have wide geographical presence.
- Greater financial viability of business catering niche areas suitable to banks.
- The priority sector lending regime has been causing discomfort for some of the foreign banks. For example, some of the foreign banks find it difficult to fulfil even the less rigorous target of 32 per cent in respect of priority sector advances.
Move towards differentiated banking system-
- The Nachiket Mor Committee suggested differentiated banking in the form of small banks and payment banks.
- The same model has been accepted by RBI. Many banks have received in-principle approval for setting up payment banks.
- An examination of the difference between small banks and payment banks is as follows:
|Small banks||Payment banks|
|Can accept all types of deposits just like a commercial bank Can give loans too||
|They have a smaller area of operation||They have no restrictions on area of operation; infact meant to promote financial inclusion|
|They are meant to cater to small businessman, small and marginal farmers, unorganised sector workers etc.||They are to cater to poor migrant workers wanting to send remittances home.|
Problems with differentiated banking model-
- would deter financial inclusion in true sense- limit the banking services available to masses to only remittance systems
- Priority sector lending is an important policy measure. Having differentiated banks which do not have to comply with priority sector norms would undermine its importance. Further, the revised guidelines on priority sector lending have rationalized the components of priority sector. These measures would make it easier to comply with the priority sector lending requirements by those banks which faced some difficulties in existing system.
- The business model adopted by such ‘niche’ banks depends heavily on ample inter-bank liquidity. Any shock leading to liquidity crunch can translate into a run on the bank.
- Can lead to price wars between banks that cater to niche areas such as payment systems
- Payment banks are differentiated banks which offer only restricted services like payments and remittance systems, sell mutual funds, pension products etc.
- They are meant to further financial inclusion by expanding outreach of banking system and offering basic minimum services
- They are meant to handle high volume of low value transactions
India Post as a Payment Bank
- Recently, Reserve Bank of India gave ‘in-principle approval’ to 11 banks to start operations as payment banks, India Post being the most prominent among them
- The new entity would be known as India Post Payments Bank (IPPB), a public limited company under the Department of Posts, with 100 per cent Government of India equity.
- Many multinational financial institutions had already evinced interest to join hands with India Post, which shows its acceptance worldwide.
- India Post Payments Bank- outlook and advantages-
- For India Post, the payment bank business will be a natural extension. India Post already accepts money from customers as part of its post office bank accounts and long-term deposit schemes such as National Savings Certificate. Its money order service is widely used by migrant workers to remit money back home
- India Post already has trust ofcustomersunlike its competitors, especially in the rural areas, as the local postman is still an integral part of the day-to-day lives of the rural populace
- High level of penetration and last mile connectivity- India Post with its vast network of more than 1.5 lakh offices, 90 per cent of which are in rural areas, can aid in financial inclusion. This should be compared with about 1.05 lakh branches of all the banks in the country.
- Like other payments banks, IPPB will target financially excluded customers such as migrant workers, low-income households and tiny businesses. It will not lend money and, as a result, will be shielded from the risks that conventional banks are exposed to.
- Effective delivery of Government services- With more people having access to banking facilities, it would be easier to transmit Government services to beneficiaries. It will also improve financial literacy levels and also the country’s financial savings.
Problems India Post is likely to face
Technological upgradation and training of its personnel
- The traditional postal staff will need extensive training in handling banking products - especially insurance and pension products - as they are different from the current financial products in India Post’s portfolio.
- They also need to be given incentives for selling the new products.
- Inadvertent misselling of sophisticated financial products to the poor customers could jeopardise this initiative, hence proper training is crucial
- Digitisation- The post office payment bank will have to quickly move to an online platform to make it easier for customers to access their accounts and conduct transactions
Way ahead for payment banks
- Currently, differentiated banks are quite new to Indian banking landscape. Hence, effective regulation by Reserve Bank of India will be the key to sustainability of the model. Regulation to check price wars and monopolies will be much needed.
- For each new entrant into Payment bank business especially India Post, partnerships with banks will be a key factor for success. Given the lack of clarity on the business model for payments banks, successful partnerships will be those that allow for changing responsibilities and revenue-sharing over time as the market matures
- Digital connectivity for transactions in Payment banks is also an issue. This needs to be sorted out to ensure payment banks seamlessly transfer money across the globe.
- Many reports point out a distrust among low end customers towards digital transactions due to various reasons. While India Post may inherently enjoy good faith of customers, other banks will have to go a long way to win the trust of these customers.