RBI to Lower Barriers to India’s Mobile Payments Market

Impending rule changes by the Reserve Bank of India (RBI) will give the country’s main telecom groups such as Bharti Airtel and Vodafone greater freedom to compete with Indian banks by offering enhanced mobile payment services, reports the
Financial Times

The paper notes the success of mobile payment technologies in developing markets such as Kenya, where Vodafone’s M-Pesa service is used as a virtual currency by more than 70% of adults. However, the same technologies have been slow to take off in India’s potentially huge market, where regulations force mobile companies to tie up with established banks and mobile customers are prevented from accessing money stored on their phones – a process known as ‘cashing out’.

This situation could be about to change, following the RBI’s release earlier this month of a report that recommends measures to increase financial inclusion in India and which proposes broad-based changes to the country’s banking system. Only one in three adult Indians currently holds a bank account.

The ‘Committee on Comprehensive Financial Services for Small Business and Low Income Households’, which produced the report, was created last September when Raghuram Rajan took over as governor of the RBI. Headed by Nachiket Mor, a member of RBI’s central board of directors, its remit was to better understand how a full range of credit products could be accessible to India’s general population.

The report recommends the creation of banks exclusively for payment services and deposit products for India’s small businesses and low-income households. The report envisions every Indian above the age of 18 holding a bank account by 2016 and suggests this can be made possible by issuing a free electronic account tied to the now mandatory biometric identification, the ‘Aadhar’.

The report also recommends the gradual abolition of the statutory liquidity ratio, as well as merging financial regulators within every state to cover a wider range of issues, such as the regulation of microfinance institutions.

Mor told the
that allowing mobile companies to offer bank-like payments services would be one of the “most transformative steps” in bringing financial services to India’s vast poor and rural population. He added that mobile groups should be given a new form of licence as a so-called ‘payments bank’ offering the same range of services that have proved popular in other countries.

“Basically this would allow guys like Vodafone or Airtel to put signs up all around India saying to their hundreds of millions of customers that they are now Vodafone Bank or Airtel Bank,” said Mor. “It would mean if you want to remit money to your uncle in your village, or receive money from your brother in Dubai, you can do that. It would be basic banking for the masses, and it would be hugely popular.”


Related reading