Reserve Bank of India Plans Payments Banks

Reserve Bank of India (RBI) plans to launch the country’s first payments bank shortly, which will provide deposit and payment services but not extend loans, according to the central bank’s deputy governor HR Khan.

The concept of payments banks was first proposed by an RBI committee, led by board member Nachiket Mor. Payments banks would promote financial inclusion by offering basic services to unbanked areas of the country. More than half of India’s adult population still lacks access to banking services.

RBI first introduced a three-year financial inclusion programme in April 2010 that led to banks opening outlets in 200,000 villages. Subsequently, it launched the second phase of the programme for 2013-2016.

In contrast to traditional full-service banks, which require basic capital of five billion rupees (INR) or around US$84m to commence operations, the new payments bank can be set up with just 10% of that figure.

Mor’s plan also included providing permissions for existing banks to create payments bank subsidiaries by converting prepaid payment issuers (PPIs). These companies provide cards that customers can use to make payments with the money stored in them. There are 27 PPIs in India, including Itz Cash Card, Oxigen Services (India) and Airtel mCommerce.

The entry of payments banks is also seen as moving India closer to a differentiated banking licence regime, where the RBI issues licences to new banks to undertake specific banking operations.

However, the RBI’s plan has been criticised by Arundhati Bhattacharya, chairman of State Bank of India (SBI), who said payments banks would hurt existing ‘universal’ banks as they will offer products which are cross-subsidizing other services. She also said that there would be an element of regulatory arbitrage as a payment bank would only be investing in government bonds.

Speaking at a conference on banking and financial service organised by SBI Capital Markets, Bhattacharya said; “There is an element of cross-subsidy in services provided by a bank. The payments bank will not have to provide the cross-subsidy. We will have to find ways to work with that.”

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