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Can Payments Bank Make India a Cashless Economy?

The concept of payments banks is the brainchild of the Nachiket Mor Committee Report on “Comprehensive Financial Services for Small Businesses and Low Income Households”. The views of the Committee resonated in the guidelines for licensing of payments banks issued by the Reserve Bank of India (RBI) which stated unambiguously that, “The objectives of setting up payments banks will be to further financial inclusion by providing (I) small savings accounts, and (ii) payments / remittance services to migrant labour work force, low income households, small businesses and other unorganized sector entities and other users”.

Jan Dhan Yojana

Conscious of the bitter reality that millions of citizens had, for long years, been left unserviced by the formal banking system, the Government of India (GoI) propelled the formal banking structure into aggressively advancing the cause of financial inclusion through the Jan Dhan Yojana (JDY). The JDY became a mission driven program which witnessed the opening of 210 million no-frills bank accounts and the issue of 174.6 million RuPay debit cards. Initial momentum has, however, stalled and there is a growing reality that there is a world of difference between opening of accounts and their active operation in the banking system. The existing brick-and-mortar set up of conventional bank branches is proving inadequate to meet the whole demand of population, not only because of geographical inaccessibility but also on account of the phenomenon of ‘white collar phobia’ often experienced by the less privileged account holders who feel intimidated and unwelcome within the formal banking establishment.

Specialised Banks

Payments banks will virtually specialise as deposit mobilisation and remittance banks. Their target clientele is slated to be migrant labour in urban area, low income households typically maidservants and daily labour, and ultra small businesses (such as panwallas, cobblers, etc.). The restriction on day end balances in deposits not exceeding Rs.1.00 lakh may, prima facie, look insignificant, but not when you look at it from the perspective of the target clientele. What these segments of the population need is easy access to banking services, a comfortable milieu and the absence of communication barriers.

Access

Payments banks are expected to have literally a million touch-points. The ATM debit cards that will be issued to all accountholders will allow for seamless transactions using the existing infrastructure. Payments banks may refrain from opening physical branches until the business model becomes viable and profitable, but they will be able to provide last mile connectivity even in the distant and remote areas by leveraging the network of mobile recharge dealers, the local convenience stores, the small cyber cafes, and, in the specific case of India Post, the network of around 155,000 post offices spread across the length and breadth of the country.

Milieu

Payments banks will have an immeasurable advantage in the financial inclusion space. Account holders are likely to be positive about actually transacting in the system because of the comfort with the service providers. No more will they be apprehensive about having to contact a veritable stranger to have their transaction executed. The owner of the local kirana store, the guy recharging the mobile phone, for that matter, any business correspondent of the payments bank in the locality, and, of course, the all too familiar dakiya (postman) will be familiar faces with whom the account holders will be comfortable.

Communication Barriers

Apart from the ‘white collar syndrome’, the average small account holders also experience communication barriers in transacting in the formal banking system not only on account of procedural hassles but also language barriers (an inevitable impact of the transfer policy of most public sector banks). What the payments banks will achieve is a transformation that will revolutionise the ground level banking environment that will enhance customer comfort and convenience, and dissolve impediments.

Boost for Capital Formation

Wage earners, who presently do not have effective access to banking services, are compelled to resort to ad hoc measures to safeguard their earnings. Such measures include concealing their income within the residence which is particularly hazardous for women earners who are often compelled, against their wishes, to hand over the cash to ill-intentioned husbands. Daily wage labour and migrant workers leave their income in the custody of the contractor or supervisor, running the risk of deception by unscrupulous custodians, apart from having no ready access to their savings. With the advent of the payments banks, the wages can be directly credited into the wage earners accounts and they could easily access the money for making small payments and withdrawing cash. The remittance route would also be far more easily workable.

Urban – Rural Connect

Payments banks also hold out immense scope for establishing a smooth urban-rural connect. Migrant labor is likely to discover that with a bank account in the city and the ATM card at their permanent residence, it becomes easy and risk-free to deposit earnings in the city while the family uses the ATM card to access funds for meeting monthly expenses in the village.

The possibility of transforming India into a cashless economy is a beguiling prospect but nevertheless not one that is likely to be achieved in the foreseeable future. What can be predicted is that payments banks will impel a significant reduction in the volume of cash transactions. And that will be a giant stride on the road to making India a cashless economy.