Mumbai: The Reserve Bank of India (RBI) on Wednesday gave in-principle approval to 11 entities to open payments banks that will widen the reach of banking services and push the government’s goal of financial inclusion.

The new category of banks, which some experts said could prove to be disruptive, will provide basic savings, deposit, payment and remittance services to people without access to the formal banking system.

The payments banks will target financially excluded customers like migrant workers, low-income households and tiny businesses. They will not be in the business of lending, so they will be shielded from the risks that conventional banks are exposed to.

In-principle approval will be valid for 18 months, after which the entities will be given formal licences, provided they fulfil conditions stipulated by RBI, which said the 11 were chosen from among 41 entities that applied for payments bank licences.

“Going forward, the Reserve Bank intends to use the learning from this licensing round to appropriately revise the guidelines and move to giving licences more regularly, that is, virtually “on tap". The Reserve Bank believes that some of the entities who did not qualify in this round, could well be successful in future rounds," it said in a statement.

Aditya Birla Nuvo Ltd; Airtel M Commerce Services Ltd, a part of India’s largest phone company Bharti Airtel Ltd; Cholamandalam Distribution Services Ltd; Department of Posts; FINO PayTech Ltd; National Securities Depository Ltd (NSDL); Reliance Industries Ltd (RIL); Tech Mahindra Ltd; and Vodafone m-pesa Ltd, a unit of telco Vodafone India Ltd, were the nine organizational entities given in-principle approval.

The list consists of the names of two individuals—Dilip Shantilal Shanghvi, founder of Sun Pharmaceutical Industries Ltd; and Vijay Shekhar Sharma, CEO of One97 Communications that runs Paytm, the mobile commerce and mobile payment company.

Dilip Shanghvi Family and Associates (DSA) is tying up with Norwegian telecom company Telenor and IDFC Ltd.

RIL is partnering State Bank of India (SBI) and Airtel M Commerce Services Ltd with Kotak Mahindra Bank Ltd.

RBI said it had chosen “entities with experience in different sectors and with different capabilities so that different models could be tried".

The National Democratic Alliance government that came to power in May 2014 has made financial inclusion a key priority of its governance agenda.

It has launched the Pradhan Mantri Jan-Dhan Yojana (PMJDY) to ensure a bank account for every household, offering accidental insurance cover of ₹ 1 lakh, a life insurance cover of ₹ 30,000 and easy transfer of money across India as sweeteners.

As of 12 August, 175.7 million bank accounts had been opened under the scheme, according to the PMJDY website.

“RBI giving payments banks licences is a significant and important step. Payments banks will reach out to people in rural areas," finance minister Arun Jaitley said in New Delhi on Wednesday.

The payment bank licence will help Vodafone in building on its payments and money transfer network across India, said Sunil Sood, managing director and chief executive officer (CEO) at the telco.

“With over 90,000 agents, we are already providing people in remote areas a convenient way to transfer money and make payments in a safe and secure manner. (We can now) offer a more comprehensive portfolio of banking and financial products and services, accelerating India’s journey into a cashless economy," Sood said.

SBI has proposed a 30% stake in the payments bank it will form with RIL.

“This partnership brings together the combined strengths of two of India’s Fortune 500 corporations committed to making a transformative impact on India’s financial inclusion landscape. We see this licence as an opportunity to promote financial inclusion by providing banking and transaction services to unbanked, under- banked and small businesses," said SBI chairperson Arundhati Bhattacharya.

The new class of banks will play a role in modernizing the payment systems, said NSDL.

“We have 14 million demat accounts and payments are involved in all our existing businesses and so we think there is a lot of scope for us to synergize our existing businesses with our planned payment bank," said G.V. Nageswara Rao, MD and CEO of NSDL.

Rishi Gupta, MD and CEO at FINO PayTech Ltd, in which ICICI Bank Ltd has a stake, said the licence will allow the company to build on its strengths. “Currently, 90% of transactions are in cash and are estimated to be of multiple trillions; we believe there is a huge opportunity for payment banks to power these transactions electronically. We intend to invest over ₹ 300 crore and look to break even in next 3 years period," Gupta said.

Still, there are sceptics who wonder whether banks that cannot lend money and which will be limited to keeping a maximum deposit of ₹ 1 lakh per customer have a future at all.

“This is overcrowding of the space. I don’t know how these banks will fare in the future," former SBI chairman Pratip Chaudhuri said.

Abizer Diwanji, head of financial services at audit and consulting firm EY, cautioned that RBI may have problems regulating these virtual banks that will operate mainly with point-of-sales devices and through business correspondents.

“RBI is not used to regulate disruptive businesses and hence the central bank itself will have to become more sophisticated. Ultimately, not all companies will be profitable and consolidation, given the sheer number of licences given, will be inevitable," Diwanji said.

The new class of banks have the potential to change the paradigm of retail banking, especially in the payments space, said Dipak Gupta, joint managing director, Kotak Mahindra Bank.

“They will also promote the habit of savings by driving cashless transactions. We are truly excited to participate in this opportunity," he said.

Some applicants who lost out said they accepted RBI’s decision but were clueless as to why their applications had been rejected.

“We are disappointed but maybe we have to become more worthy for this (licence)," said Kishore Biyani, group chief executive officer at Future Group.

Paresh Rajde, founder and chairman of Suvidhaa Infoserve Pvt. Ltd, another applicant that did not make the cut, said RBI’s choice indicates its preference for large companies and telecom services providers even if they did not have a track record in promoting financial inclusion.

“Among the companies selected only FINO has a track record in financial inclusion but the bias is clearly towards industries and telecom companies. Some of those selected have no record in financial inclusion. We are disappointed with this because we are currently servicing 30 million customers and $2 billion remittances across India," Rajde said.

Ashish Rukhiyar contributed to this story.

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via