EFFECT OF PAYMENT BANKS IN THE INDIAN FINANCIAL SYSTEM

Mrs. Sruthiya V N1
Mr. Nithin Jose2
Assistant Professor, St. Joseph’s College (Autonomous) Devagiri, Calicut, Kerala, India1
Assistant Professor, St. Joseph’s College (Autonomous) Devagiri, Calicut, Kerala, India2
Email id: amethystsru@gmail.com1
nithinjoz@gmail.com2

ABSTRACT

The concept of payment bank has got recent prominence after the country witnessed demonetization. These banks perform all the
functions of commercial banks especially financial services except lending. The main target customers will be low-income
households, small businesses and migrant laborers. This niche will create opportunity for remittances and is a major step taken
by monetary authority as a part of financial inclusion. RBI has given licenses to major players in the market to introduce this
system as a part of digitalizing the economy and also for reducing the cost of banking. Payment banks are expected to reach to
consumers through mobile phones rather than traditional system of bank branches. This paper tries to identify the effect of
payment banks in the financial system and also the transformation that happened to the Indian economy. The major reform that
was introduced in the banking sector is the entrance of private and foreign players and their renovation in the technological
aspects. Initially forty one applicants filed their applications with Reserve Bank of India. For payment banks, RBI has granted
licenses to Reliance Industries, Aditya Birla Group, Telco’s (Vodafone, Airtel), Indian Post, FINO pay tech, Tech Mahindra,
Dilip Shanghvi (Sun Pharma promoter), PayTM, National Securities Depository Limited (NSDL) and Cholamandalam
Distribution Services Ltd. This paper is based on secondary data and tries to bring a picture on the transformative changes in the
financial system of the country by giving licenses to Payment banks that can generate revolutionary storm in the Indian financial
system.

Keywords: Payment Banks; Digital economy; Mobile banking; e wallets.

INTRODUCTION

Payment banks operate on small scale with no credit risk, it can accept demand deposit up to Rs. 1 Lakh, offer remittance
services, mobile payments/ transfers, net banking, third party transfers, and can issue debit cards but they cannot issue credit
cards. In September 2013, the RBI constituted a committee headed by Dr. Nachiket Mor to study 'Comprehensive financial
services for small businesses and low income households'. The objective of the committee was to propose measures for achieving
financial inclusion and increased access to financial services. In 2014, committee submitted its report with one of the key
suggestions as payments banks to include all under the banking sector. Existing non-bank Pre-paid payment instrument issuers,
entities like the Non-Banking Finance Companies, Business Correspondents, mobile telephone companies, super-market chains,
companies, real sector cooperatives, and public sector entities can apply to set up payments banks. The minimum capital
requirement to set up this bank is Rs. 100 crore. The Promoter’s initial contribution should be at least 40% for the first five years
from the commencement of its business. As per the RBI guideline, banking should be completely networked and technologically
equipped. The RBI has issued that 25% of a Payments Bank's branches must be in the unbanked rural area. As per the rule for
FDI in private banks, foreign shareholding will be allowed in these banks. In August 2015, RBI issued in- principal approval to
set up payment banks to 11 applicants. Airtel payment bank became the first in the country to start operations by introducing their
pilot programme in Rajasthan. India Post ranks second in starting its operations in Ranchi and Raipur. One of the major players
in the payment banking is PayTM, which is now one of the most leading financial service providers that head the would-be
digitalized economy.

STATEMENT OF THE PROBLEM

Indian economy is one of the fast developing economies in the world, with its vast, diversified population. One of the reasons
behind this development is the strong monetary authority and its directives. The recent reform in the Indian financial system is
demonetisation policy in November 2016; it is viewed as a major shift towards a digitalized economy. Payment bank renders
their services through gadgets unlike brick and mortar banking. The payment bank plays an important role in rendering financial
services with the objective of reaching the unreached. This study tries to identify the current status and impact of payment banks
on the financial system.

OBJECTIVES OF THE STUDY

1. To study the effect of payment banks in the Indian financial system.

2. Identify the status of payment banking in the Indian economy.

SOURCES OF DATA

The study has been conducted mainly on the basis of secondary data. Journals, research papers, web resources and newspapers
were used for gathering relevant data.

REVIEW OF LITERATURE

Today, the world has gone digital and the easiest and fastest way of communication, information transmission, and fund transfers
all happens within a blink of an eye. The digital payment and e-wallets are the way through which fund transfers happens. A
study was conducted by Jayadatta.S on digital wallets and mobile payment systems. The study illustrates the future prospects and
growth of mobile payments and technology developments (2016). Payment banks are a revolutionary step in the Indian Baking
system quoted by Saba Abid in her research paper, she explained that introduction of payment banks in the Indian banking
system is a positive disruption to the existing banking system in the country. This revolution will definitely bring down the cost
associated with transfer or remittances and will ultimately benefit the consumers (2016).

Payment banks are the pseudo cash handling system and also it helps in identifying even a single transaction happening in the
economy, described by Madhavi Damle, Pushpendra Thenuan and Jimit Raval (2016). The study ‘Genesis of Payment Banks:
it’s stimulus on financial inclusion in India’, reviews the parameter of Financial inclusion and existing business models and
payment banks and issues faced by traditional banking system. Paper also illustrates Prepaid Payment Instruments, Business
Correspondents, ATMs, Mobile banking, can be overcome by using payment banking facilities. Nidhi Chandarana, in the
research paper had explained about what is the need of payment banks for digital India. The paper describes Payment banks as
the game changer, as it provide banking services through mobile platforms with ease and convenience (2015).
Denis Dennehy and David Sammon, in their paper present the review of literature on trends in mobile payments, which reveal the
key research themes and methodologies researched in this area. The paper explains that recently after 2014 more number of
researches is done on mobile payments as the technology is fast updated and being utilized by the organisations (2015).

PAYMENT BANKS: INDIA

Reserve Bank of India in July 2014, released the draft regarding the guidelines for application by the entities to set up payment
banks. In February 2015, RBI released the list of entities who have applied for the license, there were 41 applicants. It was
announced that an external advisory committee will evaluate the applications and in August 2015, RBI gave ‘in-principal’
licenses to eleven entities to set up payment banks in India. Aditya Birla Nuvo, Airtel M Commerce Services, Cholamandalam
Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries, Sun
Pharmaceuticals, Paytm, Tech Mahindra, and Vodafone M-Pesa were issued in-principal licenses. Three entities have
surrendered their licenses; first one being Cholamandalam Distribution Services, then Sun Pharmaceuticals and lately Tech
Mahindra. The ‘in-principal’ license will be valid for eighteen months, during this span of time these entities are not allowed to
undertake banking activities. This time period must be utilized to fulfill the requirements set by RBI.

Capital requirement: The minimum paid up capital requirement shall be Rs. 100 Crores. it should have a leverage ratio of not less
than 3% .

Promoter's contribution: The minimum initial contribution to the paid-up equity capital shall be at least 40 per cent for the first
five years from the commencement of its business.

Foreign shareholding: The foreign shareholding would be as per the Foreign Direct Investment policy for private sector banks as
amended from time to time.

Other conditions: The operations of the bank should be fully networked and technology driven from the beginning, conforming to
generally accepted standards and norms. The bank should have a high powered Customer Grievances Cell.

The major Payment bank service providers in the Indian Financial System are identified and briefed:

Airtel Payment Banks: Airtel Payment Bank became the first payment bank to be launched in the country. Day one itself it has
rolled out services in all the 29 states in the country. The initial investment by Bharati Airtel for launching Airtel Payment Bank
was 3000 crore. It is fully paperless and digital bank. The customers can open accounts using Aadhaar based e-KYC, no
documents are required. The account will be opened through a paperless process within minutes. The maximum deposit of Rs. 1
Lakh will fetch an annual interest rate of 7.25 % on deposits, while the company will charge 0.65% fees on withdrawals. At
present, Airtel Payments Bank does not offer ATM/Debit Card facility. Customers can deposit/ withdraw cash at any of the Airtel
retail outlets, which also act as the Airtel Banking Points. Customers can check their account balances through Airtel Money
App. Seventy percent of the outlets are opened at rural areas, which leads to attain the objective of financial inclusion.

PayTM: The name is the acronym for Pay Through Mobile. Paytm was launched in 2010, by Vijay Shekhar Sharma. It is an
Indian payment and commerce company which is recently funded by Alibaba group, who is now having a major stake in the
company. Quick Response code feature is included by PayTM through PayTM site or app. Consumers can also pay online using
Paytm wallet, debit/ credit card, net banking or cash on delivery. Online marketplace Paytm E-Commerce Pvt. Ltd, which now
runs Paytm Mall, is looking to tap its offline customer base at brick-and-mortar stores with an online-to-offline (O2O) strategy.

India Post Payment Bank: Incorporated as a Public Sector Bank under the Department of Posts with 100% Government Of
India equity, launched on January 30th, 2017 in Ranchi and Raipur. India Post Payment Bank is offering Savings account up to a
balance of Rs 1 Lakh, along with digitally enabled payments and remittance services of all kinds between individuals, it will also
provide current accounts and access to third party financial services like insurance, mutual funds, pension, credit products, forex,
and more in the coming years. It will offer 4.5% interest on deposits up to Rs 25,000 and 5.0% interest on deposits up to Rs
50,000. For deposits between Rs 50,000 to one lakh rupees, the bank will offer an interest rate of 5.5%.

IMPACT OF PAYMENT BANKS IN THE INDIAN FINANCIAL SYSTEM

An important component in the Indian financial system is the financial institution/ intermediaries. In India, majority of the
financial intermediation is done through commercial banks. The concept of payment banks have brought in a revolutionary
change in the way the traditional banking system was viewed. The major implication on the system is faster delivery of financial
services to every nook and corner of the country. Mobile payment system had created a lot of convenience to consumers as well
as commercial organisations. The e-wallets have drastically changed the trading and fund transfers with less cost and more
convenience.

Reserve Bank of India has made a phased plan for bringing in the banking sector to the every part of the country. As such a
number of measures were undertaken in order to service the unbanked areas. And as a result of this, changes happened in the
banking sector which includes involving Business Correspondents (BCs), Prepaid Payment Instruments in India, Payment banks
etc.

Financial Inclusion Plan – Progress Report by RBI

Particulars End- March 2010 End- March 2015 End- March 2016
Banking Outlets in Villages – Branches 33,378 49,571 51,830
Banking Outlets in Villages – Branchless Mode 34,316 504,142 534,477
Urban Locations covered through BCs 447 96847 102,552
BSBDA-Through branches (No. in million) 60 210 238
BSBDA-Through BCs (No. in million) 23 188 231
ICT-A/Cs-BC-Total Transactions (No. in million) 26.5 477.0 826.8
(Source: RBI website)

*Basic Savings Bank Deposit Account (BSBDA) is a Zero Balance Savings Account that takes care of the simple banking needs.

As per the statistics, there is an increase in bank branches opened in villages over a period of five years. By the end of 2015, there
is nearly 48.5% increase in the number of branches opened in rural India. This is a planned way of bringing balanced regional
development, through directives issued by RBI to open four branches in rural areas if banks are to open a bank in urban area. By
2016, there is an increase but at a diminishing rate of about 4.55%. And on the other side, branchless mode of banks increased
about 1369 times over the period of five years. These data illuminates the fact that past two years the financial intermediation in
India had undergone a shift towards branchless and cashless transactions in the financial system.
In the First Bi-monthly Monetary Policy Statement, 2016-17, Vision 2018 was published by RBI. Vision 2018 focus on less cash
and more digital society, the regulations will be more responsive to technological development and innovations in the payment
system. Payment banks play a vital role here in providing digital services where people from anywhere in the country anytime
can avail the financial services. Prepaid Payment Instruments are stored values that people can use to purchase goods or services
which is offered by the payment banks and one of such example is (SCW) Stored value Card Wallets provided by Airtel M
Commerce Ltd. The most widely used PayTM has also included a number of services including PayTM wallet, to enhance the
users effectives in getting services. There are around 170 million registered users with PayTM as of December 2016 and about
one billion PayTm transactions in 2016.

After November 2016, there was a tremendous increase in the online payment transactions because of the demonetisation policy.
Less cash were circulated in the country and therefore people were left with no option to go for cash transactions. The payment
banks with e wallet facilities and remittance services helped people to a great extent. These banks can achieve success and the
financial system can flourish only through the improvement of three important aspects: Financial awareness, Financial stability
and Financial inclusion. These three aspects are the key factors for the proper implementation of digital India. While granting
licenses to payment banks RBI have put forward directions on its operations. The financial inclusion is better possible through
the establishment of this niche. Airtel payment banks have about 2,00,000 banking points which act as a bank branch where
people can avail the services. Similarly, a number of commercial operations are done through POS terminals with the help of this
banking facility. Quick Response Code is also used to better track and settle the transactions. Now the monetary authority is
trying to bring in lot of innovative changes in the technological aspects in banking and these can be accomplished through both
public and private entities. This collaboration is possible with the help of these small yet enormous banks established by different
entities.

Conclusion

As India is an economy where majority of the population prefers cash transaction, this system will give a pseudo cash handling
system. Digital payments will capture even a single transaction, as such this will help in accounting each and every activities
happening in the economy. The major objective of bringing the new version of this banking is to bring the whole economy into
the realm of banking activities and to provide efficient financial services. Till date this new system of cashless banking is being
utilized by all the sectors of the economy especially, low income groups, business man, laborers etc. Vision 2018 can be achieved
by the economy through the proper implementation of infrastructure and technology development so as to make the economy
cashless or in other words, digital.
REFERENCES

1. Madhavi Damle, Pushpendra Thenuan, Jimit Raval, Genesis of Payment banks: Stimulus on the financial
inclusion in India, International Journal of Scientific and Engineering Research, ISSN 2229- 5518.,Vol 7, Issue 3,
pp 783-791, March (2016)
2. Saba Abid, Payment Banks: A Revolutionary Step in Indian Banking System, IOSR Journal of Economics and
Finance, ISSN 2321-5925, Vol 7, Issue 6, Version1, pp 81-83, December (2016)
3. Jayadatta. S, A study on digital wallets and mobile payments, IJMRBS ,Vol. 5, No. 2, (2016)

4. Nidhi Chandarana, Payment Bank- A Need of Digital India, Abhinav National Monthly Referred Journal of

Research in Commerce and Management, Online ISSN 2277- 1166, Vol 4, Issue 11, pp 12-16, November (2015)

5. Denis Dennehy, David Sammon, Trends in mobile payments research: A literature review, Journal of Innovation

Management, JIM 3, Version 1, pp49-61, (2015).

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