The truth is my banking account with Citibank started off as a zero cost account with no minimum balance requirement. Suddenly out of the blue a few years back, Citibank imposed a stricture of a minimum balance requirement of Rs 1 lakh or else pay a fine. I could not close the account due to the fact that the account was registered for EMI’s, income tax refunds etc. Bank deposits are the worst investment possible and any financial product sold by banks is more for commissions than for improving my returns. I chose to pay the fine.
The need for a bank is increasingly becoming unnecessary especially when the bank is out to milk you dry. Banks world over are facing multiple probes of rigging various markets and misselling and laundering money and are paying huge fines to regulators. In India, banks, especially state run banks have been milked dry by unscrupulous borrowers who have made sure that banks cannot put their heads above water for a while. Read our note on Bank NPA’s. The government too uses banks as a captive funding source for its fiscal deficit by making them compulsorily invest in government bonds, upto 21.5% of their Net Demand and Time Liabilities (NDTL).
The saver in India who is investing in fixed deposits receives returns lower than inflation rate as the government suppresses interest rates by using banks as a captive funding source for its fiscal profligacy. The borrower in India pays high interest rates on loans as banks are facing huge bad loan issues. Banks no longer serve an economic purpose of creating value for the customer.
Now, there is an alternative for traditional bank accounts. Payment Banks. Payment banks are only used for transactions and the banks cannot undertake lending activities. I can open a zero cost account with a payment bank, get my salary deposited in the account, transfer all the funds into a liquid fund to earn interest with liquidity on call, then draw down from my liquid fund to make payments for all my expenses, EMI’s and investments. Transaction costs will be almost zero as Payment Banks will be fully electronic without having high fixed costs like branches and I can use specialized financial service providers for other transactions, loan and investment requirements.
Traditional banking is under huge threat now. The likes of Apple, Google and Amazon are eyeing this space as they can deliver services at zero cost. The concept of banks as a savings vehicle has gone out with savers preferring to invest in mutual funds and stocks and other asset classes rather than keep money in bank deposits that earn next to nothing (in absolute terms in zero interest rate economies and in real terms in inflation prone economies). Banks really have to rework their business model.
The Reserve Bank of India has decided to grant “in-principle” approval to the following 11 applicants to set up payments banks under the Guidelines for Licensing of Payments Banks issued on November 27, 2014.
A payments bank is a type of non-full service niche bank in India. A bank licensed as a payments bank can only receive deposits and provide remittances. It cannot carry out lending activities. This type of bank is created to help India reach its financial inclusion targets. This type of bank is targeted at migrant labourers, low income households, small businesses, and other unorganized sector entities.
Details of “in-principle” approval
The “in-principle” approval granted will be valid for a period of 18 months, during which time the applicants would have to comply with the requirements under the Guidelines and fulfill the other conditions as may be stipulated by the Reserve Bank.
On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of “in-principle” approval, the Reserve Bank would consider granting to them a license for commencement of banking business under Section 22(1) of the Banking Regulation Act, 1949. Until a regular license is issued, the applicants cannot undertake any banking business.
RBI selected entities with experience in different sectors and with different capabilities so that different models would be tried and implemented with regards to payments banking. RBI has also ensured that all the selected applicants have the reach and the technological and financial strength to service hitherto excluded customers across the country.
As stipulated in the Guidelines, the External Advisory Committee EAC headed by Dr. Nachiket Mor (Director – Central Board of Reserve Bank of India) set up its own procedures for screening the applications including calling for more information, wherever required. The applications were screened for financial soundness, i.e., five year track record of the promoter and the key entities of the promoter group. The assessment also included governance issues with a focus on ‘fit and proper’ criteria for promoters based on due diligence reports and any other information indicating deliberate and repeated violations of laws and regulations; significant Incremental contribution in terms of existing and demonstrated physical rural reach, business model innovation, technological and operational capability indicating a model that can handle the required volumes of transactions and money with a high degree of demonstrated fidelity and safety; and proposed business plan in terms of product mix, innovative technological solutions, geographic access and viable financial plan.
Scope of activities:
- The Payments Banks would be allowed to accept demand deposits. Payments banks will initially be restricted to holding a maximum balance of Rs.100,000 per individual customer.
- Payments Banks would be allowed to issue ATM and debit cards but would not be allowed to issue credit cards.
- Payments and remittance services would be allowed through various channels.
- Payments Banks would be allowed distribution of non-risk sharing simple financial products like mutual fund units and insurance products.
Deployment of funds:
The payments banks cannot undertake any sort of lending activities. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
The minimum paid-up equity capital for payments banks shall be Rs.1 billion. The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks.
The applicants who have received approval are as follows:-
- Aditya Birla Nuvo Limited
- Airtel M Commerce Services Limited
- Cholamandalam Distribution Services Limited
- Department of Posts
- Fino PayTech Limited
- National Securities Depository Limited
- Reliance Industries Limited
- Shri Dilip Shantilal Shanghvi
- Shri Vijay Shekhar Sharma
- Tech Mahindra Limited
- Vodafone m-pesa Limited