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The road to financial inclusion through banking gets rockier

Posted on September 29, 2018 by Sumita Kale

At the best of times, financial inclusion is not an easy task. All these years, traditional banks have found low income customers unattractive, and mandates for branch expansion in rural areas, BSBDA accounts and BC agents did not raise usage of financial services by the poor. The hope has been that tech and the ubiquitous mobile would change the equation, allowing for low cost banking outreach. The RBI's preference for bank-led financial inclusion led to Payments Banks, conceptualised as the vehicle for financial inclusion through technology. “The primary objective of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment”.

Yet, something has gone drastically wrong in the Payments Bank model. Of the 41 applicants, 11 were given in-principle approvals in 2015 - of these 3 surrendered their licences in 2016, the three that launched operations in 2017 have all been pulled up by the RBI for violations of operational guidelines and restricted from onboarding new customers for months on end. Airtel Payments Bank was not allowed new customers from January 2018 till June 2018; Fino Payments Bank and Paytm Payments Bank have been restricted since May-June. At the same time, India Post Payments Bank launched full operations in September and it remains to be seen how the others work out. 

Given that Payment Banks can fill the gap between a full-scale commercial bank with its high cost of transactions, and the limited role that PPIs play in facilitating payments, the RBI should refocus on the objective behind setting up Payments Banks and take a comprehensive look at all rules, procedures and requirements that are leading to reduced flexibility and higher costs of PBs.  The effort should be geared to reframing the operational guidelines and regulations, where needed, to ensure lower costs of compliance.

To give just one example – the maximum balance of INR one lakh per customer to be calculated at the end of the day. Fino Payments Bank has been pulled up for violating this rule. The question that arises here is whether a one lakh limit is an appropriate one, for a business that is looking to grow; note that the limit could be exceeded in a day with receipt of claim made on insurance, redemption of units under mutual funds, sale proceeds of property etc. Mandating the opening of mirror accounts with partner banks can push customers away from the Payments Bank towards the partner bank. There are other options possible e.g. calculating the maximum balance on an average monthly basis, raising the limit to enable servicing of SME customers, allow a pool account with a commercial bank for the overflow, rather than a mirror account etc.

Further, it is also important to relook regulations that impair flexibility and innovation. For instance, Payments Banks could be allowed to offer short-term (upto 1 year) term deposit products like Fixed Deposits and Recurring Deposits. The compliance requirement of prior approval for annual branch expansion plan and new products can be removed to align with other commercial banks.

With the main aim of Payments Banks being to bring in innovative solutions, regulations such as mandating paper-based KYC for CKYCR, not allowing a second account through OTP (RBI Notification April 2018) etc are barriers that raise costs and should be relooked by the RBI.

The changing KYC regulations have been a major challenge for the Payments Banks. Payments Banks were expected to use the Aadhaar-enabled eKYC process, which were estimated to cost INR 5 compared to the regular paper-based KYC process, estimated to cost INR 40 (GSMA, 2016). Between the UIDAI and the RBI, the changes in the rules of using eKYC have caused disruption over the past few years (See https://the-ken.com/story/inside-the-paytm-payments-bank-fiasco/). The latest Supreme Court ruling striking down Section 57 of the Aadhaar Act that allowed private companies to use Aadhaar has caused more uncertainty now (Aadhaar verdict: Telcos, banks & financial companies may feel the pinch)

Meanwhile Bandhan Bank, one of the two full service banks given license to operate in 2014 has now run into trouble with not meeting its share holding commitments (RBI bars Bandhan Bank from opening new branches, September 29, 2018). 

The road to financial inclusion through banking is getting rockier.

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