Merits of experimentation

Diversity of payments bank models should aid their success

The Reserve Bank of India's (RBI's) choices for the 11 licences for payments banks announced on Wednesday evening provide some reassurance about its seriousness of intent but also raise some questions about the prospects for the initiative. On the positive side, first, the number is perhaps large enough to ensure the licensees will want to start quickly, in order to gain a competitive edge. More importantly, the diversity of organisational profiles across the group is a welcome admission that this is uncharted territory; nobody really knows which combination of domain experience, technology and organisational structure will make for a successful model. Bringing several telecom companies into play - including Reliance Industries, in partnership with the State Bank of India (SBI) - reflects the premise that a successful business model will straddle the two domains with equal emphasis. The other telecom companies have been aggressively promoting their mobile payment products. FINO Pay Tech is an established player in the business correspondent space, while Vijay Shekhar Sharma has been one of a few mobile payments pioneers through the Paytm channel. Dilip Shanghvi brings in the entrepreneurial dimension without any financial sector legacies. India Post creates the possibility of leveraging the national post office network for massive financial inclusion, a long-standing aspiration. In short, experimentation seems to be the working premise in getting this initiative off the ground and this is to be welcomed.

On the negative side, the inordinately high capital requirement of Rs 100 crore has already been flagged. A lower threshold would have enabled a larger number and a variety of innovative business models to be considered. More licences would certainly not have hurt, and could have contributed to quicker penetration. The RBI's commitment to on-tap licensing is yet to be tested. Another issue is that the Prime Minister's Jan Dhan Yojana (PMJDY) seems to have achieved saturation penetration for no-frills accounts. When the idea of payments banks was first mooted, this was presumably the space that they were intended to occupy. Given that incumbent commercial banks have already done that, it is not clear how the new entities are going to compete for accounts.

The Reliance-SBI joint venture could, conceivably, download SBI's PMJDY accounts. But what about the others? Will they be able to persuade already enrolled households to open fresh accounts? In fleshing out the operational details of the licensing, it needs to be made clear whether the new entities can contract with commercial banks to take on and manage their no-frills portfolios. Overall, though, the relatively large number of licences and the diversity of organisational profiles give this initiative as good a chance of success as any. Two specific benefits will accrue with this success. One, the inclusion agenda will increasingly be executed with new technology and more efficient cost structures than, particularly, the public sector banks can mobilise. Two, a new pool of demand for government securities will emerge, since payments banks can invest only in this instrument. This should contribute to development of the debt market.