Payment Banks: A Harbinger of ‘Ache Din’ for Deprived

By Arushi Gupta

If we ask academics why poor people are poor…different disciplines will answer… in their own unique ways; each with certain kinds of data, certain methods, certain habits of thinking…. in most substantive area (of the social sciences) there is what to outsiders seems like an amazing lack of reciprocal knowledge. (Abbott, 2001:142)

In the present times, empowering the ‘have-nots’ is one of the prime economic issues across the globe. Though economists are differently opinionated about the distribution of wealth and income in a society, they all agree that no one should live in extreme poverty. Amartya Sen’s capability approach highlights the important aspects of economic ‘well being’ and development. It is basically an individual centric concept where freedoms namely: political, economic, social opportunities, transparency in governance and protective security are the vital elements. He says that people should not be seen as mere recipients of the fruits of ‘cunning’ development programs, if opportunities are given, they will be actively involved in the development process.

The households face two major challenges due to rising financial instability and growing inequality. They lack financial knowledge and skills to make optimal financial decisions in an increasingly complex financial landscape. Simultaneously, they lack access to appropriate and beneficial financial services that create conditions for financial stability, well-being, and confidence in the future. Financial capability as defined by the World Bank is the internal capacity to act in one’s best financial interest, given socioeconomic and environmental conditions. It encompasses knowledge (literacy), attitudes, skills, and behavior of consumers with respect to understanding, selecting and using financial services, and the ability to access financial services that fit their needs. Financial capability along with accessibility to financial services will capacitate the ‘unbanked’ and ‘underbanked’ in the country.

Today millions of individuals in developing countries lack access to basic financial services because commercial banks and other financial institutions mainly cater to the needs of rich and middle class customers and simply deny their products and services to the poor and also they have not been able to reach the remote inaccessible areas. Poor have to struggle hard to save and many opportunities to build business, create jobs go unrealized. They don’t have a safe place to keep their savings or convenient way to pay their bills and availability of credit is also a problem for small and growing businesses. Exclusion of poor from the mainstream financial system especially in a country like India, where poor and poverty stricken are of significant proportion, makes the entire sector small and less efficient. Being unbanked in today’s financial marketplace can be problematic for consumers. Consumers who operate on a cash-only may face extra transaction costs and in addition it presents financial and personal risks. Further, consumers who prefer transactions in cash may not be building a financial identity through consumer and credit reporting agencies. The government has taken several steps to spread ‘financial literacy’ and  inculcate ‘banking habits’ among the deprived sections of the society and now creating ‘financial capability’ is what they are aiming at, when the savings of the poor move from covers and jars to formal financial systems, the whole economy will be better off. Henceforth if banks serve the entire population and treat small and large businesses alike, it would help the deprived sections of the society contribute towards the efficiency of the financial system. Generally, financial inclusion in India emphasizes on including maximum number of people under formal financial systems (Bhandari 2009). It is considered as an agent to stimulate inclusive growth. Introduction of Jan Dhan Yojana, differentiated banks and small finance banks are some of the steps toward this direction and formidable tasks lie ahead.

The newly introduced payment banks which will function like regular banks other than carrying out any lending activities have been touted as a great step forward in financial inclusion. This comes as a bold step taken by RBI to redefine banking in India. They predominantly target migrant labourers, low income households, small businesses, and other unorganised sector entities by providing them with small savings accounts of upto 1 lakh and payments/remittance services; they will also be able to earn interest on these savings. If the existing commercial banks were given a charge to serve the unbanked population in the country they would have to open new bank branches which could be uneconomical and not always possible because this population also lives in the inaccessible remote areas. CRISIL in a report had pointed out that east, northeast and central India will be good catchment area for payments banks because of inadequate formal banking in these regions. Kenya through its M-Pesa success and other developing countries adopting similar practices proved that implementation of mobile banking services, promotes financial inclusion.

In India, mobile financial services are viewed as a means of extending financial access to the roughly 43 percent of the population who are unbanked, with telecom companies and banks working together to offer new services, such as mobile savings accounts or remittance payments. These niche banks are technology driven, aimed at last mile connectivity which will reach its customers mainly through their mobile because mobile connectivity has reached in areas where even it is difficult for human to reach. People already having bank accounts will use these services because of the convenience it provides in routine transactions of paying utility bills, school/college fees, online payments and money transfer and encouraging the unbanked to step into formal financial system and underbanked to use the banking services regularly. Migrant labourers will be able to remit money to their homes at very low or no costs. Mobile banking and mobile payments will enable to consumers to save time from standing in queues and devote it to more productive work, the payment infrastructure will advance. It will be boon for tech-savy users. Since these banks will aim at providing low cost services to attract customers by new technology-enabled business models, the way consumers manage their finances will change. They will also face various challenges as far as Know-your- customer norms, security issues and cost minimization is concerned. The unbanked population  which often resorted to unregulated financial means will come under the ambit of formal system because of the accessibility, ease of using financial services and also the assurance that their deposits are safe as these banks have to maintain 75% of their deposits in government securities and government never defaults. Though some assistance will be required in the rural areas, the 11 big corporate firms to get licenses might have to incur higher costs and also give discounts and offers to woo customers.

As more people start using mobile banking, India’s transformation from a cash based to digital economy will be accelerated, which will be an additional tool to eliminate black money. Along with the payments banks, introduction of small finance banks which will operate in local areas to assist the small firms and businesses with credit needs will result in growth of start-ups. Increasing the capacity for the financial sector to make more loans, means more businesses can be created and grown. These businesses will create jobs, opportunities giving further boost to the economy. India will be fully banked. The holy triad of Jan Dhan no-frills bank accounts, Aadhaar IDs and mobile banking will enable direct payments to the poor, eliminating fake recipients, ensuring cash in zero-balance accounts, etc. No-doubt payment banks will create financial capabilities; in the initial stages the unbanked might be wary of these services but gradually they will be intrigued and attracted, fetching the untapped savings and a greater liquidity to the financial market leading to efficient and deepened financial inclusion.

(The Author is a student at Madras School of Economics)

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