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Small and Payment Banks for Financial Inclusion



For the growth and progress of our nation, banking services are a must. For India to grow and progress, banking and other financial services should reach every Indian, in every nook and corner of the country. This is known as financial inclusion. “In financial inclusion everyone’s included”. A revolution is taking place in Indian banking services, with licenses being granted to a number of Companies to start payment banks. Small and Payments banks are the way forward for India to achieve financial inclusion.

What are small banks?

They say “Great things come in Small Packages”. Small banks are the next big thing in banking. Small banks could complete India’s dream of total financial inclusion. Small banks are much smaller than the large commercial banks you see.
o Small banks accept deposits from you, as well as give you loans.
o Unlike commercial banks, small banks deal only in basic banking services. You would not be able to open a demat account with a small bank.
o Small banks operate mainly in rural and interior areas of the country.
o These banks do not have a large number of employees. To solve this problem, they operate extensively on technology. This helps them save on manpower and operation costs.
The very existence of small banks is to serve the rural and unbanked population of the country. They go where large commercial banks do not go. They also lend to small and micro industries as well as for agriculture and farming.
Remember: Majority of loans lent by Small Banks (about 50% of the Small Banks loan portfolio), is of loan size up to INR 25 Lakhs. This means small banks lend to the poorer sections of society.

What are payment banks?

The hot news today…Some Companies have been granted licenses to set up payment banks, by the RBI (Central Bank of India). You must be curious to know what these payment banks are.
o You can open a savings bank account with a payment bank, as they accept deposits up to INR 1 Lakh per customer.
o You can use a payment bank to make remittances, pay bills or even issue cheques and drafts.
o You can withdraw money from your account with a payment bank using a debit card at an ATM (Automated Teller Machine).
o Payment banks also market/distribute Insurance products and mutual fund folios viewed as simple financial products.

What payment banks cannot do?

You cannot avail loans or credit cards from payment banks. Payment banks are simply not allowed to lend. You can only make deposits or remit money using a payment banks. Small banks unlike payment banks are allowed to accept deposits and also give loans.
Simple: Payment banks can do everything commercial banks do, except lend.

How do payment banks promote financial inclusion?

Currently RBI has issued licenses to Companies which are into supermarket chains (have a large distribution network), mobile operators (have a large customer base), or the postal services which taps in a large number of customers. The savings and remittance services of payment banks, target people living in rural areas, or have limited/no access to banks. Since these Companies have a vast distribution network or a customer base, they help in financial penetration, making sure that financial and banking services reach every nook and corner in the country.This promotes financial savings among the poorest of the poor in the nation.

How can payment banks achieve financial inclusion?

Payment banks are all about innovation. They use technology to provide you optimum and highly efficient banking services. There is an important point to note. Payment banks are not rivals to commercial banks. They complement banking services offered by commercial banks. Payment banks can reach people in rural areas where no commercial banks have branches. Commercial banks collaborate with payment banks to use their technology. Commercial banks can also start joint ventures with payment banks, to launch innovative services and products. A payment bank cannot give loans or issue credit cards. However a payment bank can become a banking correspondent/business correspondent of a commercial bank. These are basically third parties, which provide banking services to people at their doorstep, popularly known as BC’s. They provide cash transaction services, such as opening savings bank accounts, or taking deposits from customers at their doorstep. More people in India have a mobile phone subscription than a bank account. Mobile phones are the new tools of banking. The rural customer has never had it so good. Financial and banking services are at his doorstep.

Benefits of Payment Banks

o Banking services today are very costly. Banks charge you for everything. Additional cheque books, ATM transaction from banks other than your parent bank after the expiry of free withdrawals, large money transfers, or failure to maintain minimum balance in your savings bank account. Payment banks offer zero balance savings bank accounts and banking services at very low costs. This will force most commercial banks to reduce costs of banking services.

o Most of the Savings bank accounts at commercial banks offer interest of 4% a year. Payment banks could offer a higher rate of interest on SB accounts, than these commercial banks.

o If you are a beneficiary of a social welfare scheme or a cash subsidy such as LPG, this money can be routed through payment banks. India has the highest number of post offices in the World and if post offices can become payment banks, financial inclusion is quite easy. Small banks and payment banks provide low cost banking services, as they use the latest technology. They are the future of the Indian Banking Sector and can easily achieve financial inclusion.

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