For the first time in India’s banking sector, the Reserve Bank of India is giving out differentiated banking licences. The in-principle go-ahead given on Wednesday to 11 ‘payments banks’ is, by the RBI’s own admission, an experiment — the latest in a long series of attempts to take banks to the unbanked. The push towards financial inclusion started with the nationalisation of 14 commercial banks in July 1969 through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. Then a second round came in 1980, involving six more commercial banks. With a view to economically mainstreaming rural areas, the Indira Gandhi government established regional rural banks by means of an ordinance in 1975. But even 45 years later, all these attempts have had little success in expanding banking coverage to the desired extent and scale: only 7 per cent of India’s villages have a branch of a rural or commercial bank. The policymakers seem now to have finally understood that banking inclusion cannot be just one among many businesses of a bank: it has to be the core business. The licensing condition that puts a Rs. 1-lakh cap on deposits that payments banks can receive from customers defines the market they will target — primarily the unbanked population. The RBI expects payments banks to target migrant labourers and the self-employed, besides low-income households, offering low-cost savings accounts and remittance services so that those who now transact only in cash can take their first step into the formal banking system.
Going by the international experience, this innovation of basically transforming a citizen’s mobile phone into a stripped-down bank branch has a greater chance of success. The initiative takes Vodafone’s M-Pesa closer to the version that is working successfully in Kenya, where payments on this product constituted about 30 per cent of the country’s GDP in 2014. Similar products in India so far were essentially mobile applications dependent on tie-ups with banks to make cash withdrawals and interest payments. The licence frees these companies to provide such services on their own. The greater operational flexibility will enable them to draw in more customers. Their operations could now become more cost-effective as the licence-holders will be banks in their own right, albeit without the provision to extend loans to individuals. If they indeed succeed in becoming the target market’s chosen mode of financial transactions, this technological solution could also turn out to be a major step in achieving a truly cashless economy. So, while this is a bold move, and underscores that the RBI is anything but conservative, it is ironical too that the cycle of experiments that started with the 1969 round of nationalisation has now come full circle. The responsibility of financial inclusion is now almost entirely entrusted to the private sector.