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Top[1] Introduction
Payments banks (PBs) are the latest entrants in the banking industry of India. The primary objective of their coming into existence is to promote financial inclusion by harnessing technology. They are the niche banks that leverage technology for financial inclusion and are targeted to small businesses and low-income households (RBI, 2020). They are supposed to open small savings accounts and provide payments & remittance services to migrant labourers, small businesses, low income households and other entities in the unorganised sector, by using the digital medium. Conceptually, financial inclusion is to deliver financial products and services to underprivileged and weaker sections of society at reasonable costs. It is the process to include all segments of society underneath the umbrella of recognized financial system (Aduda & Kalunda, 2012). Commercial banks due to their structural limitations are unable to provide services to difficult geographical segments. PBs have the opportunity to fill the gap (Ahmed & Gugloth, 2013). PBs have a greater reach to masses as they operate primarily through mobile phones. In India the number of mobile phone users has already reached to around 813 million by December 2018 (Statista, 2019). PBs operate through their existing mobile network agents such as shopkeepers and vendors without having brick and mortar branches. PBs can be a new model for commercial banking that consists of all the banking services like accepting deposit, save it into digital wallets, allow customer to payment for their digital transaction. PBs can provide these facilities to all the segment of people especially for the low-income households, farmers and small businesses. This model will contribute towards promotion of cashless economy of India (Rakhecha & Tanwar, 2019).
PBs are different from a typical commercial bank as the limits have been imposed on the amount of deposits that can be accepted from a single customer; and there is a complete restriction on extension of credit. Their business model focuses on small remittances which are stored in digital wallets that can be used for purchases of goods and services. Asset composition of PBs reflects the nature of their operations as they are required to maintain a minimum investment of 75 per cent of demand deposit balances in Government securities for maintenance of the Statutory Liquidity Ratio. Although they are not permitted to carryout lending activities, they are allowed to sell basic financial products like insurance, pension and mutual funds of other companies. Interest from government securities and fee income from selling of third party products are the main sources of revenue for PBs.
Merely after four years of grant of licenses, the payment banking model is gaining severe criticism from all corners and the feasibility of the model is being questioned. The business model of PBs doesn’t leave much scope for revenue generation. Interest income constitutes the major source of income for any banking institution. ‘Other income’ can only supplement the revenues. In the absence of lending activities PBs can’t generate interest income, thus they have to rely only on fee-based income to sustain their business. Due to lack of robust revenue model, the business can’t sustain in short as well as long term (Kalyansundaram, 2019).