Payment Banks and Small Finance Banks: A Route to Better Financial Inclusion?

Payment Banks and Small Finance Banks: A Route to Better Financial Inclusion?

Dhiraj Jain (Symbiosis International University (Deemed), India) and Vijay Prakash Misra (Symbiosis International University (Deemed), India)
Copyright: © 2018 |Pages: 19
DOI: 10.4018/978-1-5225-4035-9.ch002

Abstract

Banking in India has taken various forms and has undergone severeral reforms as and when the markets needed. Because of the growing need, the banks today not only strive for greater profits but also have various social targets like the priority sector lending, setting up various branches in the rural areas, extending loans, encouraging innovation, and setting up new businesses and the like. One of the latest objectives of present day banks was financial inclusion as efforts taken before had not proved very fruitful. The RBI therefore has introduced the concept of differentiated banks where it intends to issue licenses for specialized banks like small and payment banks, infrastructure banks, and so on so that the banks could develop specialized skills and affect greater financial penetration so that the overall objective of financial inclusion could be met. The guidelines have been issued for the first kind of differentiated banks—small and payment banks—and applications have been invited for the same. Though the RBI has taken a very conservative approach for different kinds of banks to co-exist, it may prove to be a step in the right direction and help in greater financial inclusion.
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Introduction

Banks have evolved over a period of time. They have moved from catering industrialists, big businessmen and persons of high net worth to the masses living at the bottom of the pyramid. The expansion of the bank branches brought the masses under the banking fold. In 2014, the new government at the centre in a major initiative launched the Pradhan Mantri Jan Dhan Yojna (PMJDY) under which around 30.97 crore accounts (as on 3rd January 2018) have been opened (PMJDY, 2018).

When viewed from a different perspective banks are moving towards being lifestyle choices rather than payments processors. Historically they were chosen on the basis of their vicinity to the customers’ homes. It didn’t matter what they charged or how they priced, as all banks provided similar services. Branding was never a matter of consideration. But over the years, as the banks retrenched and sent their people packing their bags out of the branches to do things for themselves, they have become even less differentiated. Now, most folks are picking their banks for the same reason as in its physically local (over 60% of new account openers still make the decision based on the branch being near) but, once opened, they never want to go there again. Soon, as the dynamics of the role of the branch shift became less important, customers stopped opening accounts due to the proximity of the branch and move towards lifestyle choices. How does the bank reflect one’s personality, needs and goals? Do they share common ethics and values? Do they fit in their lifestyle and outlook?

The Reserve Bank of India (RBI) in the recent times has also introduced innovation-friendly regulations and has been trying to bring as many people as possible under the ambit of financial inclusion which has today become one of the most sought for objectives of the Indian banking system as a significant value is seen at the bottom of the pyramid. The latest in this initiative was the issuing of licenses to Payments banks and Small finance banks taking a step forward in promoting niche banking in the country thus providing a framework for a variety of organizations with a sturdy distribution muscle to provide financial services at scale in India.

Existent Banking Structure and Efforts for Financial Inclusion

There have been four different phases in which the banks evolved. These phases brought in major structural changes in the banking structure and objective. Banks started moving form just the customers at the higher end to the ones at the lower end of the pyramid. There were a number of events triggering these changes. These trigger events, phases and the major changes have been depicted in Figure 1

Figure 1.

Evolution of Indian banking industry

The existing structure of the Indian banking industry is also given in the flow chart exhibited in Figure 2.:

Figure 2.

Existing structure of Indian banking industry

Figure 3.

Banking business/GDP ratio

Source: (DEPR, 2013)
Figure 4.

Projection of banking business

Source: (DEPR, 2013)

The growth of banking business to the GDP ratios in the past and its projected business for the next 10 years is given in Figure 3 and Figure 4.

Though the size of the economy enlarged, number of triggers enabled and domestic savings expanded in multiples, the coverage of the banking and financial sectors have been inadequate. Only 40% of the adults have formal bank accounts (Gandhi, 2015). Many of the villages of the country are still unbanked. The Jan Dhan Yojana though has increased the financial penetration the increased inclusion is yet to be attained. Relations between financial structures and the economic growth have to date remained in- conclusive. Depending upon the emerging structure and the needs of the economy, the country’s banking system has to evolve and remain competitive to cater to the emerging needs of the society. Banking on the poor could be a viable option in India as there is an immense potential lying at the bottom of the pyramid. There is an enormous unmet potential lying in the rural areas for financial institutions. If financial institutions could successfully tap this potential, it would be a win-win situation for institutions and the country at large (Krishnan, 2014) .

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