> Posted by Abhishek Agrawal, India Country Director, Accion, and Victoria White, Senior Vice President and Asia Regional Head, Accion
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In November 2013, Dr. Raghuram Rajan was appointed Governor of the Reserve Bank of India (RBI). In his maiden speech, he announced plans to issue differentiated banking licenses. He spoke about his intention of creating significant reforms in the banking system around priority sector lending, payment systems, and the drive towards a cashless economy, among other areas. Within two months of this speech, the RBI published what has become known as the Mor Committee report, supporting plans for differentiated licenses; and in a record setting 10 months, the RBI finalized the guidelines and invited applications for differentiated bank licenses for small finance banks and payment banks.
At the February 2 deadline, the RBI had received 72 applicants in the small finance bank category and 41 for payment banks. The stated objective of both types of banks is to further financial inclusion. For small finance banks, this is to be accomplished through the mobilization of credit and savings to underserved segments of the population. The relatively low minimum capital requirement (approximately $16 million, versus the $80 million required for banks) offers a much more feasible option for MFIs seeking to offer more than the traditional credit-only product offering. Likewise, payment banks (which will also have a minimum capital of $16 million) will be authorized to provide small savings accounts and payments/remittance services to this same underserved market segment. This option offers a tremendous opportunity to expand product offerings for those already active in the payment space.
This is a new era for financial inclusion in India. India has been struggling with exclusion, and setting up such institutions can help deepen the outreach and customer services for the bottom of the pyramid segment. So far, more than 40 percent of the economically active segment in India, a staggering 320 million people approximately have lacked access to basic financial services. Those that have accessed services have typically only gotten access to credit products offered by microfinance institutions which cannot offer savings and other liability products.
Prime Minister Modi’s recently launched Jan Dhan Yojana (People Money Scheme), aimed at providing a basic savings account, insurance coverage, and a debit card to all citizens, has witnessed the opening of a whopping 125.5 million bank accounts by the end of January 2015, after less than 6 months of its start. These accounts have mobilized savings worth INR 105 billion ($1.7billion). The servicing of such accounts however remains a big question mark. The establishment of small finance and payment banks, as well as the preexisting business correspondent networks, will hopefully help accelerate the growth and servicing of such accounts.
The current round of applications has been overwhelming and it remains unclear how many licenses will ultimately be awarded by the RBI. On numerous occasions, the RBI has indicated that licenses will be available on a “tap basis”, implying that there will be additional opportunities to seek a license in the future, but only after the first set of banks have been successfully launched. In the current round, small finance bank applicants include Ujjivan (Smart Certified), Janalakshmi, SKS MicroFinance (Smart Certified), Deewan Housing, ESAF Microfinance, and Saija Private Finance Ltd.
Big corporate giants such as Reliance Industries, Bharti Airtel, Aditya Birla Group, Future Group, Vodafone, and others are in the race to get a license for payments banks. The payment bank license offers a unique opportunity for expanding financial transactional distribution networks on technology enabled platform. As such, banks like SBI, ICICI Bank, Kotak Mahindra Bank, Ratnakar Bank, and Axis Bank have expressed an interest in partnering with applicants for payments banks. Payment banks applicants included Hermes, Paytm, Oxigen, Fino PayTech, and ItzCash.
In 2014, RBI had awarded two universal bank licenses, one to Bandhan Financial Services (a West Bengal-based MFI) and the other to IDFC (an infrastructure financing company). As both of these institutions gear up to offer the full range of financial services, the new entrants of small finance banks and payment banks will surely expand options for the millions of excluded households in India. Indeed, the market is poised for a new beginning.
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