What payments banks, Bandhan can do for inclusion

There have two big developments in financial inclusion in the country in the past few days, whose significance stands out despite the din arising from the recent global stock market crash. One was the central bank allowing 11 corporates to open "payments banks" and the other, the launch of the Bandhan Bank, a little over a year after RBI allowed the microfinance firm's entry into the banking sector.

The interesting aspect of payments banks is that they have no parallel. So, here is a banking experiment tailor-made for India, monitored by the RBI. The 11 corporates and individuals who have been given the licence to operate these banks, including Aditya Birla Nuvo, Fino PayTech, Reliance Industries, Dilip Shanghvi and Tech Mahindra, are expected to penetrate deeper into the hinterland with their services – which include raising deposits up to one lakh, enabling transfers and remittances through mobile services, automatic payment of bills, by issuing debit cards and ATM cards – in short, almost all services offered by commercial banks, except lending money or issuing credit cards.

There were 151 scheduled commercial banks in India in 2013, with more than one lakh branches, and several hundreds of co-operative banks. However, more than 40 per cent of the Indian population is still unbanked. While payments banks have the opportunity to address the needs of this untapped population, they can also lure existing customers of commercial banks by offering services driven by cutting edge technology. Most of those given licences have deep pockets – Shanghvi is one of India’s richest – while others have introduced game changing technology to reach out to the masses. Fino, for instance, has come out with fingerprint authentication machines that will help even the illiterate manage bank accounts, and claims to have brought 50 lakh people under the banking umbrella by 2012, especially in the rural areas.

Certain others are diversified, and will find payments bank customers from across their service ecosystem. One such example is the Mahindra Group, which includes IT firm Tech Mahindra as well as Mahindra & Mahindra, which manufactures utility vehicles and farm equipment. The farm equipment business gives it a rural interface, allowing the IT company to use technology to serve customers in the tractor business better. But that is only part of it. There is no doubt that these companies will use their accessibility in rural areas to make deep inroads and vie for customers, especially the youth. There is no disputing that Airtel and Vodafone, which have also got payments bank licences, will leverage on their wide reach in the circles they operate in. That should be a jolt for the existing commercial banks, especially the public sector banks and old private banks, which will now have to go all out to woo young customers. Some of them are doing this aggressively.

SBI, for instance, recently launched its mobile wallet "Buddy" in collaboration with Mastercard and Accenture, which can be used to send money to new and registered customers, book movies, flights, hotels as well as shop. It also has a tie up with Reliance Industries for payments banks, a move that was made with a lot of foresight, considering that payments banks can wean away a lot of smaller depositors from public sector banks.

Bandhan’s rise, from a microfinance firm that was started in 2001 with just two employees and a capital of Rs 2 lakh, has been phenomenal. By 2014, it had 2,016 branches that lent Rs 29,990 crore to 5.5 million customers. The target for 2020 is 10 million customers. It was the grassroots work of Ghosh that made his firm attractive to the RBI. Targeting women in poor families, Bandhan built a strong customer base, often lending sums as low as Rs 1,000, and ensuring it was paid back with interest without the need to use any coercive force. That had helped him survive the microfinance crisis of 2010, and he went on to build a trusted customer base.

According to the 2015 Brookings Financial and Digital Inclusion Project report, India ranks nine among 21 countries in financial and digital inclusion efforts - trailing after countries like Kenya, South Africa and Brazil. That means the country has a long way to go before its banking system successfully reaches most of the population.

However, it is heartening to see the several measures that are being put in place to reach that target.