Airtel launches India’s first payments bank

• Airtel Payments Bank Ltd has become the first payments bank to start operations.
• It has launched its services in Rajasthan in a limited scale.
• The pilot will run at 10,000 Airtel retail outlets where basic banking services will be provided. Customers will be offered an interest rate of 7.25% on deposits in savings account, higher than the 4-6% commercial banks are offering.
• Bank accounts can be opened by customers without documents using Aadhaar based e-KYC. The subscriber’s mobile number would function as a bank account number and transfer from Airtel to Airtel phone numbers would be free.
• The retail outlets, which will act as banking points, will offer account opening services, cash deposit and withdrawal facilities.
• The bank was the first applicant to receive the final licence from the Reserve Bank of India (RBI) in April. Kotak Mahindra Bank holds 19.9% in the Airtel Payments Bank.

About Payment banks:

• Payment banks can accept deposits restricted to Rs. 1 lakh per customer, and are allowed to pay customers interest on the money that is being deposited.
• They can be used for either current accounts or savings accounts.
• Unlike a regular bank however, a payment bank can't loan money to people, or issue credit cards. Also, the payment banks are only allowed to invest the money customers deposit into government securities.
• While the payment banks can't issue credit cards, they can issue ATM and debit cards.
• Payment banks can be integrated with your savings bank accounts via IMPS and NEFT transfers.
• Payment banks can't accept NRI deposits, which makes sense considering the goal of financial inclusion.
• The minimum capital requirement would be Rs 100 crore
• Promoter contribution would be at least 40 per cent for the first five years. Excess shareholding should be brought down to 40 per cent by the end of fifth year, to 30 per cent by the end of 10th year and to 26 per cent in 12 years from the date of commencement of business
• Foreign shareholding in these banks will be as per current FDI policy
• Voting rights to be line with the existing guideline for private banks
• Entities other than promoters will not be permitted to have shareholding in excess of 10 per cent.
• The bank should comply with the corporate governance guidelines, including ‘fit and proper’ criteria for Directors as issued by RBI

Analysis

• The goal behind creating these payment banks is to bring financial inclusion by making it easier for anyone to get a bank account.
• The payment bank licence will enable to offer a more comprehensive portfolio of banking and financial products and services, accelerating India's journey into a cashless economy.
• The new payment banks will also make people less dependent on cash, even for small sums, and since a mobile wallet could be a bank account soon, this move could, over time, have a big impact on m-commerce.
• But even after launching payment banks, all those who got new license are not so enthusiastic about the future of these banks . Because, these entities can’t undertake any lending businesses and the income stream is initially restricted to remittances. Eventually, they can cross-sell banking products through their reach and earn a fee. But neither of these two streams of revenue are high-margin businesses.
• RBI has put in place strict rules on how these banks can deploy the deposits they garner. 75% has to go into government securities. This limits their ability to earn from the deposit base as well. Garnering a strong deposit base in the first place will be a challenge as well. Besides, if these banks want to steal customers away from banks, they may have to offer more than the 4% interest rate that banks do. But to do that, payment banks need to be able to earn enough on deposits as well.
• These banks will make no money on the spread between deposit and investment. Indeed on the deposit side, they will need to pay consistently higher interest to attract deposits.
• So, these banks won't be allowed to lend, depriving them from of the main source of a bank's revenue.
• Over the last few years, large banks, including private lenders, have significantly expanded their networks in rural areas. This means that these markets are no longer wide open for new business with limited competition. Banks are offering most services that payments banks can and hence, for payments banks to offer a new and differentiated proposition will not be easy.

By: Vishal