11 entities get payments bank licences: What it means for Indian banking sector

The Reserve Bank of India on Wednesday gave in principle approval for 11 entities to set up payments banks. The move has been touted as a harbinger of a revolution in the Indian banking sector. Here are the key facts you need to know about the development: What is a payments bank? [caption id=“attachment_2376288” align=“alignleft” width=“380”]  Reuters[/caption] A payment bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regualtion Act of 1949 allows. These activities include acceptance of deposits, payments and remittance services, internet banking and function as busines correspondant of other banks. Initially, they are allowed to collect deposits up to Rs 1 lakh per individual. They can facilitate money transfers and sell insurance and mutual funds. Besides, they can issue ATM/debit cards, but not credit cards. They cannot set up subsidiaries to undertake non-banking financial services activities. More importantly, they are not allowed to undertake lending activities at all. Who all got the licence? As many as 11 entities have got the licence. Here’s is the list:  There were 41 applicants. “…Some of the entities who did not qualify in this round, could well be successful in future rounds,” the RBI has said. In future, it plans to grant such licences “virtually on tap”. When can we expect the banks to start functioning? According to the RBI, the ‘in-principle’ approval granted will be valid for a period of 18 months, during which time the applicants have to comply with the requirements and fulfil the other conditions stipulated by the guidelines. According to a PTI report, the companies that got the licence are enthusiastic and have said they will launch services ahead of the 18-month deadline. Why is this a revolution? Because it will bring unbanked masses under the ambit of formal banking and also expedite financial inclusion. The spread of banking will also make the poor financially literate and help fight poverty. Finance minister Arun Jaitley termed it a significant and important step from the RBI. “Payments banks will reach out to people in rural areas. Payments bank will ensure more money comes into banking system. Various banks are looking at increasing their rural reach, including big banks like SBI, payments banks will help them realise this,” Jaitley said. With 11 more entering the banking space, should the biggies like SBI, ICICI Bank etc feel the jitters? Not really. For one, these are differentiated banks that function only in specific areas. The major banks can actually make use of these banks to spread their reach as payment banks are allowed to function as business correspondents too. Some of them have already tied up with existing licence holders. For instance, SBI, the country’s largest lender, will take as much as 30 percent in RIL’s proposed bank while Bharti Airtel, India’s largest telecom operator, plans to give 19.9 percent stake in the bank to Kotak Mahindra Bank Ltd. Meanwhile, Aditya Birla Nuvo Limited has tied up with Idea Cellular which will have 49 per cent stake in the joint venture. With inputs from PTI (Disclosure: Firstpost is part of Network18 Media & Investment Limited which is owned by Reliance Industries Limited.)