Saturday, May 31, 2014

What is a PAYMENT BANK and what is the NEED of it  ?

  • India has struggled with financial inclusion—just 400 million of the 1.2 billion population have bank accounts—and with getting urban-centric banks to include the urban poor and the rural population.
  • But financial inclusion is not just about access to financial products—both savings and borrowings. 
  • It is first and foremost about safe, easy and low-cost access to a cash-flow management system, and that includes a payment system that allows you to move money around safely and at a low cost. 
  • The pre-paid instruments industry sprang up to bridge this gap of getting cash-in and cash-out access points to people whom banks find economically unviable to service, despite the incentives.  (So what is the Problem ? )
  • But the industry has been shackled by the need to have a bank as a partner for the cash-out function. 
  • A payment system has two parts—a pay-in and a pay-out. I can load a card and give it to my driver who can go to his village and then decide to cash out his salary. Under the current model, unless he has a bank account, cash-out is difficult.

Where lies the bone of contention ?
  • Apart from restricting the system, chaining a payment entity to a bank introduces market inefficiencies. 
  • The first is the potential of contagion or one entity’s risk spreading to another. (e.g. ?? )
  • As it happened in Kenya where the mobile payment system M-Pesa grew bigger than the banks. The same could happen in India given the lack of banking services for more than 60% people.

What happens in the present scenario ? 
  • Today, the mobile wallets and PPIs need to put customers’ money in an escrow account in which it has to partner with bank . 
( Escrow Account :- A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. An escrow account can be used in the sale of a house, for example. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. )
  • Securities, funds and other assets can be held in escrow. with the partner bank. 
  • An escrow account earns the non-bank payment company no income but the bank has access to the float. 
  • Suppose there is a run on the bank—not only will the bank customers be at risk, the contagion could spread to the potentially much larger mobile wallet or PPI operator. 
  • The payment bank concept solves this problem by allowing the PPIs and mobile wallets to transform into a bank that puts 100% of the customers’ money in government securities and is not allowed to lend money.
  • A payment bank will be a bank in every respect except that it cannot lend, thus removing the risk of leverage.


Why r we discussing about PAYMENT BANKS ?

  • A Reserve Bank of India (RBI) panel called the NACHIKET MOR COMMITTEE  has recommended that a special category of banks, called payments banks, be set up to widen the spread of payment services and deposit products to small businesses and low-income households in Asia’s third-largest economy, where about 40% of the population still do not have access to formal financial services
  • Such banks will have a minimum entry capital requirement of Rs.50 crore, one-tenth of what a full-service bank requires, since they will have a near-zero risk of default,.


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