Payments banks add-ons, not competitors: Raghuram Rajan, RBI Governor

Payments banks add-ons, not competitors: Raghuram Rajan, RBI Governor

Payment banks will complement the traditional banking sector rather than compete with it, but they will also ensure costs of these services come down and push universal banks to use more efficient and cheaper payment channels, said Raghuram Rajan, governor of the Reserve Bank of India (RBI).

Rajan’s comments at the State Bank of India (SBI) banking and economics conference came just a day after the central bank gave in-principle nod to 11 entities, including large conglomerates such as Reliance Industries Ltd and Aditya Birla Nuvo Ltd along with telecom companies like Bharati Airtel Ltd and Vodafone Plc, to launch payment banks.

“Payment banks are an add-on to the banks rather than competitors. The will be feeders into the universal bank,” said Rajan, adding that the committee that reviewed the licences was of the view that a number of different types of firms should be licensed to see what model works in this segment.

Rajan was in conversation with SBI chairman Arundhati Bhattacharya who raised that apprehension that the new payment banks would drive away cheap savings account deposits from full-service banks and hence make it difficult to price loans efficiently.

Rajan acknowledged that competition will increase, but said the customer will benefit. He, however, doesn’t see payment banks transition into universal banks.

“We haven’t got into mobile payment revolution in a big way like Kenya or Uganda. This may also force universal banks to get into payment services. Already four or five banks have tied up with payments banks. I really think we can have a revolution. Yes some may fall by the wayside but there is enough scope,” Rajan said.

Payments banks will target financially excluded customers such as migrant workers, low-income households and tiny businesses. They will not be in the business of lending, so they will be shielded from the risks conventional banks are exposed to.

“I believe there will be demand for digital services. India will leapfrog in digital technology,” Rajan said. He also said that the central bank will give out licences for new small finance banks next month. These small finance banks may have an easier path to transition into universal banks.

In a note on Thursday, Ambit Capital Pvt. Ltd said the large number of licences dispensed shows RBI’s determination to make deposit-financing competitive by introducing targeted competition in the form of differentiated banks.

“The probability of RBI announcing a large number of small finance bank licences has also risen. This will lead to rising competitive intensity (higher savings interest rates and service standards) in the banking system, particularly for PSU banks in non-urban centres,” Ambit said.