BFThe Reserve Bank of India recently gave licenses to eleven entities to start payments banks. These entities include Aditya Birla Nuvo, Reliance Industries, Tech Mahindra, Vodafone M-Pesa etc. A payments bank is a very unique concept that has originated in India.

 A payments bank means a bank that can accept deposits from public but it cannot lend to public. A usual bank both accepts deposits and lends too. A payments bank can also accept remittances. Remittances are money that you transfer to the bank account of your friend, family members or others. So a labourer working in a city can transfer money to the bank account of his wife, living in village, through the payments bank.

The purpose of creating payments bank is to increase financial inclusion in India. Financial inclusion is measured by the percentage of population that has access to bank accounts and banking services. The financial inclusion in India is dismally low. According to a recent World Bank study, financial inclusion in India stands at just 35%. This means that only 35% of Indian population right now has bank accounts and access to banking services.

The central government and RBI have made increasing financial inclusion their top priority.  Much of lack of financial inclusion is in rural areas.  Payments banks will have to maintain at least 25% of their branches in rural areas. This will give people living in these areas access to bank accounts. They can deposit their cash in these bank accounts and earn some interest on it.

How will payment banks earn their income if they are not allowed to lend? Traditional banks mainly earn their income from the difference of the interest that they charge on loans and the interest that they pay on their deposits. Payments banks will invest their deposits in government securities. They will earn interest on these securities. Part of these interests they will pay to the depositors, while the remaining they will retain as their income. They may also charge some amount for remittance transfers. Their business model is low margin- high volume one. This means that they will earn low income per customer but overall income will be high because of high volume of customers.

A large number of jobs are going to be created in the banking sector in the next five years. This will happen because more branches of both traditional banks and payments banks will be opened to increase financial inclusion.

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