Abstract

Reserve Bank of India (RBI) appointed Committee on ‘Comprehensive Financial Services for Small business and Low Income Households’ headed by Mr NachiketMor first mentioned in its report released in January, 2014 to issue licenses for payment banks. Reserve Bank of India finally came up with the ‘Guidelines for Licensing of Payment Banks’ on November 27, 2014. The concept of payment banks is very new in India and aims at higher financial inclusion. The primary objectives of setting up of payment banks are to provide small savings accounts and payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payment/remittance services in a secured technology driven environment^[1]. This report aims to study the scope of payment banks and come up with possible synergies of various sectors with the banking sector to open payment banks in India.

Introduction

As of August 2014, only 58.7 per cent of the households in India had access to banking services. PradhanMantri Jan DhanYojana launched in August 2014 by Prime Minister NarendraModi gave a major boost to the financial inclusion drive in the country. Opening one account under this scheme has cost banks Rs. 140 on an average.

Reserve Bank of India came up with the ‘Guidelines for Licensing of Payment Banks’ on November 27, 2014. The primary objective of setting up of payment banks is to aid in financial inclusion by providing small savings accounts and payments/remittance services to migrant labourers, low income households, small businesses and other users. Some of the major features of payment banks as mentioned in the guidelines^[1] are:

• They can accept demand deposits, i.e., current deposits and savings bank deposits. However, at the end of the day, balance should not be more than Rs. 1,00,000
• They can issue ATM/Debit Cards. But they cannot issue credit cards
• They can also offer internet banking
• Minimum paid-up equity capital is Rs. 100 crore
• In addition to Cash Reserve Ratio (CRR), payment banks are required to invest minimum 75 percent of its demand deposit balances in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR)
• They are required to have at least 25 per cent of physical access points including Business Correspondents (BCs) in rural centres

Although the concept of payment banks is new in India, it is fairly common around the world. Albeit started as a Corporate Social Responsibility (CSR) pilot project, M – pesa soon transformed itself into a financial service and became a huge success in Kenya. It was started in 2007 by Safaricom, a Vodafone subsidiary. The same success story can be repeated in India with certain modifications. India has over 900 million mobile subscribers out of which 40 per cent are rural consumers. This is a huge opportunity for a country which lacks the necessary banking service infrastructure especially in rural areas. The mobile companies can tap this potential by combining with banks and hence raise their revenues and help in financial inclusion as well.

Banking on mobile platform is currently been used by telecom companies in the form of Pre – paid Payment Instruments (PPIs). But they have not been as popular as expected. Some of the major factors going against PPIs are that most of the PPIs don’t facilitate the option of cashing out. Also the customers don’t earn any interest on the money present in the mobile wallet account. These factors are a major deterrent to customers adopting the PPIs. Payment banks have an advantage over the PPIs as they can both cash out as they are banks and also they have to give interest on the demand deposits as per the rules of RBI.

Everyone is talking about payment banks in accordance with their tie up with telecom companies. This can be corroborated with the fact that all the major telecom companies in the country have applied for it. In this paper we discuss tie up of payment banks with companies in the Fast Moving Consumer Goods (FMCG) sector and how both the payment banks and the organizations can leverage on each other to gain more business. During the course of last 50 years FMCG successfully improved their supply chain over the years to tap the rural market in India. Various initiatives like e – Choupal, Project Shakti, KanKhajuraTesan by FMCG majors have tapped the rural market and have become a common name in the hinterland of India.

Tie up of the FMCG companies with payment banks will have a three – fold advantage. Firstly, it will help the banks in cutting costs by using the existing infrastructure of the company. Secondly, it will help the companies to realize more sales as customer loyalty will increase and lastly, it will aid in augmenting financial inclusion in the country. We discuss the scenario of a FMCG company tie up with a bank to form a payment bank. Then we fit a linear regression model to find the scope of payment banks in India.

Methodology

We have adopted a case study approach wherein we first discuss the current banking scenario in India and the necessity of payment banks.Only 40% of the India’s population is statistically banked and out of 0.834 billion people from rural close to 60 per cent of rural households do not have a bank account and only 21 per cent have access to credit from a formal source. There are only 747 branches per 100,000 adults in India which is lower than countries like Brazil and Malaysia. Of the 6,354,321 villages in India, only 9,000 villages have more than one bank branch and only 5% ^[2] villages have a commercial bank branch. Albeit the agricultural industry has seen tremendous growth of 14.2% ^[2] in the past seven years only 1 out of 8 farmers avail bank credit. Rural households keep nearly 42 percent of their cash savings at home. This is not a good sign for a growing economy like India because the money lying stagnant under the pillows and in the almirahs has a cascading effect due to the multiplier effect and is very distressing to the economic health of the nation. The more the money ploughed back in the economy, the better the growth prospects. Certain regions in the country are excluded from financial inclusion due to reasons like lack of awareness, low income/assets, illiteracy and non-availability of branches etc. The following table^[3] is a region wise break up of basic banking services of deposit and credit available.

It can be easily inferred that the North – Eastern, Eastern and Central regions fare poorly on the banking map of India. Currently domestic remittance market is around Rs 800-900 billion with major share of daily wage earners transferring money to their family at rural place. This market is expected to grow at CAGR of 11-13% ^[2] in next 3-5 years. As per Census 2011 data, Uttar Pradesh (-2.6 million), which comes under the Central region and Bihar (-1.7 million), which comes under the Eastern region are the two states with largest number of net migrants migrating out of the state. If we take a helicopter view by combining the above 3 statements, we can see the huge untapped banking potential in India.

Next we try to analyze the trend in the banking sector. We try to fit a linear regression model and forecast the growth in the banking sector for the next five years. We have considered the agricultural and livestock GDP at current prices as one of the independent variables. The other independent variable is gross domestic savings for the household sector, again at current prices. The dependent variable is deposits. The following table reflects the values of the above variables for the last ten years ^[4].

The model that fits in is represented by the equation

Y = -3971.99 + 0.017764*X1 + 0.017624*X2

The computed value of R – square comes out to be 0.98. This shows that a large portion of Y is explained by X1 and X2. The forecast for the next five years for Y is given in the following table.

Here we have taken the average rate of year on year growth for both X1 and X2 to project their values for the next five years to find the trend for Y. The following graph depicts the trend line for the values of Y.

We see that the Compounded Annual Growth Rate (CAGR) for the projected values of Y comes out to be 15.1 per cent. This shows the huge potential in the banking sector.

Hence, in the coming years, banks will play a very crucial role in financial inclusion by way of payments bank. Banks have the necessary sector experience and hence they can provide feasible solutions to customers in the potential market.

Next we move to the FMCG sector tie ups with banks to open payment banks. The FMCG sector is a foundation stone of the growing Indian economy. This sector strikes every facet of human life. It is the fourth largest sector in India, characterized by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments. The improved economic situation of both the rural and urban consumers has helped FMCG companies to further expand their market to the hinterlands of the country.

The FMCG producers now realize that there is a lot of prospect for them to enter into the rural market. The rising income and growing lifestyle is a significant attraction for this sector. The FMCG sector has been successful in selling products to the lower and middle income groups in India. More than 70% of the sales are made to middle class households today and over 50% of the middle class reside in rural India. Also, with a near saturation and cut throat competition in urban India, many manufacturers and marketers of this sector are driven to formulate new strategies for targeting the rural consumers.

Rural India, mostly termed as “high opportunity” market, is no longer just an opportunity, but is now yielding results. The concept of Rural Marketing in India Economy has always played an influential role in the lives of people. In India, leaving out a few metropolitan cities, all the districts and industrial townships are connected with rural markets. Indian rural markets are poised to grow ten-fold by 2025 to become a US $100 billion proposition for retailer, according to the chairman of HUL. A report by Boston Consulting Group and CII projects that small town and rural customers would be the single largest market segment constituting 36 percent of households. We have created a model of tie up of a FMCGcompany with a bank. The model depicts the value chain analysis of the company and the points at which the bank’s services can be deployed.

Any company has to pay its suppliers. The group entity of FMCG organization and the bank which forms the payment bank will open the accounts for all its rural suppliers/farmers from which they acquire raw materials directly. The payment for procurement for inbound logistics can be taken care by the payment banks. This will help both the organization and the bank.

Here, we consider only the area of operations which are in the rural area. The contractual worker or a labourer working for a company may not get his dues immediately. If the worker has an account in a payment bank then the wages can be directly transferred to his account and he can cash out the money at a local Business Correspondent. This means business to both the organization and the bank and helps in financial inclusion.

Local vendors which take care of outbound logistics in the supply chain can also receive their dues in a similar fashion. Also at the end of the chain are sales and services. The salesman that travels from village to village (population less than 3000) can become the Business Correspondent for a cluster of villages. People in these villages can open their accounts with this salesman and reap the benefits of the banking services. In villages which have a population larger than 3000, the local kirana store owner can become the Business Correspondent. People opening up accounts with such Business Correspondents will instinctively become more loyal to them. This will manifest in an increment in revenue for both the FMCG company and the bank.

Conclusion

The banking sector is poised to grow at a CAGR of 15.1 per cent. This growth is attributed to the growth due to deposits. If credit is also considered, the figure above is much more. A large portion of this growth is explained by the growth in agriculture sector. Hence the growth in banking sector compliments the FMCG model and presents a great opportunity for payment banks.

References

1. http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32615
2. http://www.ibef.org/industry/banking-india.aspx
3. http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical%20Tables%20Relating%20to%20Banks%20in%20India
4. http://www.nddb.org/English/Statistics/Pages/Livestock-Sector-GDP.aspx
5. http://www.iamai.in/PRelease_detail.aspx?nid=3240&NMonth=1&NYear=2014
6. http://www.thehindubusinessline.com/industry-and-economy/banking/for-aam-india-cash-is-still-king/article5538950.ece
7. http://www.livemint.com/Industry/VFwrItOsQc2zoR4D2Ss6iN/Rise-in-Internet-transactions-helping-banks-reduce-costs.html
8. http://dazeinfo.com/2014/07/11/mobile-internet-india-2014-349-million-unique-mobile-phone-users-70-traffic-mobile-india-shining-infographic/