Mehboob Khan’s masterpiece starring Sunil Dutt and the legendry Nargis in and as Mother India, depicted the sorry plight of the Indian farmer. Myriad sacrifices of debt-laden rural folks created a lasting impression in the minds of Indians, as did the character of
Sukhilala who depicted the quintessential vicious face of the shrewd moneylender.
Loans to farmers continue to be a challenge for both the farmer community and the formal financial institutions even today. Tedious paperwork and low literacy rates impede loan disbursement. The growth of the microfinance sector (up 38 percent Y-on-Y) indicates that the rural community is willing to take the hit of high interest rates on small loan amounts since the formal banking sector has not yet been able to penetrate right down at the farm level.
Payment Banks (PBs) could have been a good opportunity to reach this critical mass of India’s rural population had they been given more teeth. The fact that corporate houses are distancing themselves from PBs despite having licences to operate speaks of a larger economic viability challenges in the face of regulatory hurdles.
But PBs should not be written off just yet. New business models can emerge if players are given leeway to explore the emergence of digitisation through flexibility on the policy front. The Nachiket Mor committee’s recommendations to the RBI on PBs half a decade ago should be revisited in light of recent developments.
An organic, digital JAM
India has evolved in the last sixty years since Mother India hit silver screens in 1957 and financial inclusion via digitisation has been a story of revolution. The Jan Dhan-Aadhar-Mobile or JAM Trinity brought banking and financial services to the fingertips of millions of unbanked Indians who possessed the two most critical necessities – an Aadhar number and a mobile phone.
The prime minister’s address from Red Fort on August 15, 2019 further asserted the government’s vision, urging citizens to say, “Yes to digital payment, no to cash.” Data suggests that cards are still more popular than digital wallets for transactions, but that could soon change with enough and more wallet players in this growing digital payments market.
According to IBEF, as of July 3, 2019, over 360 million Indians benefited from the Pradhan Mantri Jan Dhan Yojna. Cash deposits in these accounts has exceeded Rs 1 trillion and, through partnerships with over 1100 banks, more than 600 million RuPay cards have been issued. The BHIM application crossed 46 million downloads as of April 30, 2019 and as per NPCI analytics, over 114 banks are live on BHIM.
But finance is more than just about a buying and selling transaction. There’s an opportunity in managing the financial health of the rural population.
Could PBs, with technology as the most fundamental differentiator from traditional banks, have helped solve the bigger financial woes of India’s rural poor?
Share of wallet
Today, from a
chaiwala to a Chaayos, wallets are both popular and rewarding. Entrepreneurs have invested a fair deal of marketing budgets in cashback deals to get customers hooked on.
As wallets go through the three-quarter mile of a product lifecycle from introduction to growth to maturity, PBs seem to be treading, what in management terms is called, a ‘bust product lifecycle’ where the product is introduced, but it crashes soon thereafter for lack of takers.
Banking on PBs
Eleven corporations from 41 applications received the RBI’s nod for establishing PBs while only four actually took off. Last month, Aditya Birla Payments Bank decided to pull the plug. This was preceded by Vodafone m-Pesa earlier this month.
Today, there are no more than three likely serious players left – namely Fino Payments Bank, Airtel Payments Bank and Paytm Payments Bank.
In a mature market, Dr Jagdish Sheth’s ‘Rue of Three’ theory may hold true, but not in a new product where demand should compel multiple players to compete before consolidation.
In today’s environment, marred by a potential slowdown and slumping demand, rural markets must be looked at to propel consumption. This is where PBs can come in, if policy flexibility permits.
Some questions need answering for such flexibility:
Why cap deposits to Rs 1 lakh?
Shouldn’t customers be given that choice? If they trust the PB with their money and the RBI has issued the licence – why should we assume the worst case risk scenario?
Why should the money be invested only in government securities or large banks?
The former offer a lower return and the latter, greater risk. Can there be a case to invest only a minimum required percentage of the deposits in government securities to offset risk, and the rest in equity markets or hybrid options for greater potential returns, making PBs more economically viable?
Why restrict lending?
If PBs are given the option to lend to the same population at a rate that the market allows them to operate on, wouldn’t the space open up to compete with larger banks and smaller micro-finance players – eventually making the whole lending proposition more competitive.
Until such policy and regulatory issues are looked at and addressed through the lens of business viability, PBs may not emerge from the bust lifecycle and become history sooner than anticipated. The rural segment will continue to be excluded despite mere bank accounts open that offer little access to capital and villages in India will depend on the likes of
Sukhilala to serve them loans that generations will end up servicing. Kartik Malhotra is Senior Executive Producer & Editor, Special Projects at Network 18. He is an alumnus of IIM Lucknow and, when not behind the camera, indulges in armchair analysis of strategy and technology.