February 2015

The year has begun on a positive note for India's inclusion mission – the PMJDY target of covering all households with bank accounts has been accomplished before the deadline and the RBI has received an excellent response to its call for licence applications for the new niche banks. With 72 applicants lined up for Small Finance Banks and 41 for Payments Banks, the committees for evaluation are set to report their decisions in a few months. The list of applicants includes firms and banks of all sizes (India Post has also applied for a Payments Banks license) and the finalised list should allow for sufficient number to ensure a competitive market that will deliver universal inclusion.

The road ahead is not without its challenges. While the PMJDY has achieved 100% household coverage by banks in almost all states, the government has to now move to the next stage of ensuring that these accounts are used actively. One of the biggest challenges is ensuring that the agent on the ground receives sufficient remuneration (Rs. 5000 per month minimum as set by the PMJDY); currently less than a third of the agents get this amount. To confound matters, the notification released on 16th January that fixes commission for banks distributing direct benefit transfers has moved the pace one step back. As noted by Puneet Chopra, Lokesh Kumar and Graham Wright in a blog post, banks are currently losing money on the Direct Benefits Transfers and there is a strong case for raising the transaction charges to 3.14% as set out by the Nandan Nilekani Task Force, rather than limiting it, as per the latest dispensation.

For Payments Banks, it is important to incentivise customers into using digital payments and for this there are five challenges to overcome, as noted by Kabir Kumar and Daniel Radcliffe (Business Standard, January 30, 2015). These include keeping transaction charges as low as possible for digital transactions, discouraging over the counter transactions through agents, pricing remittance transfers competitively, investing large funds upfront for long term profitability and partnering with banks for credit issuance.