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India to launch payment banks for low-income population

Estimates suggest that 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account.

Many Indians, particularly from low-income backgrounds, often rely on informal lenders for credit. Rupak De Chowdhuri / Reuters
Many Indians, particularly from low-income backgrounds, often rely on informal lenders for credit. Rupak De Chowdhuri / Reuters

India is planning to launch a new category of banks to boost the reach of financial services in a country where more than half the population does not have a bank account.

The limited-service banks, called payment banks, are to be targeted at poor households and small businesses.

The Reserve Bank of India deputy governor, HR Khan, yesterday said that the banks would be launched soon, Reuters reported.

“Estimates suggest that 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account,” said a report released earlier this year by an RBI panel looking at financial inclusion for the poor and small businesses.

This means that many Indians, particularly from low-income backgrounds, often rely on informal lenders for credit.

The panel proposed that payment banks offering payment and deposit services to the target market should be set up to help bring more Indians into the formal banking sector.

“Providing access to financial services for low-income households and small businesses is not a new goal for India. However, the record of progress on this front has left a great deal to be desired,” the report said.

The panel was announced by Raghuram Rajan, the RBI governor, soon after he took up the role last September.

Some experts, including the former RBI deputy governor, KC Chakrabarty, have questioned the financial viability of payment banks and how they will be able to make a profit.

But others point out that India needs such a model in a country of more than 1.2 billion where many struggle to get access to banking services.

“The existing banking systems are ill-equipped to cope with the demands of the large interstate migrant population of our country and as such payment banks are a necessity,” said KR Bijimon, the chief general manager of Muthoot Finance, an Indian financial firm.

Rural areas of India in particular have limited access to banking services.

“Wide disparities exist across India and within states in terms of access to financial services,” said Crisil, a ratings and research firm. “India’s six largest cities have 11 per cent of the country’s bank branches. At the other end of the scale, there are four districts in the north-eastern region with only one bank branch each.”

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