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[Banking] Nachiket Committee: Payment Banks- Rationale, Features, Advantages,

Limitations, Pre Paid Instrument Providers (PPI), USSD Banking
Posted By On 14/01/2014 @ 8:56 pm In Economy | 33 Comments

Payment bank is in news because RBI Committee recommended it. Well see Nachiket Committee in detail,
in separate articles later. This article only deals with Payment banks and allied Topics.
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Pre-Paid Instrument Providers (PPI)

Why Nachiket hates PPI model?
Why Payment Bank?
What is payment bank?
M-Pesa: Why India should get Payment banks?
Payment Banks: Anti-Arguments
USSD and Conflict of Interest
USSD connectivity for Banking
Mock Questions

Pre-Paid Instrument Providers (PPI)

Airtel money is an example of PPI. So, What do they do?
You give them money (from your regular bank account)
They give you a digital wallet tied with your mobile.
You can use it to pay bills, shopping, movie tickets etc.
What are the features/characteristics of such PPI?
Theyre regulated by RBI under Payment and Settlements Act of 2007. (More than 20 such
companies allowed to run their PPI scheme.)
KYC norms apply.
You dont earn interest rate on the money saved in it
You can put maximum Rs.50000 in it.
You cannot pull out money from it. (Meaning youve to spend. You cannot ask for refund in cash.
except under some special models/schemes.)
Transaction fee applies. Every time you buy something using your Airtel Money account, they
charge ~0.5% as commission.
Other examples of PPI:
Gift cards issued by banks e.g. prepaid.onlinesbi.com/giftcard.html
Airtel money, Oxigen Prepaid cards
Paypoint, Zipcash, flipkart wallet, Paytm, Mobikwik

By the way, unlike currency notes, these prepaid instruments are not fungible. For example, if you have 500
Rs. in your Airtel money account, you cannot get it exchanged for 500 Rs. in Oxigen prepaid card. (even if
you manage to do it by some jugaad- there will be ~0.5% commission charge, you never get full
convertability from one instrument to another instrument.)
For more on fungibiity, click me

Why Nachiket hates PPI model?

Last year, RBI appointed a Committee for financial services under Nachiket Mor. Committee observed that:
PPI doesnt offer interest rate. From financial inclusion point of view, this doesnt help the poor
people and small businessmen save their money.
PPI is a nested payment model: you give money to PPI, they deposit it in an escrow account in
some bank. Everytime you do something using digital wallet, they take out money from that escrow
account and pay on your behalf. Whats the problem?
Problem is nested models= they increase contagion risk.
Contagion risk = bad thing happens @one place, then it also leads to more negative outcomes
@other places in the market.
Suppose TRAI/Supreme court cancels Airtels license for xyz reason, result?
Direct problem for people whove money in Airtel account.
indirectly, gives an opportunity for some crook to start a baseless rumor via facebook that airtel
has deposited all that PPI money into ICICI/xyz bank and now theyll also go out of business =>
then juntaa will rush to demand their money back, share prices fall down and so on. creating
instability in the banking-finance system.
plus, Issues related to account security, KYC etc.
Therefore, Nachiket recommends:
1. RBI should NOT give any more licenses to open PPI.
2. Still, If anyone is interested, RBI should ask him to become a Banking business correspondent OR

apply for Payment Bank license.

Now comes the main topic:

Why Payment Bank?

Nachikets thought process is like this:
1. Pre-Paid Instrument Providers (PPI) = suck because they dont pay interest on your money.
2. But their basic model /concept is good= You load cash into your mobile (airtel), use it for buy
things, pay utility bills and so on. No need to carry cash, cheque book, credit card or visit ATM
booth.
Thus, from financial inclusion point of view, PPI model is good, if they gave interest on your money. So,
based on that idea, Nachiket recommends RBI to give license to a new type of banks called payment
banks. [Under the banking regulation Act.]

What is payment bank?

Payment banks will have following characteristics:
1. Target audience: small businessmen and poor people. (=low income households)
2. Potential candidates to run Payment banks: mobile phone companies, consumer goods
companies, post office system, agri/dairy type cooperatives and Corporate Business
correspondents. Even Scheduled commercial banks can open payment banks as their subsidiaries.
3. Payment bank will have to keep CRR (Cash reserve ratio) just like other Scheduled commercial
banks (SBI, PNB, BoB, Dena, ICICI etc)
4. Payment bank cannot hold more than Rs.50,000 per customer. (This is similar to PPI.)
5. Payment bank cannot involve in any credit risk. (again similar to PPI)
Mohan Cannot assume credit risk? What does that mean?
Nachiket It means Payment bank cannot give loans to anyone, especially to liquor kings like Vijay Mallya.

Mohan

Hold on! That raises even more questions. Banks main function is to take deposit from
one guy, give it as loan to other guy and make profit in between these interest rates.
But if bank cannot loan the money, then how will they make profit and howll they give

interest to those depositors?

Na
Mohan

Hold your horses, brother. Payment bank will be permitted to invest in SLR approved securities.
Meaning?
Meaning Payment bank can invest customers money in Government securities (G-Sec) and
corporate bonds of reputed companies like Infosys, reliance, TCS etc.
So?
Investment in SLR securities give you return of atleast ~8%. So, payment bank can keep some
money as profit and give the remaining to customer as interest.
Toh thik hai. (then it is alright!) but what is SLR?
click me

Nachi
Mohan
Nachi
Mohan
Nachi

more characteristics of Payment banks:

1. Payment bank will enjoy all the rights and responsibilities of a Scheduled commercial banks (SCBlike SBI, PNB, BoB, Dena and ICICI)
2. Entry capital requirement will be Rs.50 crore.
Hold on. I read in some newspaper that, to open a full scale SCB like SBI, you need minimum entry
Mohan capital of Rs.500 crore. Then why such relaxation given to Payment banks? Why do you allow
them to open bank with just Rs.50 crores?
As I told you earlier, Payment bank cannot assume credit risk (meaning they cannot give
out loans)
and since they cannot give out loans=> there is no danger of loan default/NPA.
Payment bank can invest money in SLR securities, but they are safe investments, you can
easily recover money.
In short, Payment bank faces near-zero risk of default. so, they dont need a large capital
for emergency backup.

Nachi

Mohan Toh thik hai. (Then it is alright!)

side note: Nachiket also recommended wholesale investment banks and wholesale consumer banks. But
well see about them in a separate article later. For now, Lets make a table:
System
Payments Network Operator (like
Mastercard, Visa)
Payments Bank (Nachikets Brainchild)
Sch. Commercial Bank (SBI, ICICI)
White Label ATM (TATA/Indica$h)
Bitcoin digital wallet

Can Give Loans

(Credit)?

Can Accept Retail

Deposits?

Can Make Payments?

No

No

Yes

No
Yes
No

Yes
Yes
No

No

No

Yes
Yes
Yes
Yes (only if both party
agree)

M-Pesa: Why India should get Payment banks?

Nachiket cites the case study of M-Pesa, to strengthen his argument in favour of Payment banks. So lets
check what is this M-Pesa?
M-Pesa is Kenyas Payment bank. (Fundamentally, it is a Mobile payment service, just like our Airtel
Money.)
M=mobile; Pesa=swahili word for money.
M-Pesa is the brainchild of Vodafone (=enemy#1 of our Income tax department) + Kenyas local
mobile company called Safaricom +IBM.
2006: M-Pesa launched. At this time, more than 70% of Kenyas Juntaa didnot have bank accounts.
How does M-pesa system Work?
You go to an M-Pesa outlet (local kiranawalla, shopping center, petrol pump, paan-ki-dukaan etc.)
Give him cash, he fills up your M-pesa electronic account with that money. (just like how you
recharge your prepaid mobile)
This M-pesa Account is tied up with your mobile phone. Wherever you go, money goes.
M-pesa helps in money transfer between one person to another, international remittances (e.g.
Kenyan worker from USA can send money home), utility bill payments and so on.
You can even borrow money from Microfinance Institutions (MFI) via mobile phone (and later repay
the loans, via same mobile phone).

M-Pesa size and Success:

Today, More than 75% of Kenyas juntaa uses M-Pesa system
More than 25% of Kenyas GDP flows through M-Pesa system.
M-Pesa also offers a separate model called M-Shwari to give 2-5% interest rate on your money
saved in that M-Pesa account.
So, If Payment bank model can succeed in Kenya, it can also succeed in India. (Atleast thats what
Mr.Nachiket believes)

Payment Banks: Anti-Arguments

Bankers have criticized this idea of Payment banks because:
#1: Nothing new under the sun
M-Pesa model you saw above- it is nothing radically new- SBI, ICICI and all other big banks
already offering such services via mobile banking platform.
So instead of opening new Payment banks, better just let those existing banks to give these
banking-investment-insurance services through their branches, mobile banking, internet-kiosks,
business correspondents and bancasurrance model.
OR Mr.Nachiket could have simply recommended all PPIs like Airtel money should pay interest on the
money held in digital wallets. instead of coming with a new type of payment banks
#2: Not 100% financial inclusion
Financial inclusion is a bigger thing than mere payment/money transfer- Financial inclusion
means access to complete bouquet of financial services banking, investment, insurance, pension
everything.
But thats very difficult to achieve through Payment bank system. (Because Nachi himself said,
bank cannot assume Credit risk.)
#3: Price wars
Schedule commercial banks also permitted to run Payment banks through their subsidiaries. That
defeats the whole purpose because SBI is a giant elephant with large resources and manpower. If it
starts a payment bank then other small players payment banks cannot compete, and theyll bleed
in price wars.
in the previous article on White label ATM, we saw how ATM operation costs are hurting the entire
banking sector.
So instead of allowing NBFCs and private companies to open Payment banks and compete with
regular (commercial) banks, Nachiket should better suggest a model where they all can work in
synergy to achieve 100% financial inclusion.

USSD and Conflict of Interest

Mohan

For mobile banking, you need an active mobile number to send those SMS and passwords
during online transaction.
And You just said Mobile company can also get license to open Payment bank.

Nachi What is your point?

Mohan There is conflict of interest=> customer exploitation. Observe:
Suppose both Airtel and Idea got Payment bank license. I open a payment bank account with Idea
but keep airtel phone number.
Then what if airtel charges more money per SMS when I want to do some net banking /balance
inquiry about my Idea BANK account?
And airtel walla also promises me that if I open Payment bank account in Airtel, theyll give free
services and even discounts @Bharti-walmart malls!
Your concern is valid. There will be conflict of interest when such large companies also run
payment banks. To solve this problem, All mobile companies must be ordered:
Nachi

1. to provide USSD connectivity as per recent TRAI regulations (Rs 1.5 per 5 interactive
sessions.)
2. to categories all SMSs related to banking and financial transactions as Priority SMS
services (with reasonable rates)

Mohan

Man!! that means RBI and TRAI will have to take additional headache and supervision to
prevent customer exploitation.
That is one more negative argument against Payment banks. Better just let the regular
banks handle stuff instead of opening new payment banks.
Anyways, what is this USSD connectivity?

USSD connectivity for Banking

USSD=unstructured supplementary service data
Example of USSD= When you type #123* etc. numbers in your mobile to check balance, activate
2g/3g pack, ringtones etc.
USSD can be used for prepaid call-back service, location-based content services and menu-based
information services.
Unlike SMSs, USSD messages create a real-time connection during a USSD session.
The connection remains open, allowing a two-way exchange of a sequence of data making USSD
more responsive than services that use SMS.
Last year, TRAI cameout with guidelines on USSD that:
For banking related USSD, the mobile company can charge only Rs.1.50 per session.
This money will be charged on subscribers account (i.e. balance in your mobile phone).
ICICI and SBI have already launched their USSD Based mobile banking services. For example click
me for SBI page

Mock Questions
1. What do you understand by the term Pre-Paid Instrument Providers (PPI)?
A. White label ATMs
B. Brown Label ATMs
C. Both A and B
D. Neither A nor B
2. Recently, Nachiket Committee on Financial services, has recommended a new type of Payment
banks. Which of the following, is not true about them?
A. Scheduled commercial banks will be allowed to open Payment banks as subsidiaries.
B. Payment banks will be exempted from CRR and SLR requirement.
C. Mobile phone companies, consumer goods companies, post office and cooperative
societies will be allowed to apply for Payment bank license.
D. None of Above
3. Correct statements about Pre-Paid Instrument:
A. With RBIs permission, prepaid instruments are issued in the form of smart cards, internet
wallets, or mobile wallets.
B. They can be used for purchasing railway tickets, paying utility bills and purchase of goods
and services.
C. Scheduled Commercial banks can issue such Pre-Paid instruments.
D. As per RBI rules, 4% interest rate has to be paid on each such Prepaid instruments
4. Find the correct statement(s) about Payment Banks as recommended by Nachiket Mor Committee
A. Payment banks will be kept outside the purview of Banking regulation Act.
B. Payment banks will be focusing mainly on Service class employees and HNI (High networth
individuals).
C. Payment banks will have to follow the targets under PSL (Priority sector lending).
D. None of above
5. Correct Statements about USSD
A. USSD facilitates real-time two-way exchange of data between mobile phone and the service
provider.
B. As per TRAI regulation, mobile companies are requireed to provide all USSD services free of
cost.
C. Both A and B
D. Neither A nor B
Descriptive/Mains
1. Nachiket Committees proposed payment banks are better suited to achieve the goal of financial
inclusion compared to the existing setup in banking sector. Do you Agree? Justify your stand. (10m
| 200 words)
2. Write a note on Nachiket Mor Committees recommendations regarding Payment Banks. (5m | 100
words)

3. Compare and contrast between the proposed Payment banks and Scheduled Commercial banks.
(5m | 100 words)
4. Define USSD. Explain its utility in Mobile Banking and Financial inclusion. (5m | 100 words)
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