NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, January 26, 2015

India is betting that mobile phone vendors, fuel stations and corner stores can help it put basic banking within the grasp of hundreds of millions of its poor people living beyond the reach of traditional bank branches.

The clock is ticking down to a Feb. 2 deadline for applications to set up so-called payments banks under new rules that would allow successful bidders to offer services such as remittances and deposits, but not loans.

The regulations announced by the central bank, the Reserve Bank of India (RBI), reflect a realization that traditional banks alone can’t achieve the objective of financial inclusion championed by Prime Minister Narendra Modi.

In a four-month campaign to end “financial untouchability”, Modi has opened 115 million new bank accounts. Yet of those, 80 million have no money in them, underscoring the huge challenge he faces in delivering on his promise.

Backers of the payments banks say they could help bring those accounts to life by bridging the gap from bank branches in town to India’s 600,000 villages, making it easier to send money home, collect state benefits or do business deals.

“There’s an entirely new set of actors,” said Bindu Ananth, a member of the RBI committee that designed the payments banks rules. “We said: Let’s create a regulatory framework that allows the participation of non-banks.”