The concept of payment banks seems to be a novel concept having financial inclusion its most likely outcome. However, some have expressed doubts over their viability and scalability. Examine the issue throwing light on their business model.

Model Answer
Payment banks cannot give loans and cannot accept time deposits. This would simply mean that they cannot earn the interest spread between loans and deposits and their revenue model is mainly on transaction charges. Since they would work on thin margins and volumes would be key to their survival ; some have expressed doubts on their viability and scalability. However these doubts seem to be overemphasized. This is because:

• A payment bank can also work as business correspondents for scheduled commercial banks and offer loans, credit cards and earn commission on any insurance and mutual fund products they sell.
• These banks need to input 75% of their deposits as SLR (statutory liquidity ratio). Since SLR earns some interest, it can neutralize against the interest they would need to pay on customer deposits.

Also, knowledge of local economy is another key to succeed in the Payment Banks business. For this, the payment banks will need to identify the correct regions and expand networks in those areas. (167 words)

Topics: GS-III: Indian Economy Issues Relating to Planning