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production process, while Smith described how the Currency Circulation
work was divided into a set of simple tasks, which
would be performed by specialized workers. The result Presently, Currency Circulation is less in urban areas due
of labor division in Smith's example resulted in to the use of Debit/Credit Cards and Internet/Mobile
productivity increasing by 24,000 percent (sic), i.e. Banking compared to rural and semi urban areas. With
that the same number of workers made 240 times as Payment Banks using Technology-mobile phones and bio-
many pins as they had been producing before the metric system (Aadhar Card enabled bank accounts)-the
introduction of labor division. use of Currency Circulation in these areas too will
decrease drastically. Payment of utility bills, tax payments,
Lack of awareness of the structured Financial System and and small business transactions will change to Wire
an unregulated or disorganised Rural Banking System, Transactions. This will help fight the problem of Forged
prevented most rural population from depositing their Notes and reduce the Import of Paper for Printing
savings in banks. The introduction of Payment Banks in Currency.
the rural, semi urban, and interior pockets will change
this scenario, usage of and access to the system will help A Narrow Banking Model
people understand it's functioning and help in Channelising
the Savings of the people in these areas. It will also give Attracting deposits for lending is one of the core activities
government access to funds for development activities. of the Commercial Banking system. However, mobilising
deposits and investing them in safe mode-in treasury bills,
The Government of India and the Reserve Bank of India government securities is called Narrow Banking. Since
have implemented various Business Models to achieve TFI Payment Banks are mandated to invest their mobilised
i.e., No-frills Accounts, Business Correspondents, Business funds in government securities,is these maybe classified
Facilitators, Local Area Banks, Regional Rural Banks, and under the 'Narrow Banking Model'. This is the safest
setting up of Rural Branches of Commercial Banks. model as there is no Credit Risk involved, and the Spreads
However, their contribution has been negligible. Payment are high due to the mobilisation of low-cost deposits.
Banks are better poised to achieve TFI. Their strength lies
in the use of Technology and the Low Operational Cost 100% Safety
would entail in contrast with the Bricks-and-Mortar
Banking Model. The Maximum Deposit to be mobilised by Payment Banks
has been capped at Rs.1,00,000/-. The maximum deposits
Payment banks will offer the following Advantages guarantee covered by DICGC is also Rs.1,00,000 which
means depositors' funds with payment banks are
Completely Secure. This is one of the USPs that will
attract Savings Bank Accounts to Payment Banks-most
customers in the Rural Areas seek complete security for
their hard earned savings funds. The activation of these
Banks across the country will also lead to the decline of
Chit Funds, and other unauthorized institutions that
exploit Rural Population.
High Spread
The Operational Cost for these banks is less compared to
Conventional Banking System. Further the use of latest
Technology will increase the Spread of their business
operations. In addition to Spreads, as these banks are
authorised to sell other financial products such as Life
Insurance, General Insurance and Mutual Funds like SIPs,
44 | 2015 | NOVEMBER | BANKING FINANCE
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