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India unveils country’s first ‘stripped-down bank’

With the Indian financial system still working to cope with the impact of the country’s drastic demonetization moves last month, it’s never been more important to promote easy access to finance in the country.

That’s why it may be the perfect time for the introduction of a new type of bank designed to encourage financial inclusion and bring better service to rural parts of the country where it has traditionally been difficult and not cost-effective to deploy full branches.

Called ‘payment banks’, they are a stripped-down concept created by the Reserve Bank of India (RBI) and offer basic services such as current and savings accounts. While they can provide customers with ATM and debit cards, they won’t be able to offer products such as loans or credit cards. They can also accept deposits of up to 100,000 rupees (around $1,450).

RBI governor Raghuram Rajan hopes the introduction of these simplified banks will diversify the country’s financial structure and bring those who still rely on cash into the system. Customers will be able to sign up using only their national ID card number, which BBC News notes is a significant benefit in a country notorious for its complex bureaucracy.

The first pilot of the scheme is being run by Airtel, which is also India’s largest telecom provider, with over 325 million subscribers. As transactions such as transfers and withdrawals can be carried out via smartphone apps, this may give the business a head start when it comes to attracting customers, as it already has a large user base to tap into.

Airtel’s trial is taking place in Rajasthan, a state that has a large rural population and limited access to formal banking services. Airtel is promising a completely paperless operation and offerings such as 7.25 per cent interest on savings – significantly more than the average of around four per cent offered by traditional banks.

However, it will not be distributing ATM or debit cards at this stage, with customers instead able to make cash withdrawals at designated Airtel retail outlets and via transfers to other banks.

It’s a pilot that many financial institutions in the country will no doubt be watching closely as efforts to move more Indians into the financial system gather pace.

Written by Jack Dougal