Payment Banks in India: Features & Regulations

Payment banks play a significant role in India’s banking sector, aiming to extend financial services to the unbanked and underbanked sections of society. As a UPSC (Union Public Service Commission) aspirant, understanding the concept and objectives of payment banks is crucial. In this section, we will explore what payment banks are, their objectives, as well as their history and background.

What are Payment Banks?

Payment banks are a type of specialized bank introduced in India with the primary objective of promoting financial inclusion. Unlike traditional banks, payment banks offer a limited range of banking services. They focus on providing basic banking services such as deposits, remittances, and payments, primarily through digital platforms and technology-driven infrastructure.

In addition, these banks leverage technology to reach remote areas and serve customers without access to traditional banking. They offer current and savings accounts, along with services like ATM cards, fund transfers, bill payments, and net banking to account holders.

History & Background

The history of payment banks in India can be traced back to the recommendations of the Nachiket Mor Committee in 2014. The committee was formed by the Reserve Bank of India (RBI) with the objective of enhancing financial inclusion and expanding access to banking services for all segments of the population.

Recommendation and Draft Guidelines: In January 2014, a committee appointed by the Reserve Bank of India (RBI) submitted its report, which recommended the introduction of specialized banks known as “Payment Banks.” The RBI subsequently prepared draft guidelines in July 2014 to govern the operations of these banks.

Final Guidelines: After careful consideration and refinement, the RBI issued the final guidelines for Payment Banks on November 27, 2014. These guidelines outlined the eligibility criteria, capital requirements, and permitted activities for entities seeking to operate as Payment Banks.

Evaluation: To ensure a thorough evaluation process, the RBI announced the formation of an External Advisory Committee (EAC) headed by Nachiket Mor. The EAC assessed the applicant entities based on their financial track record and governance issues.

In-Principle License: Following the evaluation by the External Advisory Committee, on July 6, 2015, the committee submitted its findings. As a result, 11 entities were granted an “in-principle” license by the RBI to launch Payment Banks. This license allowed them to operate for a specified period of 18 months. During this time, the entities were required to fulfill certain requirements outlined by the RBI.

Grant of Full Licenses: Upon successfully meeting the stipulated requirements and fulfilling the conditions specified in Section 22 of the Banking Regulation Act, 1949, the RBI granted full licenses to the 11 entities to operate as Payment Banks. This marked the final authorization for these entities to provide specialized banking services to the public.

The following 11 entities were granted “in-principle” licenses to launch Payment Banks by the Reserve Bank of India (RBI):

1. Aditya Birla Nuvo Limited
2. Airtel M Commerce Services Limited
3. Cholamandalam Distribution Services Limited
4. Department of Posts
5. Fino PayTech Limited
6. National Securities Depository Limited (NSDL)
7. Reliance Industries Limited
8. Paytm Payments Bank Limited
9. Tech Mahindra Limited
10. Vodafone m-pesa Limited
11. Jio Payments Bank Limited

List of Active Payment Banks in India

The following is the list of active payments banks:

• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank

S.No.	Name of Bank	Headquarters
1	Airtel Payment Bank	New Delhi
2	Fino Payment Bank	Mumbai, Maharashtra
3	India Post Payment Bank	New Delhi
4	Paytm Payment Bank	Noida, Uttar Pradesh
5	NSDL Payment Bank	Mumbai, Maharashtra
6	Jio Payment Bank	Navi Mumbai, Maharashtra

Objectives

The following are the objectives of payment banks:

• Extend banking services to remote areas and underserved populations.
• Promote financial inclusion and bring the unbanked into the formal banking system.
• Utilize technology to provide convenient and accessible banking solutions.
• Offer affordable and cost-effective banking services.
• Enable digital transactions and promote cashless payments.
• Enhance financial literacy and awareness among customers.

Features of Payment Banks

• Limited saving deposits, with a maximum limit of up to 2 lakhs per person.
• Customers can open both savings and current accounts.
• ATM or debit cards are provided, but credit cards are not available.
• Non-Resident Indians cannot deposit in Payment Banks.
• Payment Banks do not offer loan services.
• Restrictions on receiving cross-border remittances in current accounts.
• Required to maintain Cash Reserve Ratio (CRR) with the Reserve Bank of India.
• Payment Bank account holders can use any ATM for depositing and withdrawing money.
• Mobile banking and net banking services for online bill payments.
• “Payments Bank” must be included in the bank’s name.
• Selling financial products, such as mutual funds and insurance, requires prior approval from RBI.
• Prohibited from engaging in Non-Banking Financial Services activities.

Also Read: NeoBanks in India

Regulations Under Payment Banks

Regulations play a crucial role in shaping the operations and functioning of Payment Banks. These regulations are put in place by the Reserve Bank of India (RBI) to ensure the stability, transparency, and effectiveness of the Payment Banking system.

Minimum Capital Requirement and Promoter’s Interest: Payment Banks must have a minimum capital of Rs. 100 crores, and the promoter’s interest should remain at least 40% for the first five years. This ensures a significant commitment to the bank’s operations.

Cash Reserve Ratio (CRR): Like other banks, Payment Banks are required to maintain a Cash Reserve Ratio as per the Reserve Bank of India’s guidelines. This ensures sufficient reserves to maintain liquidity and stability.

Foreign Ownership and Investment: Payment Banks can have foreign ownership under the Indian Foreign Direct Investment (FDI) guidelines for private banks. This allows for international participation and investment. Additionally, Payment Banks are required to invest a minimum of 75% of their “demand deposit balances” in approved Government securities or treasury bills with a maturity of up to one year, as per the Statutory Liquidity Ratio (SLR).

Voting Rights and Branch Distribution: The Banking Regulation Act of 1949 governs the voting rights of shareholders. Any shareholder’s voting power is limited to 10%, with the potential to be increased to 26% by the Reserve Bank of India. Moreover, Payment Banks must have 25% of their branches in unbanked rural areas, promoting financial inclusion.

Name Distinction and Licensing: Payment Banks are required to include the term “payment bank” in their name, distinguishing them as specialized institutions. They are licensed and regulated under Section 22 of the Banking Regulation Act of 1949, ensuring compliance with regulatory guidelines and maintaining the stability of the banking system.

Eligible Promoters of Payment Banks

• Non-bank Financial Institutions: Existing non-bank financial institutions are eligible to apply for setting up Payment Banks.
• Other Entities: Individuals, professionals, Non-Banking Finance Companies (NBFCs), Corporate Business Correspondents (CBCs), mobile telephone companies, supermarket chains, companies, and real sector cooperatives can also apply to establish Payment Banks.
• Public Sector Entities: Public sector entities that are owned and controlled by residents are eligible to apply for setting up Payment Banks.
• Joint Venture with Scheduled Commercial Bank: Promoters or promoter groups can form a joint venture with an existing scheduled commercial bank to establish a Payment Bank.
• Equity Position by Scheduled Commercial Banks: Subject to the provisions of the Banking Regulation Act of 1949, scheduled commercial banks can take an equity position in Payment Banks, as permitted.

Advantages & Disadvantages of Payment Banks

Payment Banks have brought significant changes to the banking sector, offering unique advantages as well as presenting certain limitations. Let’s explore the advantages and disadvantages of Payment Banks:

Advantages of Payment Banks

• Financial inclusion for unbanked populations.
• Convenient and widespread access to banking services.
• Lower operational costs lead to cost-effective services.
• Faster and seamless transactions.
• Promotion of digital payments.
• Innovative use of technology.

Disadvantages of Payment Banks

• Limited services compared to traditional banks.
• Restrictions on deposit amounts.
• Inability to offer credit facilities like loans.
• Exclusion of non-resident individuals from depositing.
• Lack of cross-border remittance services.
• Dependency on technology infrastructure for uninterrupted services.

Conclusion

In conclusion, Payment Banks have emerged as a significant development in the banking sector, offering advantages such as financial inclusion, accessibility, cost-effective services, and promotion of digital payments. However, they also come with limitations like limited services, deposit restrictions, absence of credit facilities, and dependency on technology.

Evaluating the pros and cons of Payment Banks helps in understanding their role in expanding financial services and addressing the needs of underserved populations. As the banking landscape continues to evolve, these banks play a crucial role in promoting financial inclusion and driving innovation in the digital banking space.

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