What are Payment Banks ?

Payment bank is a new model of bank conceptualised by Reserve Bank of India. It is like any other bank operating on a small scale without involving any credit risk. It is a differentiated bank empowered to undertake restricted banking functions under Banking Regulation Act 1949. These banking functions include acceptance of deposits, making payments, remittance services, internet banking etc but without any kind of loans and advances. Such payment banks are useful for low income households, small businesses, migrant labourers and other unorganised sectors. The payment banks have been created by India to achieve its financial inclusion targets. Following are the Do’s and Don’ts applied to the Payment banks by Reserve Bank of India :-

Do’s Accept demand deposits from individuals small businesses and other small entities upto Rs 1 Lakh. Issue debit cards. Offer internet banking facilities. Open branches, ATMs and correspondents. Undertake utility bill payments. Sell products of Insurances, Pension and Mutual funds. Undertake remittances from and to other banks.

Don’ts Loans and Advances. Issue credit cards. Accept NRI deposits Setup subsidiaries for non-banking financial services. Form subsidiaries to undertake non-banking activities.

REGULATIONS FOR PAYMENT BANKS

• The minimum capital requirement is 100 crores.
• For the first five years, the stake of the promoter should be at least 40%. Foreign investment allowed as per FDI rules applicable in private banks of India.
• The bank should be computerised and networked from the very beginning.
• The bank should accept utility bills.
• 25%  of its branches must be in the unbanked rural areas.
• The bank must use the term ‘Payments Bank’ in its name to distinguish it from other type of banks.
• The bank’s board of directors should have a majority of independent directors appointed as per RBI guidelines.

After satisfying above conditions, RBI issues license to Payments bank under section 22 of the Banking Regulation Act, 1949 and it is registered as Public Limited Company under the Companies Act, 2013.

HISTORY

About 40%-50% of India’s population is still unbanked. To widen the banking services especially for small businesses and lower income groups, RBI constituted a committee headed by Dr. Nachiket Mor in September 2013. The committee submitted its report to RBI in January 2014 with key suggestion as to introduce ‘Payment Bank’ to cater to the banking needs of lower income group by January 2016. With Payment banks, RBI seeks to penetrate banking services to the remotest areas of the country. Out of 41 applicants, RBI issued licenses to 11 entities as below :-

1. Aditya Birla Nuvo Limited.
2. Airtel MCommerce Services Limited.
3. Cholamandalam Distribution Services Limited.
4. Department of Posts.
5. Fino PayTech Limited.  
6. National Securities Depository Limited.
7. Reliance Industries Limited.
8. Sun Pharmaceuticals.
9. Paytm.
10. Tech Mahindra Limited.
11. Vodafone m-pesa limited

Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licenses. The approval granted is valid for a period of 18 months during which the applicants have to comply with the requirements and fulfil other conditions stipulated in RBI guidelines.

IMPACTS

The beginning of ‘Payment banks’ will bring positive revolution in India which will cover unbanked masses under the ambit of formal banking. The spread of banking will make the poor financially literate and will help fighting poverty. Payment banks will reach out to people in the remotest corners of the country. More money will come into the banking system. The existing Public sector and Private banks will be inclined to bring new schemes in their technology platforms to cope up with the changing scenario. In fact, new Payment banks are likely to increase competition between Public sector banks and Private banks. The Public sector banks, with much more resources available, can focus on high networth clients. As per RBI views, the big banks will complement the payment banks rather than compete them.

SURVIVAL OF PAYMENT BANKS

Existing banks pay 4% interest on savings fund deposits. Payment banks, in order to get deposits, may offer more than 4% of interest. Secondly, there is no income to the Payment banks from lending. For survival, Payment banks will earn 7% interest on their investment in Government securities. Most of the companies, holding Payment banks licenses, are already well established in their fields. These companies/Payment banks will get millions of customers in their fold to increase their financial resources. They can facilitate normal fund transfer and charge commission or fees on that. To generate more revenue, Payment banks can use their BC network to offer E-Commerce facilities like purchase and delivery of products through online marketplaces. To the uppermost, Payment banks do not need to keep provisions for losses on NPAs in case of existing banks.

Inclusion of Payment banks will mark biggest revolution in India after the Nationalisation of banks. It will make banking more competitive and inclusion for depositors thus making banking more affordable to the common man.