Payment Banks

• 08 Jul 2020

What are Payment Banks?

• A payments bank (Airtel Payments Bank, India Post Payments Bank, etc.) is like any other bank, but operating on a smaller or restricted scale.
• Credit risk is not involved with the Payments Bank. It can carry out most banking operations but cannot advance loans or issue credit cards.
• It can accept demand deposits only i.e. savings and current accounts, not time deposits.
• The Payment Banks cannot set up subsidiaries to undertake non-banking financial services activities.
• A committee headed by Dr. Nachiket Mor recommended setting up of 'Payments Bank' to cater to the lower income groups and small businesses.
• Benefits: Expansion of rural banking, access to diversified services, social & financial inclusion are some of the benefits.
• Challenges: Lack of customer awareness, lack of incentives for agents, lack of infrastructure, technological issues are some of the challenges.

Note:

• There are two kinds of banking licences that are granted by the Reserve Bank of India - universal bank licence and differentiated bank licence.
• Payments bank comes under a differentiated bank licence since it cannot offer all the services that a commercial bank offers. In particular, a payments bank cannot lend.
• It can take deposits upto ₹1 lakh per account and it can issue debit cards but not credit cards.
• Commercial banks in India like State Bank of India or ICICI Bank, do not have any such restrictions.

Objectives

• The objectives of setting up of a payments bank is to further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

Scope of Activities

• Acceptance of demand deposits, initially restricted to holding a maximum balance of Rs 100,000 per individual customer.
• Issuance of ATM/debit cards.
• They cannot issue credit cards.
• They are not allowed to give loans.
• Payments and remittance services through various channels.
• Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.
• They are only allowed to invest the money received from customers' deposits into government securities.
• They cannot accept NRI deposits.
• A payments bank account holder would be able to deposit and withdraw money through any ATM or other service providers.
• Payments licensees would be granted to mobile firms, supermarket chains and others to cater to individuals and small businesses.

Eligible Promoters

• Existing non-bank Pre-paid Payment Instrument (PPI) issuers;
• Other entities such as
  
  • individuals/professionals;
  • Non-Banking Finance Companies (NBFCs),
  • Corporate Business Correspondents (BCs), mobile telephone companies,
  • Supermarket chains, companies, real sector cooperatives; that are owned and controlled by residents; and
  • Public sector entities may apply to set up payments banks.
• A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank.
• Scheduled commercial banks can take equity stake in a payments bank to the extent permitted under the Banking Regulation Act, 1949.

Regulation

• The Payments Bank will be registered as a public limited company under the Companies Act, 2013. It is governed by the provisions of the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and Directives.
• They need to maintain a Cash Reserve Ratio (CRR).
• Required to invest a minimum 75% of its "demand deposit balances" in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year.
• Need to hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

Other Important Provisions

• Capital requirement: The minimum paid-up capital for payments bank is Rs 100 crore.
• Promoter's contribution: Minimum initial contribution to the paid-up equity capital shall at least be 40% for the first five years from the commencement of its business.
• Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

Important Terms

• Promoter: A person involved in setting up and funding a new company.
• Credit Risk: Risk of loss or default which arises from the debtor being unlikely to repay the loan amount.
• Paid-up Capital: Amount of money for which shares of the Company were issued to the shareholders and payment was made by the shareholders.

Read TTP on India Post Payment Bank