Payment Banks | 08 Jul 2020

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.

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.

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.

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.

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.

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.

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.