Payment Banks

Payment Banks in India aim to increase financial inclusion by providing banking services to the underprivileged sections of society including small businesses and low-income households. They are regulated under several Acts and can be promoted by diverse entities such as mobile companies or NBFCs.

They can undertake a variety of activities like accepting deposits, issuing debit cards, and distributing financial products, but they cannot lend or issue credit cards. However, they face challenges like increased competition and lack of public awareness. In this article, you will know about meaning and definition of Payment Banks, its function, criteria and challenges faced by them. To explore more interesting UPSC Economy GS-Paper 3 topics like Payment Banks, check out other articles and IAS Notes of IASToppers.    

Table of Content

• What are Payment Banks?
• Regulation of Payment Banks
• Who can be payment bank promoters?
• Criteria for Payment Bank
• Activities that can be undertaken by Payment banks
• Activities that cannot be undertaken by Payment banks
• Challenges For Payment Bank
• Conclusion
• FAQs on Payment Bank

What are Payment Banks?

• It is an Indian new model of banks conceptualised by RBI without issuing credit.
• It was based on the recommendations of the Nachiket Mor Committee.
• The main objective of payments is to advance financial inclusion by offering banking and financial services to the unbanked and underbanked areas, including small businesses, low-income households, and the migrant labour workforce.
• India currently has 6 active Payment Banks:
  • Airtel Payment Bank,
  • India Post Payment Bank,
  • Fino Payment Bank,
  • Paytm Payment Bank,
  • NSDL Payment Bank and
  • Jio Payment Bank.

Regulation of Payment Banks

Payment banks are governed by following acts:

• Banking Regulation Act, 1949,
• RBI Act, 1934,
• Foreign Exchange Management Act, 1999,
• Payment and Settlement Systems Act, 2007.

Who can be payment bank promoters?

• Non-bank Prepaid Payment Instruments (PPIs),
• Non-Banking Financial Companies (NBFCs)
• Corporate’s mobile telephone companies,
• Super market chains,
• Real sector cooperatives companies and
• Public sector entities etc.

Criteria for Payment Bank

• Minimum paid-up capital is Rs. 100 crores;
• Promoters’ minimum initial contribution to above 40% (to be bought to 26% within 12 years of commencement);
• Should maintain a minimum Capital adequacy ratio (CAR) of 15 % of its risk-weighted assets (RWA);
• Such Banks would be required to use the word ‘Payments’ in its name to differentiate it from other banks.

Activities that can be undertaken by Payment banks

• They can accept demand deposits in the form of savings and current accounts up-to 2 lakh per customer.
• Money received as deposits can be invested in government securities only in the form of Statutory Liquidity Ratio (SLR).
  • This must amount to 75% of the demand deposit balance.
  • The remaining 25% is to be placed as time deposits with other scheduled commercial banks.
• They can issue debit cards (prepaid payment Instruments)
• They can make personal payments and receive cross border remittances on the current accounts.
• They can distribute financial products such as, mutual funds and insurance.
• They can offer utility bill payment on behalf of the customers
• They can offer internet banking
• They can function as business correspondent for other banks
• They can participate in the payment and settlement system and has access to inter-bank call money market

Activities that cannot be undertaken by Payment banks

• Do lending activities as they are have ‘differentiated’ bank license from the RBI
  • 2 types of banking licenses are given by RBI:  universal bank license and differentiated bank license.
  • Payments bank are given differentiated bank license as they are unable to provide all the services given by commercial banks.
• Issue credit cards and loans
• Accept time deposits or NRI deposits
• Set up subsidiaries to undertake non-banking financial activities

Challenges For Payment Bank

• As they are not allowed to lend money and thus are deprived of earning interest income, they have to depend on other sources for profitability.
• The conventional commercial banks are also providing payment bank services. This increases competition.
• Lack of awareness about the payment banks among the public.
• Wide network is essential to operate payment banks in a large scale. Because of this only telecom companies have entered into payment bank regime.
• Payment Banks have no physical presence and thus transactions are done only with the help of internet. Internet access with low speed and bandwidth can adversely affect their operations. 
• Payment Bank model can generate conflict of interest arising out of difference in mobile service providers and Payment Bank service providers.
  • If the mobile service provider charges higher for banking services, then the whole Payment Bank model will fail to generate the desired result. 
• Operating in specific financial products require certified and trained manpower to sell the products, which implies higher costs and limited upside on income.
• The mandatory requirement of investing 75% balances in SLR eligible government bonds or T-Bills restricts their ability to optimize treasury operations.

Conclusion

Payment Banks have the potential to revolutionize financial inclusion in India, particularly in unbanked and underbanked regions. However, to ensure the success of Payment Banks, the Indian government should focus on increasing public awareness, improving internet connectivity, and creating a conducive environment for these banks to thrive.

Ref: Source-1

FAQs (Frequently Asked Questions)