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What are Payment Banks?  Why India Needs Payment Banks?



Rajesh Goyal 

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In last few days, newspapers and internet news websites have been carrying many stories about payment banks.   In my 30 years of service in bank, I never heard of this term as it is a new concept introduced for first time in India.   However, now almost everybody is talking about these new type of banks!.   Thus, question arises what are these Payment Banks?   Why suddenly they have come into news so much.

 BackGround to “Payment Banks” in India :

 The term “Payment Banks” is new and seems to have been invented in Indian context.   In September 2013, a “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households”, headed by Nachiket Mor, was formed by the RBI.    By January 2014, the Nachiket Mor committee submitted its final report and one of its recommendations was  the formation of a new category of bank called payments banks.

The above was followed by announcement in Union Budget 2014-2015 (presented on July 10, 2014)  wherein it was decided that  “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks.  Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”.

Taking cues from the Budget, RBI issued the  draft guidelines in July 2014 itself on payments banks and small banks as differentiated or restricted banks.   Based on the feedback RBI came out with final guidelines for Payment Banks in November 2014, and called the applications from entities which are interested to start such banks.


What are Payment Banks or Define a Payment Bank :

We can define a Payment Bank in India as a type of bank which is a non-full service niche bank.  A bank licensed as a Payments Bank can only receive deposits and provide remittances. It cannot carry out lending activities. Thus, Payment Banks can issue ATM/debit cards, but can not issue credit cards as they are not empowered to carry out lending activities.


What is the Objective of Creating Payment Banks in India :

We can sum up the objectives in one sentence that these banks have been created to help India reach its financial inclusion targets. This type of bank can be highly useful for migrant labourers, low income households, small businesses, and other unorganised sector entities. 

RBI in its guidelines says “the objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.


Some Regulations for Payment Banks :

·         The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.. For the first five years, the stake of the promoter should be 40% minimum. Foreign share holding will be allowed in these banks as per the rules for FDI in private banks in India.    

·         The bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form subsidiaries to undertake non-banking activities.

 ·          Initially, the deposits will be capped at Rs.1,00,000 per customer, but it may be raised by the RBI based on the performance of the bank. The bank cannot undertake lending activities.

 ·         25% of its branches must be in the unbanked rural area. The bank must use the term "payments bank" in its to differentiate it from other types of bank. The banks will be licensed as payments banks under Section 22 of the Banking Regulation Act, 1949 and will be registered as public limited company under the Companies Act, 2013.  

 ·         The banks must maintain CRR, minimum 75% of demand deposits in government bonds of up to one year and maximum 25% in current and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. 

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What will be the Scope of activities to be allowed to Payment Banks :

a.      Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs.100,000 per individual customer.

b.      Issuance of ATM/debit cards. However, payment  banks cannot issue credit cards.

c.       Payments and remittance services through various channels.

d.      BC of another bank, subject to the Reserve Bank guidelines on BCs.

e.      Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.


Where Payments Banks will be able to Deploy their funds :

a.      The payments bank cannot undertake lending activities.

b.      Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its "demand deposit balances" in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.


RBI’s In Principle Licences to 11 Entities

In response to RBI’s call for applications for new Payment Bank licences, 41 applicants were in the race

On 19 August 2015, RBI gave "in-principle" licences to following eleven entities to launch payments banks:-


Aditya Birla Nuvo


Airtel M Commerce Services


Cholamandalam Distribution Services


Department of Posts


FINO PayTech


National Securities Depository


Reliance Industries


Dilip Shanghvi, (founder of Sun Pharmaceuticals)


Vijay Shekhar Sharma, (CEO of Paytm)


Tech Mahindra


Vodafone M-Pesa


The "in-principle" licence is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licences under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.


How Payment Banks Are Likely To  Impact Indian Population :

Indian Finance Minister, Mr Arun Jaitley said payment banks “will change the way people think, change the way they keep the money, where they keep their money, the way they pay,”

We know that still there are large population in India do not have banking facilities due to India’s geographical spread, regional disparities, reach and connectivity.   It is expected that these payment banks can use the mobile platform to provide basic banking transactions, in particular, payment for services and subsidies through mobile phones.  Thus, there is still lot of opportunity available in India for this type of banking provided they get their technology solutions right.  These banks are likely to help expand banking services to the remotest corner of the country.

New Payment banks needs to introduce new  products or new applications, so that instead of cash, people start carrying out more transactions electronically. Globally, that has been the trend.   However, in India, although the number of users of credit and debit cards have increased yet these have been limited penetration on account of costs involved for merchants or establishments which accept these cards. Mobile phone platforms still has lot of opportunity to penetrate rural India with alternate methods for transactions.

Whether New Payment Banks Can Prove to be Disrupters for Existing Banks :

It is very difficult to predict how these new payment banks will impact the existing banks.  Some believe that these banks will prove as disrupters to the existing PS and private banks.   However, RBI Governor is of the view that these banks would complement rather than compete; as he pointed out, universal banks can do everything that a payments bank can, but the reverse is not true.  Thus, the existing PS and private banks will have to introduce some changes in their technology platforms so as to provide similar facilities to their customers. 

Undoubtedly the new payment banks are likely to increase competition for PS Banks and private sector banks.  However, as these new banks will be catering to the needs of people who have limited funds at their disposal, PS banks, with much more resources available,  can focus on high networth clients.

One of the interesting part is that RBI has given licences for 11 payment banks, which includes names like Airtel, Vodafone and Idea, which are mobile service providers and thus already have a customer base of over 580 million potential customers.  They have also already in place the mobile technology which can really change the scenario.   Thus, biggest threat to PS Banks will be coming from these mobile service providers, as they already have grounds prepared for them.

How These Payment Banks Will Survive, when they can not lend? :

This is also an interesting question.  The questions are being raised as to how these new banks will be able to survive in absence of income from lending.  However, we are forgetting that most of the new players are already well established in their fields.  These payments banks are expected to play on volumes as they are likely to romp in to their fold  millions of customers who are currently not within the fold of the formal financial system.  This would lead to large volumes of transactions fetching the payments banks fees - a charge of even 1 or 2 per cent on a large volume can be lucrative on normal cash transfers, which will include government’s direct benefits transfer programmes. Moreover, new payments banks can also earn 7.0% or so on their investments in government securities.  The mobile companies will have limited additional costs and thus they may even offer payment of  more than 4% interest, which is the norm among banks as they pay mere 4% on  savings banks.   With no need for any provisions or losses on NPAs for these payment banks, they may become fitter banks than existing banks.  .


Other Plans of RBI :

RBI now plans to issue licences for ‘small finance banks’.  RBI has already received 72 applications for small finance banks.   These banks will primarily take up basic banking activities in defined geographies and cater to small business units, marginal farmers, and shop-keepers, among others.


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