Payment Banks

Payment banks are a revolution in the banking industry and a new type of bank created under the supervision of the Reserve Bank of India. Payment banks like Fino Payments Bank accept a maximum deposit of Rs 100,000. These banks can only take deposits and are not eligible to provide loans or issue any credit cards. In this article, we will explain in detail payment banks, their history, and different regulations.

What are Payment Banks?

Payment banks like Fino Payments Bank, Airtel Payment Bank, Paytm Payment Bank, or India Post Payment Bank operate just like any other bank but on a much smaller scale. Credit-giving risk is not involved; hence, they don’t provide loans or credit cards. They generally accept deposits, i.e., only demand deposits in savings and current accounts. Unlike commercial banks, they cannot accept demand deposits. Payment banks also are not allowed to set up any subsidiaries and cannot undertake any non-banking financial services activities.

History 

The payment bank was created as per the recommendations of the committee on comprehensive financial services for small businesses and low-income households headed by Nachiket Mor. The committee was formed in September 2013 and gave its recommendations on January 7th, 2014. 

In the same year, in July, the RBI created a draft guideline that would specifically govern the payment bank and asked significant stakeholders and the public for comments. The final guidelines were published in November 2014. In the year 2015, RBI released a list of entities that had applied for the payment bank licence. Initially, there were 41 applicants. 

Further, in 2015, the Indian Post Office announced that it would be using its extensive network in setting up payment banks across the country. Additionally, on August 19th, 2015, the Reserve Bank of India gave “in principle” licences to eleven other entities like Fino Payments Bank to launch payment banks.

The Objective of Payment Banks

The main aim of setting up a payment bank is to expand financial inclusion by providing banking facilities and small savings accounts to low-income households, small businesses, and other unorganised entities.

• A payment bank will be registered as that of a public limited company set up under the Companies Act 2013. It is to be governed under the provisions of the RBI Act 1934, Banking Regulation Act, Foreign Exchange Management Act 1999, Payment and Settlement Systems Act, and other Statutes and Directives.

• Payment banks are also required to maintain Cash Reserve Ratios.

• Payment banks are also required to invest 75% (minimum) of all their demand deposits in the form of SLR, or statutory liquid ratio, in selective eligible government securities that have a maturity of one year.

• They should also hold a maximum of 25% in fixed and current deposits in other scheduled commercial banks to manage liquidity.

• The capital requirement, i.e., minimum paid-up capital for a payment bank is Rs 100 crore.

• The initial contribution to the paid-up equity capital should be 40% for at least the first five years till the commencement of the business.

• Also, the FDI policy of the payment bank must be on similar lines to the FDI policy of other private sector banks. 

Range of Activities

The acceptance of demand deposits was initially restricted to payment banks for a maximum balance of Rs 1,00,000 per customer.Payment banks are eligible to issue ATM cards but not credit cards. Moreover, they are not allowed to provide loans. Payment banks also provide various payment as well as remittance services through multiple channels. They also can distribute different non-risk simple financial products like mutual funds and insurance products. As per regulations, they are specifically allowed to invest the money that they receive from customers’ deposits to that of government deposits. Payment banks are also not allowed to accept NRI deposits. It is important to note that a payment bank account holder can deposit and withdraw money through ATM or other service providers. 

Promoters 

Following are some of the eligible promoters of payment banks:

1. Pre-paid Payment Instruments issuers that are non-bank
2. Non-Banking Finance Companies or NBFC
3. Mobile telephone companies or corporate business correspondents
4. Real sector cooperatives as well as supermarket chains that are controlled by residents

Apart from these, a promoter or a group of promoters can set up a payment bank with a scheduled commercial bank. Similarly, a scheduled commercial bank can hold a state of equity in a payment bank permitted under the Banking Regulation Act 1949.

Difference between Payment Banks and Commercial Banks

• The main objective of a payment bank is to expand financial inclusion by providing banking facilities to small businesses, low-income households, etc. In contrast, commercial banks cater to the general population. 

• Payment banks are only allowed to issue ATM cards. However, no such regulations exist for commercial banks. 

• The minimum capital requirement for a payment bank is 100 crores, whereas it is Rs 500 crore for a Payment bank.

• Payment banks cannot provide loan services to the people, whereas commercial banks earn mainly from credit services.

• Indian payment banks are not allowed to accept deposits from NRI persons, whereas commercial banks are eligible to receive deposits from NRI.

• Payment banks must invest a minimum of 75% of their total demand deposits with a maturity period of a year. However, commercial banks must invest a minimum of 22% in eligible government securities.

Conclusion

Hopefully, by now, you have understood Indian payment banks, their history, regulations, and how they are different from commercial banks. Today, payment banks have revolutionised the banking industry and have made banking easy and accessible.