Payment Bank

Introduction

• A payments bank is like any other bank, but operating on a smaller scale.
• Credit risk is not involved with the Payment Banks. 
• It can carry out most banking operations but cannot advance loans or issue credit cards.
• The Nachiket Mor Committee suggested the establishment of a payment bank in India.
• The committee was created by the RBI -named Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”. 

Objectives

• The objectives of setting up of payments banks will be to further financial inclusion by providing

1. small savings accounts and 
2. 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. 
• They will initially be 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 payment 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.

Important Points

• 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 a maximum 25%  in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
• They will be permitted to participate in the call money and CBLO (collateralized borrowing and lending obligation) market as both borrowers and lenders. 

Eligible promoters 

• Existing non-bank Pre-paid Payment Instrument (PPI) issuers; 
• Other entities such as 

1. individuals / professionals; 
2. Non-Banking Finance Companies (NBFCs), 
3. Corporate Business Correspondents(BCs), mobile telephone companies, 
4. Supermarket chains, companies, real sector cooperatives; that are owned and controlled by residents; and 
5. 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.

Other Important Provisions

• Capital requirement: The minimum paid-up equity capital for payments banks shall be 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.

Meaning of Important Terms 

• CBLO: A lending and borrowing instrument issued in an electronic book entry form, for a maturity period ranging from one day to one year. 
• 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