Updated Apr 13, 2022

What is a Payments Bank?

What is a Payments Bank?

The Reserve Bank of India has introduced a new category of banks known as the Payments Banks. Payment Banks meet the remittance and credit requirements of low-income households, small businesses, and the unorganised sector. Thus, they operate on a small scale with less credit risk.

Payments banks are registered under the Companies Act 2013. In addition, they are governed by various other legislations such as Banking Regulation Act, 1949, RBI Act 1934, Payment and Settlement Systems Act 2007, and the Foreign Exchange Management Act 1934. Payments banks earn money by depositing into the accounts of bigger commercial banks that provide higher interest.

The objective of payment banks

The Payments Banks' primary objective is to provide banking and financial services to the underbanked and unbanked areas. In addition, they aim to help low-income households, small entrepreneurs, migrant labourers, etc.

The history behind the concept of Payment Banks

The Indian Government wishes to expand its reach of the digital India initiative to every Indian citizen irrespective of their location. However, the commercial banks lacked a broad reach. Thus, they launched payments banks to overcome this hurdle.

Around 41 companies applied for payment bank licences, and only six were approved. The main factor considered by RBI was the network and reach of the company. Hence, the government gave payments bank licences to companies dealing in supermarket services, mobile telecommunication services, prepaid wallet services, etc., to cater to individuals and small businesses with less or no access to banks.

Payments banks in India

Currently, six payments banks are operational in India. They are:

1. Airtel Payments Bank
2. Paytm Payment Bank
3. India Post Payment Bank
4. Fino Pay Tech Ltd
5. NSDL Payment Bank
6. Jio Payment Bank

Payment bank features

Payment banks are not like conventional banks. The unique features of the payment bank are:

• First, they are not universal banks and are differentiated.
• Their reach is small.
• They need to have a minimum of Rs 100,00,00,000 paid-up capital.
• The first five years' minimum initial promoter contribution to the payment bank for the paid-up equity capital should be 40%.

What can payment banks do?

The payment banks can undertake the following activities:

• Take deposits of up to Rs 2,00,000.
• In addition, they can accept demand deposits for savings and current accounts.
• The money received can be invested only in secure government securities in the Statutory Liquidity Ratio (SLR) format. As a result, 75% of the demand deposit balance can be invested, whereas the remaining 25% must be placed as time deposits with other scheduled commercial banks.
• Payments banks can make personal payments and receive cross-border remittances for current accounts.
• Payments banks can issue debit cards.

Limitations of payments banks

• Payments banks receive a different banking licence from RBI and hence cannot lend.
• Cannot issue credit cards.
• Cannot accept time or NRI deposits.
• Cannot issue loans.
• Cannot set up subsidiaries for non-banking financial activities.

Advantages of payments bank

With the induction of payments banks into the Indian banking system, the following advantages have been observed:

• Banking has expanded to rural areas resulting in their financial inclusion.
• Expansion in the formal financial system.
• Practical alternative to the commercial banks.
• Deal efficiently with low value and high volume transactions.
• Easy access to diversified services.
• It provides technology-driven, secured transactions that can be tracked easily without any loophole for black money.

Challenges faced by payments banks

Though there are numerous benefits of the payments bank, they face specific challenges that need to be addressed, such as:

• Masses lack the awareness to access these services.
• Agents get no incentive to boost their involvement.
• Access to operation resources and infrastructure is missing.
• Technological challenges.

How are payments banks different from prepaid wallets?

Prepaid wallets are often confused with payments banks, but they are different. For example, E-wallets let users perform activities like cash withdrawal at ATMs or banks and transfer funds, but they do not provide interest on the deposited money.

Conclusion

Payments banks were established to reach society having little or no access to the banking and financial system. They facilitate easy money transactions to individuals from low-income range, small business owners, labourers, rural populations etc. The government's aim behind payments banks is to ensure the digitalisation of the entire India.