Welcome to the era of Payment Bank

Recent developments with regards to payment banks have had the country abuzz with debate. Initiated with the intent to encourage financial inclusion in remote areas as well as developing regions; these banks have gotten the green flag from the country’s apex banking authority. Read on to know more about payment banks so you can understand exactly how they operate.

The need for payment banks

A major milestone in helping India go cash-less is the concept of payment banks. These have been planned by the Reserve Bank of India (RBI) to broaden the scope of the nation’s banking system. The institutions have been designed as a niche category that can cater to the needs of a select audience. This specifically targets the demographic that hitherto remains located in the unbanked geographical regions.

The banks in question shall only proffer a range of fundamental banking services. In order to comprehend the full scope of these new-age institutions, you must understand how they differ to conventional banks.

How a payment bank differs from a private bank

A conventional bank offers a wide array of services to account-holders. However, payment banks are more limited in the services they extend as they are limited by the provisions of the Banking Regulation Act of 1949. Here’s a list that explicitly details the services that are permissible for these banks as well as the ones that aren’t.

What is permissible What is disavowed
Undertake demand deposits from persons, budding concerns and similar bodies Any form of lending, loans
A present limit of 1 lakh INR for all cash deposit acceptances Taking on NRI deposits
Provide debit cards and ATM services Offering credit cards
Present a highly functional internet banking service Establishing subsidiaries that offer non-banking financial services
Offer mutual funds, insurance related pension schemes Providing additional financial/non-banking facilities of promoters
Allow remittances to other banks and accept remittances in turn
Agree to pay utility bills

The target demographic of these institutions

The authorities have voiced their intent behind creating this concept, which was to bring affordable banking to the rural sector. Progressing toward a predominantly cash-less economy is the main aim of furthering financial inclusion. The target demographic for payment banks is mostly individuals, families, and businesses that hail from low-income sectors.

It seeks to facilitate transactions with a greater frequency, yet a restricted sum for migrant factory and land labourers, sole proprietors, and the similar public. Account-holders can set up low-value saving accounts that aid them in making routine bill payments, remittances, etc.

The list of RBI approved entities

Although a staggering number of 41 banks applied for the sanction, the RBI chose to give an in-principle permit to only 11. Here’s the list of the institutions that have been licensed so far. Furthermore, the RBI stated that subject to the initial success of these entities, the application status of the other applicants shall be revisited.  

  • Aditya Birla Nuvo Limited
  • Airtel M Commerce Services Limited
  • Cholamandalam Distribution Services Limited
  • Department of Posts
  • Fino PayTech Limited
  • National Securities Depository Limited
  • Reliance Industries limited
  • Shri Dilip Shantilal Shanghvi of Sun Pharma fame
  • Shri Vijay Shekhar Sharma- the CEO of One Communications (Brainchild- PayTM)
  • Tech Mahindra Limited
  • Vodafone m-pesa Limited

Guidelines on which payment banks must operate

However, these entities have been allowed an 18 month period to confirm compliance to the following RBI mandated guidelines, subject to which the banks shall officially be open for business.

  • Their lowest capital prerequisite is 100 crore INR.
  • The promoters must chip in 40% for initial 5 years.
  • Surplus shareholding can be consolidated to 40% at the conclusion of the 5th year; 30% at the closing stage of the 10th year and to 26% after 12 years post the start of banking.
  • When it comes to overseas shareholders, the FDI guidelines that govern private banks stand true here as well.
  • No one apart from the promoters can be permitted to own over 10% of the business.
  • All of the purchase of over 5% shall require RBI consent.
  • The physical location of 25% branches should be unbanked rural regions.
  • Voting rights be dictated by 1949 Banking Regulation.
  • Right from the onset, the institution needs to be wholly technology enabled.
  • These institutions must be called ‘payment banks’ as a way to be distinguished from private or government banks.
  • They are mandated to have a great emphasis on resolving client complaints with a strongly staffed ‘Customer Grievance Cell’.
  • Their registration shall be dictated by the norms of a public limited company according to the Companies Act, 2013.
  • Independent directors should be dominant in number on the boards of payment banks. Moreover, their hire should be governed by RBI guidelines. Each of the directors must be in compliance with the RBI’s ‘fit and proper’ rule as well.

The advent of payment banks certainly bodes progress for the national banking sector. However, its impact on the financial markets as well as the denizens remains to be seen in the coming years.

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