Payment Bank in India
In August 2015, the RBI issued in-principle licences to 11 entities to establish payments banks in India – a unique format of banking which has not been used anywhere else in the world. Fully based on modern technology, these banks are expected to bring the huge unbanked population of India under the formal banking system. In this explainer, Rahul Choudhury describes the evolution of payments banks, the opportunities they offer, and the challenges they face.
Even though there are over 157 banks operating in India, a large number of people are not covered by the formal banking system. According to Census 2011, out of 246.7 million households, only 144.8 million have access to banking services. The problem is particularly acute in rural India. Operation costs of running a traditional bank branch in rural areas are very high as sufficient volume of funds is not deposited by the account-holders and loan disbursement is low. For these and other reasons, small-sized banks and foreign banks are usually not interested in opening branches in rural or even semi-rural areas. Hence, it is crucial to think of innovative measures to address the situation. This led to the establishment of payments banks in India.
Evolution of India’s payment system and banking structure
The payment system in India has undergone significant changes since the early 1980s. The Indian banking system has always been a front-runner in adopting modern and latest technology. The Reserve Bank of India (RBI) adopted computerised settlement facilities at all its clearing houses as early as 1988. This was followed by the installation of a core banking software in 2000 and the introduction of internet banking in 2001. In 2007, the Indian Parliament passed the Payment and Settlement Systems Act. Since the inception of this Act, the government has been striving towards a cashless economy. Initiatives taken by the government have created a catalytic environment for the greater proliferation and growth of digital payments. The establishment of the National Payments Corporation of India (NPCI)1 in 2008 and introduction of Real-Time Gross Settlement (RTGS) in 2004, the National Electronic Funds Transfer (NEFT) in 2005, the Immediate Payment Service (IMPS) in 2010, and Unified Payments Interface (UPI) in 2016, are examples of the government’s initiatives in this regard
Payment Bank
- Payment bank is generally a non-full service niche bank in India. It is a distinguished bank that will undertake only limited banking functions which are allowed as per the Banking Regulation Act of 1949.
- The licenced entities as payment banks could only receive deposits and offer remittances. They cannot undertake lending activities. These banks can offer banking functions such as payments, deposits, remittances, internet banking, and would initially be allowed to take cash deposit of maximum Rs. 1 lakh per individual.
- The main objective of the payment banks is to increase financial inclusion by offering small saving accounts and payment remittance services to low-income households, migrant labour workforce, small businesses and other unorganised sector entities and other similar users. It will also enable high volume-low value transactions in deposit and payment/remittance services in a technology-driven environment.
- In the year 2013 RBI formed a committee for bringing the unserved and underserved sections of the society into the mainstream of financial inclusion. The committee was headed by Mr. Nachiket Mor.
- On the recommendation of the Nachiket Mor Committee, in the year 2014 RBI released the guidelines for payment banks.
- Finally, in the year 2015 RBI granted banking licenses under section 22 (1) of the banking regulation act, 1949.
- Initially, RBI issued payment bank licenses to 11 entities to launch payment banks but out of these 3 entities surrendered the license.
Payment bank are accessible to certain dos, they are :
- Accept demand deposits from individuals, small business or other similar entities.
- Take cash deposits to the limit of Rs. 1 lakh (this might be raised later by the RBI depending upon the performance of the bank).
- Set up branches, ATMs and correspondents
- Issue debit cards and offer internet banking facility
- Sell mutual funds, insurance and pension products
- Accept remittance to be sent to multiple banks and receive remittances from them too.
- Undertake utility bill payments
Payment bank are accessible to certain don’ts, they are :
- Lend loans
- Issue credit cards
- Accept NRI deposits
- Set up subsidiaries for non-banking financial services.
- Offer other financial/non-financial services of promoters
Payment banks are scheduled banks like commercial banks. As per RBI guidelines, payment banks have to fulfill all the necessary parameters for a banking license like:
- The minimum paid-up equity capital of Rs. 100 Crores was decided for payment banks. Banks have to maintain net demand and time liability of 100 crores and above to set up a payment bank.
- Payment banks have to maintain the Cash Reserve Ratio (CRR) with RBI as other commercial banks do.
The RBI had received 41 applications for payment banks; however, it offered licence to only 11 of them:
Payment Bank | Year of Establishment | Headquarters |
Cholamandalam Distribution Services | 2017 | surrendered the license |
Sun Pharmaceuticals | 2017 | surrendered the license |
Tech Mahindra | 2017 | surrendered the license |
Aditya Birla Payments Bank | 2018 | defunct payments banks in 2019 |
Vodafone m-pesa Limited | 2017 | defunct payments banks in 2019 |
Airtel payments Banks | 2017 | New Delhi |
India Posts payments banks | 2018 | New Delhi |
Fino payments banks | 2017 | Mumbai |
Jio payments banks | 2018 | Mumbai |
Paytm payments banks | 2017 | Noida, Uttar Pradesh |
NSDL Payments Banks | 2018 | Mumbai |
Out of 11 only above 6 highlighted payment bank are active.
Airtel Payments Bank was the first such bank to start its commercial operation in November 2016 on a pilot basis covering only Rajasthan initially and extending nationwide later in January 2017.
Airtel Payments Bank has a network of 250,000 retail stores that also function as banking points.
