Payment Banks

Before diving further into this topic, let us first understand,

What exactly is a Payment Bank?

Payment Bank is basically a new model of banks that has been conceptualized by RBI. Now, many of you may further ask,

How is it different from a regular bank ?

Yes, A Payment Bank is very similar to a regular bank but it varies from a regular bank on following grounds –

  • Payment Banks operate on a smaller scale as compared to the commercial banks of the country.
  • Payment Banks do not have any credit risk involved with them as they cannot issue loans and credit cards.
  • Payment Banks can accept demand deposits up to Rs 1 lakh only.

Now one may further ask,

Why were the Payment Banks required?

The primary aim of Payment Banks is to expand the availability of financial services to many unbanked entities, for instance small businesses, households with low income, migrant labour force etc i.e. achieve Financial Inclusion as well as increase the access of financial services to all, especially the rural areas of the country.

History of Payment banks

Reserve Bank of India (RBI), on 23rd September 2013 constituted a Committee on Comprehensive Financial Services for Small Businesses and Low Income Households that was headed by Nachiket Mor. The committee submitted it’s report on 7th January 2014 and also recommended the formation of a new category of bank (Payment Banks) among its other recommendations.

Draft guidelines for payment banks, seeking the opinion of interested entities as well as general public was released by RBI on 17th July 2014. Final guidelines for Payment banks were released by RBI on 27th november 2014.

41 applicants applied for the licence of Payment Bank and their list was released by RBI in February 2015. The licence applications were evaluated by External advisory Committee (EAC), headed by Nachiket Mor, which submitted it’s report on 6th July 2015 after examining the financial track record as well as governance issues of the applicant entities.

On 19th august 2015, RBI gave in-principle licence to 11 entities to launch Payment Bank. The In-Principle licence is valid for a period of 18 months and the concerned entities are required to fulfill the requirements within this period. They cannot engage in the Banking activities in this period. Upon satisfactory fulfillment of the conditions required to setup a Payment Bank, RBI will grant full licences under Section 22 of the Banking Regulation act, 1949.

Following 11 entities were initially granted the In-Principle licence by RBI –

  • Airtel M-Commerce Services
  • Department of Posts
  • Aditya Birla Nuvo
  • FINO PayTech
  • Cholamandalam Distribution Services
  • National Securities Depository
  • Paytm
  • Tech Mahindra
  • Vodafone M-Pesa
  • Reliance Industries
  • Sun Pharmaceuticals (Dilip Shanghvi)

However, 3 out of these 11 organisations surrendered their licences, namely –

(a) Cholamandalam Distribution Services
(b) Sun Pharmaceuticals (Dilip Shanghvi)
(c) Tech Mahindra

Now, let us have a look at the conditions that need to be fulfilled to set up a Payment Bank

An entity in order to setup a Payment Bank is subject to following regulations –

  • The minimum capital requirement to set up a Payment Bank is Rs. 100 crore.
  • The stake of the promoter for the initial 5 year period should be minimum 40%.
  • Foreign share holdings will be permitted subject to the rules of foreign direct investment for private banks in India.
  • The voting rights in the bank will be regulated by Banking Regulation Act, 1949 and the upper cap of voting right for any shareholder will be 10%. This may be raised to 26% by Reserve bank of India.
  • Any acquisition of more than 5% needs to be approved by RBI.
  • Majority of Bank’s board of Directors should consist of independent directors, who should be appointed as per RBI Guidelines.
  • Payment Bank can accept Utility Bills and they cannot form separate subsidiary to undertake non-banking activities.
  • 25% of the branches of these banks should be in the unbanked rural areas.
  • Payment Banks cannot approve/ disburse loans or issue credit cards.
  • Payment banks can offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers.
  • Payment Bank will be provided licence under Section 22 of the Banking Regulation act, 1949 and they will be registered as a Public Limited Company under Companies act, 2013.

As of now, 3 entities have already started their operations as Payment Bank. In order of their inception, these are –

  1. Airtel Payment bank Ltd.
  2. Paytm Payment bank
  3. India Post Payment Bank
  4. Fino Payment Bank

Let us have a look at the features of these Payment Banks in brief now.

Airtel Payment bank Ltd

  • Airtel Payment Bank Ltd is a joint venture between Bharti Airtel (80.1%) and Kotak Mahindra Bank (19.9%).
  • Airtel Payment bank Ltd launched its pilot project of its banking services 10,000 Airtel retail outlets in Rajasthan on 23rd November 2016.
  • Mr. Shashi Arora is the MD & CEO of Airtel Payments Bank.
  • Airtel Payments Bank is a fully digital and paperless bank.
  • It offers quick and paperless account opening using Aadhaar based e-KYC i.e no documents are required, only the customer’s Aadhaar number is sufficient.
  • Customer’s Airtel mobile number will be his/her bank account number.
  • Airtel Payment Bank offers interest rate of 7.25 % p.a. on deposits in savings accounts.
  • It also offers personal accidental insurance of Rs. 1 Lac with every Savings Account.

Paytm Payment Bank

  • Paytm received approval from RBI to start its Payment Bank in January 2017 and is expected to start its operation this month with first branch coming up in Noida, Uttar Pradesh.
  • Vijay Shekhar Sharma, founder of One97 Communications (parent company of Paytm) is expected to take up the executive job in the bank and will hold majority share in Paytm Payments Bank, with the rest being held by One97 Communications.
  • Its first branch in Northeast would be opened in Guwahati.

India Post Payment bank

  • India Post Payment Bank (IPPB) was incorporated as a Public Sector Bank under the Department of Posts with 100% Government of India equity.
  • First branch of IPPB inaugurated at Raipur and Ranchi on 30th January, 2017 .
  • IPPB will play a major role in financial inclusion as India Post has about 1,54,000 post offices, of them 90% are in rural areas.
  • IPPB will set up 650 branches across the country by September 2017.
  • IPPB will offer an interest rate of 4.5 per cent on deposits up to Rs 25,000; 5 per cent on deposits of Rs 25,000-50,000 and 5.5 per cent on Rs 50,000-1,00,000.

Payments Banks will thus help expand the potential of financial inclusion in the economy.

All the best for your exams..

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