Everything You Need to Know About India’s Brand-New Payment Banks

Swetha Dhinesh

15 Mar, 2023

The Reserve Bank of India established a committee led by Dr Nachiket Mor to investigate “Comprehensive financial services for small companies and low-income people. The committee’s goal was to provide strategies for promoting financial inclusion and improving access to financial services.
The committee delivered its report to RBI. One of the committee’s main recommendations was to establish “payments banks” or specialised banks to serve the needs of low-income individuals and small businesses. The Reserve Bank of India’s programme, payment banks, aims to advance digital, paperless, and cashless banking across the country.

What is a Payments Bank?

A new class of banks called a payments bank was conceptualised by the Reserve Bank of India. It works on a much smaller scale than a traditional bank and has no credit risk. It can do the majority of banking tasks, but it cannot grant credit or advance loans. Instead of having physical branches, these banks operate digitally (on mobile phones and other internet-connected devices).

Payments banks’ primary goal is to increase access to financial and payment services for small businesses, low-income households, and migrant workers in a safe, technology-driven environment. The RBI wants to extend the penetration of financial services into rural areas of the nation through payment banks.

Scope of Payment Banks

• Demand deposits were initially only accepted up to a maximum sum of Rs. 100,000 per customer.
• Issuing of debit/ATM cards.
• They cannot issue credit cards.
• Loans are not permitted from them.
• Services of payments and remittance through a variety of ways.
• Distribution of simple financial products like insurance policies and mutual fund units that don’t share risk.
• They are only permitted to invest client deposits’ proceeds in government securities.
• NRI deposits are not accepted here.
• Every ATM or other service provider would be able to accept deposits and withdrawals from a payments bank account.
• To serve individuals and small businesses, payment bank licences would be given to supermarket chains, mobile companies, and other organisations.

Activities that Payment Banks May Carry Out

• Up to Rs 2,00,000 can be deposited with payment banks. Demand deposits in the form of savings and current accounts are acceptable.
• Only in the form of a Statutory Liquidity Ratio^[1] (SLR) may deposits be invested in secure government assets. This must equal 75% of the remaining balance on the demand deposit. The remaining 25% must be deposited over a period of time with other designated commercial banks.
• Payments banks will be able to transfer money domestically and internationally on current accounts.
• Debit cards may be issued by it.

What makes Payment Banks a wise choice?

Opening a payment bank account is quick and simple in contrast to opening a standard bank account, which requires extensive paperwork and takes time. One may easily conduct the same using a mobile phone and avoid waiting in line in today’s society, where everyone has a smartphone. For instance, all you need to register with the nation’s first payment bank, Airtel Payment Bank, is your Aadhar number (which serves as an e-KYC), along with your mobile number.

Qualified promoters of Payment Banks

• Existing non-bank financial organisations and other entities, such as individuals or professionals. Non-banking finance companies (NBFCs), corporate business correspondents (CBCs), telecom companies, retail chains, cooperatives in the real estate sector, and public sector entities that are owned and controlled by residents, who may submit applications to establish payments banks.
• A promoter or promoter group may join forces with an existing scheduled commercial bank to establish a payments bank.
• The Banking Regulation Act of 1949 permits scheduled commercial banks to invest in payments banks to the degree permitted by law.

Benefits and challenges of Payment Banks

Some advantages and challenges of operating a payments bank are as follows:

• Payments banks help financial inclusion by assisting unbanked individuals in obtaining formal banking accounts.
• The expansion of banks will also help the poor and those fighting poverty become more financially literate.
• It reaches out to people in rural areas.
• Payments banks will allow more money to flow into the banking system.
• It will aid numerous institutions, including big banks like SBI, in their efforts to expand into rural areas.
• Rural banking is being expanded, as is financial inclusion.
• The structure of the formal financial system is developing.
• It serves as a healthy substitute for conventional banks.
• Successfully manages high-volume, low-value transactions.
• It has access to numerous banking services.

Challenges – Lack of public awareness of the existence of these services and inadequate infrastructure and operating resources are among the challenges encountered. Other than technological barriers, there aren’t any incentives for agents to engage in these activities.

Development of payments banks in the current trends

Growing populations, greater financial inclusion, and technological advancements have all been good in our case, as we have seen. Together with this, we have seen how the consumer’s shifting banking habits, in which they increasingly favour flexible banking service options, have caused the number of new customers for payments banks to soar.

Banks and fintech, two of the largest FIs (financial institutions), are continually competing for the same market and service share.

One is continually regulated, and the other is unregulated, providing an unfair edge. This problem is comparable to that which payments banks encounter. We hope for more inclusion in 2023 through changes to our licencing provinces and providing a level playing field with other FIs, even though the regulator has taken steps to ensure a level playing field, which is a positive sign.

List of Payment Banks in India 2023

Why are Payment banks important?

• The RBI has now handed banking authority to other non-banking financial sectors for the first time in Indian history and has already given small-scale banks a second set of distinct licences. 
• By offering a secure payment gateway for all transactions, this effort seeks to redefine the Indian economy. By offering all services via mobile phones and charging a very modest transaction cost for each service, it also reaches out to lower-income groups and migrant workers.
• This is the RBI’s second initiative to eradicate black money and encourage cashless transactions in order to digitise India after demonetisation. Being cashless eliminates the need to exchange devalued currency and the associated expense of printing new notes. 
• This programme has already been made available in some areas of the world and has achieved ground-breaking success. With these guidelines in mind, there is no doubt that payments bank are the future of banking and will fundamentally alter the financial industry.

Conclusion

RBI’s initiative to widen the spread of financial payment services to small businesses, low-income households, and the migrant workforce is a good move. With these guidelines in mind, there is no question that payment banks in the future will fundamentally alter the financial industry. The establishment of payment banks will not only broaden financial inclusion but also improve the weaker section of the nation, enabling them to contribute to the country’s economic growth.

Also Read: The Scope of Payments Bank in India