The Scope of Payments Bank in India

Narendra Kumar

05 Jun, 2019

It is a new face of the digital economy.It is a differentiated Payment Bank & is confined to the activities to be pursued for which it is set-up. It is restricted to undertake only such activities which are permitted to them under Banking Regulation Act, 1949.

*They cannot set up subsidiaries to continue doing NBFC activities which are not covered in their ambit. Also, it needs to use the word ‘Payments’ in their name in order be differentiated.

 What is the Scope of Activities?

• Acceptance of Demand Deposits: They are eligible to accept Current deposits & savings deposits under its structural ambit. Eligible deposits might be covered under DICGC Regulations.
• Payment & Remittance Services: It is possible through various channels such as branches, mobile banking etc. It involves of acceptance of payment from one end & its payout at one end.
• Issuance of Prepaid Payment Interface issued from time to time under PSI – DSS Act.
• Enabling Internet Banking: It is expected to leverage technology in order to offer low-cost banking solutions. It needs to look after other concerns such as information technology forefront, cyber frauds, electronic banking etc.
• Functioning as a Business Correspondent for other banks: It may choose to become a correspondent of other banks for credit & other services to be availed.
• Employment of funds & its end-use: They are restricted in the usage of lending activities. However, they are entitled to participate in payment & settlements system. It also participates in temporary liquid management.

What are the Provisions Regarding Capital Requirement?

• The minimum paid up capital requirement is 100 Crores for the advancement of
• Also, it should maintain a Net worth of 100 Crore at all times.
• The  Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 percent of its risk-weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time.  However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I standards.
• As a backup measure to maintain the risk infra, it should have a leverage ratio of not less than 5% i.e. its outside liabilities should not exceed 20% of its net worth.
• The promoter’s minimum initial contribution to the paid-up equity
  the capital of such payments bank shall at least be 40 percent for the first five
  years from the commencement of its business.
• It is required to invest minimum 75% of its ‘Demand Deposit
  balances’ in Statutory SLR eligible Government securities/treasury bills with
  maturity up to one year and hold maximum 25% in Current and Time / Fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

*Around 11 entities have launched their payments bank lately. They reach customers through their mobile devices rather than regular banking channels.  Also, they are technology driven in their approach.

What are the services offered under this?

• Enabling eligible transfers & remittances through a mobile
• Issuance of debit or ATM cards.
• Services such as payment of Bills etc. through digital mode.
• The offer of forex services at lower cost than a bank.
• Transfer of money to banks at minimal cost.
• Issuance of forex cards to travelers or a pay cheque is drawn.
• Rising of deposits up till 1 lakhs & pay interest as if it’s a savings bank account.

How is it going to Work?

A virtual account will be opened on the basis of unique mobile no. &Customer can make a transaction or remittance through web-based mobile application or through IVR/USSD gateway to registered merchant or user. PB user can withdraw cash or top-up their accounts from points (Vendor, ATM, Agent, etc.) recognized by their payment bank service provider assigned in this behalf.

Objective:

The main objective is to widen or deepening of greater financial inclusion by providing of small payments account & remittance services. These banks are expected to reach out to customers through their mobile phones. Also, they cannot undertake lending activities or issue credit cards.

E.g.:  The RBI has granted ‘in principle’ approval for payment banks to 11 entities, including big names like Reliance Industries, Aditya Birla Nuvo, and Tech Mahindra, as also Airtel and Vodafone. Also, Paytm is a niche example as well.

Model or Structuring:

It is like any other Bank, but operating on a smaller scale. It was introduced by RBI upon recommendation from Nachiket Mode Committee. It recommended to sorts of banking license:

• Universal Bank License
• Differentiated Bank License.

What Are its Advantages?

• It is initially in the history of India’s banking sector first time that RBI is giving out differentiated licenses for specific activities.
• Payments Banks registration will enable poorer citizens who transact only in cash to take their first step into formal banking & enable its virtual aspects.
• Payment bank can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education, and gas are paid directly to beneficiaries’ accounts.