Payment Bank License Procedure

Narendra Kumar

04 Jun, 2019

After the demonetization driven in November 2016 led to a surge in the usage of digital payments in India with even hawkers embracing cash-free payment options. Mobile wallets suddenly became the buzzword and gained mainstream acceptance from being seen as a niche player. Here we will talk about Payment Bank License Procedure.

The concept of payment bank is a key driver in India. It has achieved unprecedented success in recent Pradhan Mantra Jan Dhan Yojana declared by the government. In the first week of introducing yojana, numerous accounts were opened with the Bank.

What is Payment Bank?

Payments Bank is a distinguished micro-bank with limited banking functions set up under the payments banks guidelines issued by the Reserve Bank of India (“RBI”). In the recent time, RBI main focus has been the financial inclusion. Payments banks is an endeavor to make sure that all sections of society, including people living in remote and rural areas, have access to banking facilities.

Such kind of Banks provides the financial services through smartphones since it may not be economical for conventional banks to have branches in remote areas

Normally, a payments bank has a low deposit limit which is a comfortable amount even for persons belonging to lower income groups. Since the transactions are cashless, it will also help in transitioning the users to a less-cash dependent lifestyle.

Who is the Eligible Promoter?

• Non-bank Pre-paid Payment Instrument issuers
• Individual/professional
• Non-Banking Financial Company
• Corporate Business correspondence
• Mobile telephone Companies
• supermarket chains
• companies
• real sector cooperatives
• public sector entities
• A promoter/promoter group can have a joint venture with an existing scheduled commercial bank

What is the Procedure to set up Payment Bank License?

As per RBI guidelines, the prior requirement is to take an in-principle approval of the RBI. RBI shall before giving approval for Payment Bank License conduct a preliminary assessment of the applicant.

The promoter who complies with the fit and proper criteria stated by RBI having sound track record can seek an in-principle approval from RBI. The application shall be accompanied by a business plan and other requisite information.

The RBI after satisfaction grants its approval which is valid for the period of 18 months during which time the applicants have to comply with the other requirements under the Guidelines and specific conditions that may be stipulated by RBI in the in-principle approval.

The promoter shall comply with following conditions:

• Capital requirement:

Shall at least have a minimum of INR 100 crore.

• Promoter’s contribution:

Initial promoter contribution shall have at least 40 % of total paid-up capital for the first five years from the commencement of business.

• Foreign shareholding:

The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks. So currently FDI up to 49% is permitted in private banks under the automatic route and further FDI up to 74% investment falls under the prior government approval route.

• Voting rights of shareholders:

The voting rights of stakeholders in a payments Bank Company will be regulated as per the Banking Regulation Act, 1949, which in the first instance caps voting rights of a shareholder in a private sector bank at 10%. This limit can be increased by RBI up to a maximum of 26% in a phased manner.

• Prior approval of RBI:

Acquisition of more than 5% of stake in the payments bank company by any party will require prior approval of RBI.

What is the operation’s compliance directed by the RBI?

A Payments Bank is permitted to undertake only the following activities:

• Can have both saving and current accounts.
• Can accept deposits up to INR 1,00,000 per customer.
• The payment of deposits accepted shall be paid as of a savings bank account of conventional banks.
• The transfer and remittance services allowed through a mobile
• Offer services such as automatic payments of utility bills and cashless/ cheque fewer purchases through a mobile
• Can set up branches and its ATMs and issue debit cards.
• Provide forex cards to travelers, usable again as a debit or ATM card all over India
• Sell third-party non-risk sharing simple financial products like mutual fund units and insurance products through its mobile apps and outlets.
• Shall maintain cash reserve ratio, it is also required to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio in eligible government securities or treasury bills with maximum maturity of 1 year and shall hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management. Setting up subsidiaries to undertake non-banking financial services activities is also prohibited for payments banks.

Prohibition activity:

A Payments Bank is prohibited from undertaking any kind of lending activities and issuing credit cards.

The way forward of Payment Bank:

The biggest challenge to achieving complete financial inclusion in India is lack of banking facilities in remote areas of the country. Payments banks act as a bridge the gap with their telecom assisted banking services, even in areas where there are hardly any ATMs or banks. This is a major advantage for payments banks over their traditional counterparts, which can also be a game changer for the banking sector in India. India already some player like forefront, India Post Payments Bank, Airtel Payments Bank and Paytm Payments Bank have granted in-principle approval and have commenced business. It is waiting and watches to evaluate how successful payments banks are in bringing about the avowed objective of financial inclusion in India.