The research article focuses on analyzing and interpreting, basically decoding the Payment banks. This article states the role of these banks and also its aim and objective. It brings out the idea and concept behind the reasoning of the Payment Banks in the first place.
It also presents out the sections and the acts, respectively, that controls the existence of this kind of bank. Starting from the registration to the guidelines provided to maintain and bring out the actual necessity of the payment banks for which they were built up.
Speaking in the literal term, a Payment Bank is like any other bank but works on a smaller scale without including any credit risks. The central bank of India, RBI, has been on an approval spree for quite a while. Aside from approving substantial cuts in repo rates, RBI has also given the nod for fixing of latest sorts of banks: Small Banks and Payments Banks.[i] Small banks can operate as regular commercial banks, albeit at a little scale like catering only to a specific niche region.
The latter, i.e. Payment Banks, however, are a stimulating concept since it’s a breakaway from conventional banking procedures. A payments bank cannot enjoy lending activities like sanctioning loans or providing Mastercard to its customers. This suggests that the bank will earn revenue from limited tasks that it’ll be allowed to perform, including facilitating financial transactions (transfers and remittances) among its customers and providing services like ATM cards, debit cards, forex cards, net-banking, and mobile-banking.
The RBI (Reserve Bank of India) on 23rd September 2013 constituted a committee on Comprehensive Financial Services which was headed by Nachiket Mor. The committee submitted its report on 7th January 2014 and also recommended the formation of a replacement category (Payment Banks) among its other recommendations. The license applications were assessed and analyzed by External Advisory Committee headed by Nachiket Mor which was submitted on 6th July 2015 after examining the financial diary also as governance issue on applicant entities.[ii]
The main aim of the payments bank is to spread the payment and financial services to small businesses, low-income households, migrant labor workforce in an affixed technology-driven environment as widely as possible. With payments banks, RBI seeks to extend the penetration level of monetary services to the remote areas of the country.
Role & Features
The role of payment banks comes with a twin goal to make sure financial inclusion. Firstly, to act as a platform where the low-income groups can have a bank account and deposit their incomes and savings. Secondly, to facilitate transactions and payments for little businesses and promote entrepreneurship. As an example, to pay the wage to migrant laborers and to hide costs of raw materials.
Payments banks are a kind of differentiated bank introduced by the RBI for promoting financial inclusion and facilitating payments and remittance flows. They’re differing types of banks compared to the traditional universal banks because the Payments banks can concentrate on just two sorts of activities – accepting demand deposits and facilitating payments. They need slightly different business activities and regulations. The RBI has made extensive guidelines for the licensing, regulation, and merchandise delivery of Payments Banks though it’s circular in July 2014. [iii]
One advantage needless to say is zero non-performing assets in payments banks since NPAs occur only borrowers default their interest/ principal repayments. While the Indian banking landscape is straddled with bad loans and resultant dip within the profits of the public also as private banks, payments banks can steer beyond such mishaps. Another clear advantage for payment banks is to require a minimum of the minimal financial services to the remote areas of the country and cater extensively to small businesses and low-income households.
Uneconomical and infeasible for traditional banks to open branches in every village, payments bank, on the digital platform, is a kind of torchbearer taking low-cost services to the inner parts of the country and at an equivalent time assisting India’s move towards a cashless economy . This provides the payments bank a chance to capture the big unbanked market of India.
As the commercial banks, the payment banks also accept the cash of the people as a deposit but the limit is fixed, which suggests the payments banks can accept deposits up to a maximum of Rs. 1 lakh from a customer. Payments banks are entitled to issue ATM or debit cards to their customers but cannot issue a Mastercard. These banks are authorized to open both savings and current accounts of their customers but cannot provide loans or lending services to customers as stated earlier. Payments banks are not allowed to accept deposits from the Non-Resident Indians (NRIs) which means that the people of Indian origin who have settled abroad cannot deposit their money within the payment banks. They are allowed to form personal payments and receive remittances from the cross approach on the current accounts.
Payment banks need to deposit the quantity within the sort of a Cash Reserve Ratio (CRR) with RBI as other commercial banks do. They also need to invest a minimum of 75% of its demand deposits in government treasury/securities bills with maturity up to at least one year and hold a maximum of 25 %in currents and FDs (fixed deposits) with other commercial banks for operational purposes . Payment banks can provide the power of utility bill payments to its customers and therefore the general public. They can’t open subsidiaries to undertake Non-Banking Financial Services activities.
However, they can approvingly from RBI, can work as a partner with other commercial banks, and can also sell mutual funds, pension products, and insurance products. Payments banks must use the word “Payments Bank” in their names to seem different from other banks. They are also allowed to supply internet banking and mobile banking facility to their customers. Payments banks can become a business representative of the other bank, but it’ll need to suits the rules of the Federal Reserve Bank of India. The payments banks can accept remittances to be sent to or receive remittances from multiple banks through payment mechanism approved by RBI, like RTGS / NEFT / IMPS.[iv]
About Legal Provisions
Payment Banks (“PB”) are supposed to be registered as public limited companies under the Companies Act, 2013, and are to be licensed under Sec 22 of the Banking Regulation Act, 1949. PBS is to tend the status of scheduled banks under section 42 (6) (a) of the Reserve Bank of India Act, 1934. However, the words “Payments Bank” need to be employed by the businesses in their name to differentiate it from other banks.
There are governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Deposit Insurance and Credit Guarantee Corporation Act, 1961; and other relevant Statutes and directives. The rules are going to be reviewed by the RBI regularly. RBI’s main aim to push for payments bank is to serve the necessity of various banking activities within the rural areas. This has both micro and macroeconomic benefits and serves the overall public at large.
The existing non-bank Pre-paid Payment Instrument (PPI) issuers authorized under the Payment and Settlement Systems Act, 2007 (PSS Act); and other entities like individuals/professionals; Non-Banking Finance Companies (NBFCs), corporate BCs, mobile companies, companies, real sector cooperatives; that are possessed and managed by residents; and public sector entities may consider applying in the Payment Banks.[v]
Existing PPI license holders could choose conversion into payments banks. an existing PPI issuer doesn’t need to use for a payments bank license and it’s going to continue as a PPI issuer as per the rules issued by RBI from time to time. A promoter/promoter group can have a venture with an existing scheduled full-service or the commercial bank to line up a payments bank. However, the scheduled commercial bank could take an equity stake during a payments bank to the extent stated under Section 19 (2) of the Banking Regulation Act, 1949.
If a Government entity desires to line up a payments bank, it should first obtain necessary approvals from the government and submit its application. If the promoter succeeds in obtaining a payment bank license from the RBI after due process of law, it might be required to line up the payments bank under a separate corporate structure unless it’s an existing PPI license holder choosing conversion into a payments bank .
The entities and their Promoters / Promoter Groups as defined within the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 must be ‘fit and proper’ to be qualified to market payments banks. RBI would evaluate the ‘fit and proper’ status of the applicants and group entities based on their record of sound credentials and integrity; financial status and capability and a minimum of 5 years of professional experience or in running their businesses.
From the above research, it can be concluded that Payment banks are getting the foremost popular medium of digital transactions. India is moving towards a cashless and digital economy, which is more feasible and adaptable about the recent technological and economic trends. It is viewed as a wise strategy towards financial inclusion, the method of ensuring access to appropriate financial products and services needed by vulnerable groups like weaker sections and low-income groups at a reasonable cost during a fair and transparent manner by mainstream institutional players.
However, the competition between traditional and payment banks will cause widening and improvement in the quality of banking services which can finally lead to financial inclusion. In comparison, it’s too early to interpret or judge the competency of Payment banks concerning well-established banks. This move is additionally a plus to ‘Pradhan Mantri Jan Dhan Yojna’.
- What are Payment Banks?
- A Payment Bank is like any other bank but works on a smaller scale without including any credit risks which means it can receive deposits and offer remittances only. It cannot issue loans and credit cards. It aims to revolutionize financial services. These sorts of banks are useful for low-income households, small businesses, and any other unorganized sector.
- How is it helpful?
- A few of its advantages are: it offers zero balance account which means there’s no penalty on zero balance in payment banks account. A high rate of interest is given by the payment banks as compared to commercial banks to draw in deposits. Some added benefits of payment banks are accidental insurance, open-end funds. It will help people in rural areas where they don’t have access to bank connectivity. Now they will use their account through their mobile phones and it also yields in high profits of the banks as there’s no infrastructure cost.
- How many Payment Banks are in action currently?
- The RBI gave license to a total of 11 payment banks among which only 6 have received the license. Initially, 7 of them started but one of them shut their services down, i.e. Aditya Birla Payments Bank. Six of them are:
- Airtel Payments Bank
- Fino Payments Bank
- Jio Payments Bank
- NSDL Payments Bank
- India Post Payments Bank
- Paytm Payments Bank.
Among these six, 3 are operating: Airtel Payments Bank, Paytm Payments Bank & India Post Payments Bank.
- How are Payments Bank different from pre-paid wallets?
- Payments Banks are often confused with prepaid wallets but there is quite a difference among them. Though open e-wallets let users perform activities like withdrawal of money at ATMs or banks and transfer funds they don’t offer interests on money deposited. E-wallets aren’t banks but just online wallets used for storing money to facilitate transactions.
- How does it work?
- The new entities are created to simply accept deposits through basic bank accounts of up to ₹ 1 lakh from each individual. Though the entity may issue debit cards, it’ll not be allowed to issue credit cards. It also can distribute open-end fund units or insurance products that are non-risk in nature. Interestingly, these new entities can become business correspondents of universal banks and offer services like credit on banks’ behalf.
- Pallab Sikdar, Amresh Kumar (May 2017). Payment Bank: A catalyst for financial inclusion. Asia-Pacific Journal of Management Research and Innovation DOI: 10.1177/2319510X17696648
- Dr.V. Ramesh Naik, P.Firdous, P.Harika (2018). A study on the role of Payment Banks in India- Financial Inclusion.
- Sandesh D’Souza (October 2018). Payment Bank: A Revolutionary step of Indian Post Payment Bank towards financial inclusion. Journal of Emerging Technologies and Innovative Research (JETIR) JETIRG006021, Volume 5, Issue 10.
- [i] Decoding payments bank concept and viability; 13th September 2020; http://suvipra.com/decoding-payments-bank-concept-and-viability/
- [ii] Kashish Khattar; All you need to know about Payment Banks; 13th September 2020; https://blog.ipleaders.in/what-is-payment-bank/
- [iii] What are the key features of Payments Banks in India?; 13th September 2020; https://www.jagranjosh.com/general-knowledge/what-are-the-key-features-of-payments-banks-in-india-1520858287-1
- [iv] Sandesh D’Souza; Payment Bank: A revolutionary step of Indian Post Payment Bank towards financial Inclusion; 13th September 2020; http://www.jetir.org/papers/JETIRG006021.pdf
- [v] Guidelines for licensing Payments Banks; 13th September 2020; https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2900#:~:text=The%20payments%20bank%20will%20be,of%20payments%20and%20remittance%20services.