Payment Banks: An Evolution in the Banking Sector

To widen the reach of the banking services in India and in order to achieve central government’s goal of financial inclusion, the Reserve Bank of India (RBI) has taken a strategic move. The RBI has given an in-principle approval to 11 entities to be set-up as payment banks. These payment banks are aiming to provide basic banking facilities, especially to low-income groups and small businesses. Let us see what this evolution stands for and how will it work for the Indian population and the financial markets. What are payment banks? In simple terms, a payment bank is generally a non-full service niche bank in India. It is a distinguished bank that will undertake only limited banking functions which are allowed as per the Banking Regulation Act of 1949. The licenced entities as payment banks could only receive deposits and offer remittances. They cannot undertake lending activities. These banks can offer banking functions such as payments, deposits, remittances, internet banking, and would initially be allowed to take cash deposit of maximum Rs. 1 lakh per individual. What are the objectives of payment banks? The main objective of the payment banks is to increase financial inclusion by offering small saving accounts and payment remittance services to low-income households, migrant labour workforce, small businesses and other unorganised sector entities and other similar users. It will also enable high volume-low value transactions in deposit and payment/remittance services in a technology-driven environment. What they can do and what not? The payment banks are accessible to certain dos and don’ts. They are:

Do’s

Don’ts

Accept demand deposits from individuals, small business or other similar entities.
Take cash deposits to the limit of Rs. 1 lakh (this might be raised later by the RBI depending upon the performance of the bank).
Set up branches, ATMs and correspondents
Issue debit cards and offer internet banking facility
Sell mutual funds, insurance and pension products
Accept remittance to be sent to multiple banks and receive remittances from them too.
Undertake utility bill payments

Lend loans
Issue credit cards
Accept NRI deposits
Set up subsidiaries for non-banking financial services.
Offer other financial/non-financial services of promoters

How did the payment banks come into being

On 23 September 2013, the RBI formed a Committee on Comprehensive Financial Services for Small Businesses and Low Income Households headed by Nacghiket Mor.

On 17 July 2014, the RBI issued the draft guidelines for payment banks, inviting suggestions and comments from interested entities and general public.
On 27 November 2014, final guidelines for payments banks were released by the RBI.
On 4 February 2015, the RBI released the list of the entities which have applied for the payment banks.
On 28 February 2015, during the announcement of the Annual Budget, it was declared that India post will run a payment bank through its large network in the country.
On 19 August 2015, the RBI gave an in-principle approval to 11 entities to set up payment banks.

Who all got the licence? The RBI had received 41 applications for payment banks; however, it offered licence to only 11 of them:

Aditya Birla Nuvo Limited
Airtel M Commerce Services Limited
Cholamandalam Distribution Services Limited
Department of Posts
Fino PayTech Limited
National Securities Depository Limited
Reliance Industries limited
Shri Dilip Shantilal Shanghvi (Sun Pharma promoter)
Shri Vijay Shekhar Sharma (CEO of One Communications, which runs PayTM)
Tech Mahindra Limited
Vodafone m-pesa Limited

When will these banks start functioning? The ‘in-principle’ approval granted by the RBI will be valid for a period of 18 months. The applicants will have to comply with the requirements and fulfil the conditions given as guidelines by the RBI, within this stipulated timeframe. What were the guidelines set by the RBI for payment banks?

Minimum capital required should be Rs. 100 crore.
For the first five years, the promoter contribution should be at least 40%.
Excess shareholding could be brought down to 40% by the end of fifth year, to 30% by the end of tenth year, and to 26% in 12 years since the date of commencement of business.
Foreign shareholding would be on similar rules for FDI set up for the private banks in India.
The Banking Regulation, 1949 to regulate the voting rights.
Other entities except for promoters will not be allowed to have shareholding of more than 10%.
Any acquisition of more than 5% will need approval from the RBI.
The majority of bank’s board of directors should include independent directors who will be appointed as per the guidelines of the RBI. It should also have to comply with the ‘fit and proper’ criteria meant for Directors as issued by the RBI.
The payment bank has to be fully networked and technology driven from the time of its commencement.
25% of its branches have to be in the unbanked rural areas.
They must use the term “payment bank” so as to differentiate it from other type of banks.
They will be registered as public limited company under the Companies Act, 2013.
The RBI has strictly said that the banks need to have a high powered ‘Customer Grievance Cell’ to handle customer complaints and concerns.

How payment banks will affect existing banking sector? The payments banks will help reach out to the people in rural areas where banking system is not very effective. This way they will bring the unbanked masses under the ambit of general banking. They will also ensure that more money comes into the banking system and hence will expedite financial inclusion. They will also be helpful in making the poor more financially literate. With the advent of these new set of banks the existing top-notch banks will not be affected much as payment banks will operate in specific areas only. Also, the major banks in India could use these banks to improve their reach in every part of the country, as the payment banks can also function as business correspondents. In fact, some of the major banks have already tied up with the licence holders. For instance, the State Bank of India (SBI) has tied up with RIL’s proposed payment bank and will have about 30% share in the same. Similarly Aditya Birla Nuvo Limited has tied up with Idea Cellular which will have 49% share in the joint venture. Kotak Mahindra Bank will have 19.9% stake in Bharti Airtel’s bank. Tech Mahindra is likely to join hands with Mahindra Finance for payment banks. Norwegian telecom giant Telenor, Dilip Shanghvi and infra financier IDFC have entered into a deal for payment banks. Read Also: Mobile Banking: Is It Safe? Airtel Launches Payments Bank; Is it a Big Deal? Bandhan Bank: A New Entrant in the Banking Sector RBI’s Battle Against Inflation – Bonds to Check Liquidity RBI’s Concern Over Unclaimed Funds Amounting To Rs 3,652.3 Crore In The Different Banks Of The Country RBI reduces free ATM withdrawals in metro cities RBI’s Rate Cut: Beginning of the End of Uncertainty in Investment & Growth New Financial Reforms from new Governor of RBI Modi’s Vision for Banking Industry Investment Risks to Economy – Caution Is the Watchword for RBI Differentiated Banking Licenses – India’s Next Milestone? Swap your old currency notes with new one

Payment Banks: An Evolution in the Banking Sector

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