A Payment Bank (PB) is similar to any other bank, but it operates on a smaller scale and does not involve any credit risk. In other words, it can perform the majority of banking operations but cannot make loans or issue credit cards. It can accept demand deposits of up to Rs 1 lakh, as well as remittances, mobile payments/transfers/purchases, and other banking services such as ATM/debit cards, net banking, and third-party fund transfers.

What is a Payment Bank?

• A payment bank is a distinct type of bank that performs only the limited banking functions permitted by the Banking Regulation Act of 1949.
• Acceptance of deposits, payments and remittance services, internet banking, and acting as a business correspondent for other banks are examples of some oftheactivities.
• They are initially permitted to collect deposits of up to Rs 1 lakh per individual.
• They can help with money transfers as well as sell insurance and mutual funds. Furthermore, they can only issue ATM/debit cards, not credit cards.
• They are not permitted to establish subsidiaries to provide non-banking financial services. More importantly, they are not permitted to engage in any lending activities.
• A committee chaired by Dr Nachiket Mor recommended the establishment of a "Payments Bank" to serve low-income individuals and small businesses.
• The Reserve Bank of India granted "in-principle" permission to the following entities to establish payment banks:
  • Nuvo Aditya Birla, Airtel M Commerce Services, Cholamandalam Distribution Services, Department of Posts, FINO PayTech, National Securities Depository, Reliance Industries, Dilip Shanghvi - Sun Pharmaceuticals, Paytm, Tech Mahindra, M-Pesa (Vodafone M-Pesa).
• Out of the above mentioned, three of them have surrendered their licences - Chalomandalam Distribution Services, Dilip Shanghvi Sun Pharmaceuticals, and Tech Mahindra.
• The "in-principle" licence is valid for 18 months, during which time the entities must meet the requirements. They are not permitted to engage in banking activities during this time.
• Currently, there are 6 Payment Banks in India - Airtel Payment Bank, India Post Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank, and Jio Payment Bank.
• Non-bank PPIs, NBFCs, individuals, corporations, mobile phone companies, supermarket chains, real estate cooperatives, and public sector entities are all eligible promoters for payment banks.
• With differentiated banks entering the banking space, the biggies such as SBI, ICICI Bank, and others are feeling the heat. These banks will only operate in specific areas.

Payment Banks – Objective

• The primary goal of a payments bank is to provide payment and financial services to small businesses, low-income households, and the migrant labour workforce in a secure, technology-driven environment.
• The RBI's goal with payments banks is to increase financial service penetration in the country's remote regions.

Payment Banks – Scope of Activities

Payment Banks – Important Regulations

• The Payments Bank is proposed to be registered as a public limited company under the Companies Act of 2013, and licenced under Section 22 of the Banking Regulation Act of 1949.
• It will be governed by the provisions of the Banking Regulation Act of 1949, the Reserve Bank of India Act of 1934, the Foreign Exchange Management Act of 1999, the Payment and Settlement Systems Act of 2007.
• They must keep a Cash Reserve Ratio (CRR).
• A minimum of 75% of its "demand deposit balances" must be invested in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturities of up to one year.
• For operational and liquidity management purposes, a maximum of 25% in current and time/fixed deposits needs to be heldwith other scheduled commercial banks.
• A payments bank must have a minimum paid-up capital of Rs 100 crore.
• For the first five years after the company's inception, the minimum initial contribution to paid-up equity capital must be at least 40%.

Payment Banks – Significance

• Payment banks bring unbanked people into the fold of formal banking while also accelerating financial inclusion.
• The spread of banking will also help the poor become financially literate and aid in the fight against poverty.
• The RBI's establishment of payment banks is a significantstep. People in rural areas will be reached by payment banks.
• Payments banks will ensure that more money enters the banking system.
• Various banks, including big banks like SBI, are looking to expand their rural reach, and payments banks will help them achieve this goal.
• Rural banking and financial inclusion are being expanded.
• The formal financial system is expanding.
• It is an effective alternative to commercial banks.
• Deals with low-value, high-volume transactions efficiently.
• It has access to a variety of services.

Payment Banks – Limitations

• Payments banks have a no-lending business model – they can't lend money from their deposits, so they can't earn high interest on a user's borrowed capital.
• Credit as a product does not exist for PBs, putting them at a significant disadvantage when compared to commercial banks.
• Payments banks are also facing fierce competition from unexpected sources such as Unified Payments Interface (UPI).
  • UPI quickly became the star of digital transactions due to its seamless interoperability, stringent security, and massive cash backs from third-party payments apps on the platform.
  • In contrast to payment banks, the UPI app (third party) has a simple interface that is not governed by banking regulations. It is a one-tap solution that a user can use without the need for KYC.
• There is a general lack of awareness among the general public about how to access these services.
• Incentives for agents to participate in these activities are lacking.
• Inadequate infrastructure and operational resources.
• Various technology-related obstacles.

Conclusion

The establishment of payments banks will not only increase financial inclusion in the country but will also strengthen the country's weaker sections, allowing them to contribute to the country's economic development.