Payment Banks in India Wiki

In this article I will share a wiki on Payment Banks in India which will provide savings accounts and remittance services at a low transaction cost.

The Reserve Bank of India provided on 19 August 2015, “in-principle” licences to eleven entities to start payments banks:

  1. Department of Posts
  2. Aditya Birla Nuvo
  3. Reliance Industries
  4. Cholamandalam Distribution Services
  5. FINO PayTech
  6. Airtel M Commerce Services
  7. National Securities Depository
  8. Vijay Shekhar Sharma, Paytm
  9. Tech Mahindra
  10. Vodafone M-Pesa
  11. Dilip Shanghvi, Sun Pharmaceuticals

What are Payment Banks?

Payment Banks in India are new bare-bones type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches.

They will provide savings accounts and remittance services at a low transaction cost.

In the Union Budget 2014-2015 it was decided that “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.”

Target Segment for Payment Banks in India

  • Unorganized Sector
  • Migrant laborers
  • Farmers
  • Low-income households
  • Small businesses

Rationale for Payment Banks

Payments banks will allow poorer citizens who transact only in cash to take their first step into formal banking.
It is uneconomical for traditional banks to open branches in every village but mobile phones coverage are a good low-cost platform for allowing basic banking services to every rural citizen.
This will speed up India’s journey into a cashless economy.

As per RBI guidelines: “the objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labor workforce, low income households, small businesses, other unorganised sector entities and other users.”

As per Shri Arun Jaitley, Honble Finance Minister, Payment Banks in India are a significant and important step from the RBI. “Payments banks will reach out to people in rural areas. Payments bank will ensure more money comes into banking system. Various banks are looking at increasing their rural reach, including big banks like SBI, payments banks will help them realize this,” Jaitley said.

History of Payment Banks

  • Sep 2013 – RBI forms Committee on Comprehensive Financial Services for Small Businesses and Low Income Households headed by Nachiket Mor
  • Jan 2014 – Committee submits report and recommends formation of new type of Bank.
  • Jul 2014 – RBI issued the draft guidelines for setting up Payments Bank in July 2014 and sought comments were sought from various participants by August 2014
  • Nov 2014 – RBI released the final guidelines for licensing of Payments Bank on November 27, 2014
  • Aug 2015 – RBI gives “in-principle” licences to eleven entities

What can Payment Banks Do?

  • Payment Banks in India can raise deposits of upto Rs. 1 lakh, and pay interest on these balances just like a savings bank account does.
  • They can provide services such as buying in cashless, chequeless transactions and automatic payments of bills through a phone.
  • They can issue debit cards and ATM cards usable on ATM networks of all banks. However, payment banks cannot issue credit cards.
  • They will be in a position to provide card acceptance mechanisms to third parties such as the “Apple Pay.”
  • They can allow remittances and transfers through a mobile phone.
  • Being a part of the gateway that connects banks they can transfer money directly to bank accounts at nearly no cost.
  • They can issue forex cards to travellers which can be used as a debit or ATM card all over India.
  • They can provide forex services at charges lower than banks.

Regulations for Payment Banks in India

Payment Banks in India will be licensed as payments banks under Section 22 of the Banking Regulation Act, 1949 and will be registered as public limited company under the Companies Act, 2013.

  • Payment Banks in India cannot form subsidiaries to undertake non-banking activities.
  • The bank must use the term “payments bank” in its to differentiate it from other types of bank.
  • The minimum capital requirement is INR 100 crore.
  • For the first five years, the stake of the promoter should be 40% minimum.
  • Foreign share holding will be allowed in these banks as per the rules for FDI in private banks in India.
  • The voting right of any shareholder is capped at 10%, which can be raised to 26% by Reserve Bank of India (RBI).
  • Any acquisition of more than 5% will require approval of the RBI.
  • The majority of the bank’s board of director should consist of independent directors, appointed according to RBI guidelines.
  • The bank should be fully networked from the beginning.
  • The bank can accept utility bills.
  • Initially, the deposits will be capped at INR 100,000 per customer, but it may be raised by the RBI based on the performance of the bank.
  • The bank cannot undertake lending activities.
  • 25% of its branches must be in the unbanked rural area.

Conclusion

Saurabh Tripathi of Boston Consulting Group says:
“The payment bank is an Indian innovation. It is a response to the problem of [financial] inclusion, which we have not been able to solve for so many years. There are telecom companies with a much larger customer base than traditional banks. So allowing telcos to participate in banking, in a manner where systemic risk is taken care of, is a very innovative solution. Instead of making telcos and banks work together, they [the RBI] have allowed telcos to work out solutions on their own ….

… Payments can be at the centre of the relationship and payment banks can bring a non-banking financial company (NBFC) or a mutual fund (MF) as a partner, and create an offering that replicates a bank. NBFCs are good at lending, payment banks have expertise in doing payments and an MF manages money well. We can create a seamless combination that is good for the customer and for the bank as well.”

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References

http://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2900
http://www.thehindu.com/business/all-you-need-to-know-about-payment-banks/article7561353.ece
http://www.allbankingsolutions.com/Banking-Tutor/Payment-Banks-in-India.htm
http://forbesindia.com/article/special/payment-banks-to-challenge-traditional-banks-saurabh-tripathi/42841/1

A Few Last Words

Before making any investment decision, please contact your financial adviser.

I have provided this article for educational purpose only.

I hope you found this article on Payment Banks in India Wiki useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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