Payments Bank: UPSC Key Aspects

Payments Bank

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Context

Paytm Payments Bank sought to soothe troubled customers by sending out emails and text messages assuring them that
their money is safe

Payment Banks

Payment Banks, recommended by the Nachiket Mor Committee, operate on a smaller scale with minimal credit risk.

Objective:

Advance financial inclusion by providing banking services to the unbanked and underbanked areas, aiding migrants, low-income households, and small entrepreneurs.

Regulation:

Registered under Companies Act 2013, governed by Banking Regulation Act 1949, RBI Act 1934, Foreign Exchange Management Act 1999, Payment and Settlement Systems Act 2007.

Existing Payment Banks in India (as of now):

Airtel Payment Bank
India Post Payment Bank
Fino
Paytm Payment Bank
NSDL Payment Bank
Jio Payment Bank

Features of Payment Banks:

Differentiated, not universal banks.
Operate on a smaller scale.
Minimum paid-up capital of Rs. 100 crores.
Promoter's minimum initial contribution to paid-up equity capital at least 40% for the first five years.

Activities Allowed by Payment Banks:

Can take deposits up to Rs. 2,00,000, in savings and current accounts.
Investments in secure government securities (SLR) - 75% of demand deposit balance; remaining 25% as time deposits with other banks.
Personal payments, cross-border remittances on current accounts.
Issuing debit cards.

Activities Not Allowed:

Cannot lend, issue credit cards, or accept time deposits/NRI deposits.
Cannot issue loans or set up subsidiaries for non-banking financial activities.

Advantages of Payment Banks:

Expansion of rural banking and financial inclusion.
Formal financial system expansion.
Efficient handling of low-value, high-volume transactions.
Access to diversified services.

Challenges Faced:

Lack of awareness among masses.
Limited incentives for agents.
Infrastructure and operational resource challenges.
Technological hurdles.

Way Ahead for Payment Banks:

Boost Awareness:

Implement impactful awareness campaigns.
Collaborate for broader reach in rural and urban areas.

Agent Incentives:

Develop attractive incentives for agents.
Encourage active participation and financial literacy.

Strengthen Infrastructure:

Invest in robust infrastructure.
Leverage digital tech to overcome challenges.

Government Collaboration:

Align with national financial inclusion initiatives.
Collaborate with government schemes for maximum impact.

Diversify Services:

Explore diverse service offerings.
Introduce innovative financial products.

Regulatory Adaptation:

Engage in continuous dialogue with regulators.
Advocate for supportive regulatory adjustments.

Technological Innovation:

Invest in cutting-edge technologies.
Embrace fintech for seamless customer experiences.

Collaborate with Traditional Banks:

Partner with traditional banks for extended reach.
Collaborate on financial literacy initiatives.

Customer-Centric Approach:

Prioritize customer needs and preferences.
Collect feedback for informed enhancements.

Regulatory Advocacy:

Advocate for a conducive regulatory environment. - Work closely with regulators for solutions to challenges.

PRACTICE QUESTION

Q. What is the primary objective of Payment Banks in India?

A) To maximize profits through diverse financial services.

B) To exclusively focus on lending activities for small businesses.

C) To advance financial inclusion by providing basic banking services.

D) To cater exclusively to low-net-worth individuals.

Answer:

C) To advance financial inclusion by providing basic banking services.

Difference	Small Finance Bank			Payments Bank
Primary Focus	Focuses on providing basic banking and financial services to the unbanked and underbanked population.			Targets unserved and underserved sections, including small businesses, micro and small industries, and unorganized sector entities.
Licensing Authority	Licensed by the Reserve Bank of India (RBI) as Small Finance Banks.			Licensed by the Reserve Bank of India (RBI) as Payments Banks.
Area of Operation	Typically serves a geographically limited area, initially confined to specific states.			Primarily operates at a smaller scale, often leveraging digital platforms for outreach.
Services Offered	Provides a broader range of banking services, including savings, deposits, loans, and other financial products.			Offers basic banking services like savings and current accounts, remittances, and debit cards. Cannot engage in lending activities.
Objective	Aims to provide comprehensive banking services to small businesses and low-income households, contributing to financial inclusion.			Aims at promoting financial inclusion by reaching the unbanked and underbanked population.
Examples in India	Examples include Equitas Small Finance Bank, Ujjivan Small Finance Bank, and ESAF Small Finance Bank.			Examples include Airtel Payments Bank, India Post Payments Bank, and Paytm Payments Bank.
Promoter's Share		40% in the beginning, then gradually reduced to 26% over 12 years.	40% for the first five years from the date of business start-up.
Capital Required		Minimum Paid-Up capital should be Rs. 100 Crores.	Minimum Paid-Up capital should be Rs. 100 Crores.
Customer Reach		Customers are reached through the company's branches.	Customers are reached through Mobile banks.
Demand Deposit		Can accept demand deposits as savings deposits are accepted, with no set limit.	Can accept demand deposits like savings deposits only up to Rs. 2 lakh.
Time Deposit		Can accept Time Deposits such as Fixed Deposits and Recurring Deposits.	Cannot accept Time Deposits such as Fixed Deposits and Recurring Deposits.
Loan		Can offer small loans.	Cannot offer loans directly.
Credit Card		Can issue credit cards.	Cannot issue credit cards.
Branches		25% of branches must be in rural areas for the first three years.	Must have 25% branches in rural areas.
Services Offered		Provides a broader range of banking services, including savings, deposits, loans, and other financial products.	Offers basic banking services like savings and current accounts, remittances, and debit cards. Cannot engage in lending activities.
Lending Activities		Permitted to engage in lending activities, facilitating credit access to small businesses and other segments.	Not allowed to undertake lending activities, issue credit cards, or provide loans. Can partner with other institutions to offer credit products.
Ownership Structure		Ownership can include a variety of entities, including existing NBFCs, microfinance institutions, and other entities with a successful track record.	Ownership can be diverse, with telecom companies, retail chains, and non-banking financial companies (NBFCs) participating.