Payment Banks: Nature and Benefits

Payment Banks: Nature and Benefits

Question: RBI has recently granted in principle approval to payment banks? What are payment banks? What are their benefits?

Nature

- A payment bank is different from conventional banks in that it cannot lend money to consumers

It can however perform the following functions:

- Remittances

- Deposits

- Simple Financial Products

- Payment banks must invest 75% of their funds in government securities

- Minimum capital needed for setting up such a bank is INR 100 crore

- Bank will be allowed to accept savings deposit amounting to INR 1 lakh from each customer

- Target audience of payment banks are those from weaker sections of society and low income households

- Those who can run payment banks include the following: mobile phone firms, consumer good companies, post offices, agri/dairy type cooperatives and corporate business correspondents as well as scheduled CoBs

- Payment bank cannot have more than INR 50,000 per customer and it is required to maintain a cash reserve ratio

- It cannot be involved in credit risk though it has the same rights as SCBs

- Entry capital requirement os of a specified amount and such banks face near zero risk of default because they can invest money in SLR securities which are safe investments

Benefits

- Customers can make a numerous range of transactions because of payment banks such as paying electricity bills while purchasing groceries at the local supermarket

- Payment banks will also be allowed to open current and savings account of INR 1 lakh per customer and issue debit cards as well as offer simple financial products such as MF and insurance

- Those operating accounts in payment banks can be regular salary account holders in other banks

- Individuals can guard against debit card fraud by keeping smaller balance in account; this is perfect for students living away from home

- CoBs have fees and stringent KYC norms which payment banks do not have

- Payment banks are also technology intensive and offer higher interest rates to attract customers

- Banking at the doorstep is the USP of payment banks which provide last mile connectivity lacking in regular banks

- Payment banks also contribute towards rural development; interested organisations must set up 25% of their physical access in rural communities

- This is important given that rural banks in India have declined from 54% in 1994 to 37% in 2013

- Payment banks will also revitalise India’s mobile money industry and provide services to the unbanked

Facts and Stats

- The Reserve Bank of India (RBI) on 19 August 2015 granted in-principle approval to 11 payment banks applicants under the Guidelines for Licensing of Payments Banks.

The 11 payment banks granted the approval include:

- 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

- Shri Vijay Shekhar Sharma

- Tech Mahindra Limited

- Vodafone m-pesa Limited

- The RBI approval will be valid for 18 months at which time applicants will have to comply with requirements under the guidelines

- Regular license will only be issued when required conditions are met under S 22(1) of Banking Regulation Act 1949