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Monday, 4 July 2016

Payment Banks and there importance in Indian banking sector

Dear mm expert readers. In a series of sharing useful study material for upcoming banking exams. Today we are providing Banking Awareness Notes PDF format. As today special news we are here with Payment Banks concepts and functions. Here we are taking about Payment Banks and there importance in Indian banking sector. 

These concept are very important in Banking awareness knowledge section and Interview. This series of study notes are a part of your Banking Awareness Study Material for Bank Exams. Banking Awareness Questions and Answers for IBPS, RBI, SBI Exams.

You know that the term “Payment Banks” is new and seems to have been invented in Indian context.   In September 2013, a “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households”, headed by Nachiket Mor, was formed by the RBI.

By January 2014, the Nachiket Mor committee submitted its final report and one of its recommendations was  the formation of a new category of bank called payments banks. These Payment bank shall be fair and beneficial to all concerned. Economy shall be more active and growth momentum could be faster hereafter, 

Definition of Payment Banks?

Payments banks will be a new category of banks which will focus on deposit mobilization and payments or transaction services like payment of utility bills, mobile recharge, remittances, ticketing etc. The current lot of universal banks can do these transactions too, but their focus on corporate and retail loans keeps them away. But now with payments banks, they are likely to feel threatened. They are now protecting their territory by launching innovative new products.


In other words we can define a Payment Bank in India as a type of bank which is a non-full service niche bank.  A bank licensed as a Payments Bank can only receive deposits and provide remittances. It cannot carry out lending activities. Thus, Payment Banks can issue ATM/debit cards, but can not issue credit cards as they are not empowered to carry out lending activities.

Objectives of setting up of payments banks

RBI in its guidelines says “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 labour workforce, low income households, small businesses, other unorganised sector entities and other users.

Read- Important a to z Full Forms - Abbreviations for Bank and Other Exams

Regulations for Payment Banks :

  • The minimum paid-up equity capital for payments banks shall be Rs. 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 bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form subsidiaries to undertake non-banking activities.
  • Initially, the deposits will be capped at Rs.1,00,000 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. The bank must use the term "payments bank" in its to differentiate it from other types of bank. The banks 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.  
  • The banks must maintain CRR, minimum 75% of demand deposits in government bonds of up to one year and maximum 25% in current and fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

Scope of activities to be allowed to Payment Banks

According to Reserve Bank of India (RBI) Official Notification following activities to be allowed -
  1. Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs.100,000 per individual customer.
  2. Issuance of ATM/debit cards. However, payment  banks cannot issue credit cards.
  3. Payments and remittance services through various channels.
  4. BC of another bank, subject to the Reserve Bank guidelines on BCs.
  5. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

Advantages for Payments Banks

  • They will employ local people as client servicing and marketing personnel 
  • Printing of all stationery in the local language. 
  • May be they can take quicker decisions like Urban Co-operative Banks too.

RBI’s In Principle Licences to 11 Entities

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

In response to RBI’s call for applications for new Payment Bank licences, 41 applicants were in the race

On 19 August 2015, RBI gave "in-principle" licences to following eleven entities to launch payments banks:-

The "in-principle" licence is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licences under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.

Other Plans of RBI :

RBI now plans to issue licences for ‘small finance banks’.  RBI has already received 72 applications for small finance banks.   These banks will primarily take up basic banking activities in defined geographies and cater to small business units, marginal farmers, and shop-keepers, among others.

To know more on their eligibility and functioning Click here

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