The Digital revolution has rapidly transformed the life of Indians. Sending information, storing data, ordering food, shopping, socializing, including banking everything happens at fingertips with the Smartphone.
In this article, one such product of part of the Digital revolution, “Payments Bank” is going to be discussed in detail.
Maybe you are familiar with Airtel Payments Bank, Jio Payments Bank, India Post Payments bank, etc, these are a few Payments Bank operating in India.
Payment Bank is one of the “Differentiated Bank” (Banks which are aimed at serving the financial needs of the specific demographic area) conceptualized by RBI. This model of bank upholds the objective of financial inclusion and deeper penetration of digital financial services to the rural segment of India.
These banks are also like Commercial banks are eligible to accept demand deposits, pay interest, remit funds, etc, but ineligible to lending activities. Issuance of credit cards, extending credit, accepting long-term loans is restricted by the RBI.
Let’s explore more about this in the latter of the article.
What is Payments Bank?
In the year 2013, on October 23rd a Committee “ Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households”, was constituted under the chairmanship of Nachiket Mor, by the RBI.
Six months later on 7th January 2014, this committee submitted its report with various recommendations, which had also idealized the formation of “Payments Bank”.
On 17th July 2014, the RBI issued guidelines to start Payments Bank in India seeking out suggestions and comments from interested investors and entities. Finally on 27th November 2014 final guiding principles governing the Payments Bank were released by the RBI.
Even though there were forty-one interested applicants, Nachiket Mor Committee evaluated all license applicants and on 19th August 2015, RBI issued an “in-principle” license to eleven entities to commence the “Payments Bank” model, under section 22 of the Banking Regulation Act,1949.
These eligible entities were supposed to begin their operation, within 18 months after receiving the license. Bharti Airtel is the pioneer to launch its payment bank in India. As of now, six payment banks are operating in India.
Objectives behind the launch of Payments Bank
As higher transaction costs reduced the usage of internet banking, it held the objective of financial inclusion in the rural segment of India through digitalization. Also to Promote small savings habits and serving in remittance needs of small businesses, migrant laborers, households, etc in a secured technology-driven environment.
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Features and scope of activities of Payments Banks
1. Eligibility – RBI has provided the eligibility to the following forms of entities to conduct Payment Bank operations. Non-banking prepaid instrument issuers( which provides funds transfer, mobile wallets, vouchers through cash/debit/credit cards prepayment facilities) Mobile telecom companies( mobile network operators), Non-Banking Finance Companies (which do not accept demand deposits, and funds projects which are vital for the economic growth of the country), Corporate business correspondents( representatives of the business), Co-operatives( a form of a business organization jointly owned by many interested parties sharing similar thoughts, ownership, and rewards) and Supermarket chains are eligible to apply for the license of the payments bank.
2. Deposits – Payments banks are permitted to receive only demand deposits (Current account for the business and Savings account for the individuals) up to the maximum limit of Rs 1,00,000 from the customers and not time deposits (like recurring deposit and fixed deposit).
3. Credit Services – These banks are permitted to accept deposits but not to lend loans. Credit cannot be extended by these banks, which differentiates it from the regular bank. And hence, these are entitled to issue ATM or debit cards but not credit cards.
4. NRI – Non-Resident Indians are restricted from depositing money with the payment banks.
5. Facilities – Payments bank can undertake utility bills payments like electricity bill, water bill, gas bill, etc for the benefit of the general public. It can also act as a business correspondent (representative) of business houses. It can handle cross-border remittances and payments of personal in nature.
6. Cash Reserves Ratio and Statutory Liquidity Ratio – A Payment bank has to invest 75% of the demand deposits in Government and Treasury bills or securities which are approved by RBI as could be entitled to Statutory Liquidity Ratio and 25% has to be invested in time and demand deposits of the other commercial banks for its operational and liquidity management.
7. Capital Requirement – The minimum paid-up capital required for a payments bank to commence its operations is Rs 100 crores.
8. Digital Services – Payment banks can provide mobile and internet banking services in a secured digital environment for faster transactions and ease of operations.
9. Financial Inclusion – As it is an idea conceived with the objective of financial inclusion, RBI mandates at least 25% of its physical branch centers to be operated in unbanked rural areas.
Advantages of Payments Banks
1. Ease of operations – RTGS, NEFT, internet, and mobile banking services offered by the Payments bank reduce the transaction time of businesses and individuals as compared to traditional branch banking.
2. Digitalization and financial inclusion – Cash-less transactions, internet banking, and mobile help in achieving rapid growth and spread of digital literacy in rural and unbanked areas, which also fulfills the objective of financial inclusion. A consistent increase in mobile users is added advantage to this.
3. Safe Investment – Funds deposited by the public in these banks are either invested in Guilt edged securities, government bonds, or in time and demand deposits of Commercial banks and hence are not subject to wide speculation, ensuring the safety of funds for the depositors.
4. Restrictions on lending operations – As these banks are not entitled to lend, the risk of default by customers or piling up NPAs are totally unseen, which assures safety and security to the depositors.
5. Unorganized Sectors – Reduced Cash transactions and widespread usage of digital services and digitalization of the economy, support the growth of unorganized sectors and converges them with the formal sector.
Challenges of Payments Banks
1. Economic feasibility – Even though initially 41 applicants applied for the license and only 11 entities got the license, out of which only 7 commenced with the operations and latter one entity surrendered its license, and as of now only six entities are operating in India, it’s due to the thin margin of the model. Always the difference between the interest on loan lending rate and interest on deposits interest rate i.e. the spread is the profit to the bank. As these banks are restricted from lending operations, it reduces the profitability of the banks. Also, interest rates offered by government bonds and deposits in commercial banks are not very attractive, which steered the other three entities to surrender the license and one bank to defunct.
List of eleven entities to receive a license from RBI
1. Aditya Birla Nuvo Limited
2. Airtel M Commerce Services Limited
3. Cholamandalam Distribution Services Limited
4. India Department of Posts (Wholly owned by Government of India)
5. Fino PayTech Limited
6. National Securities Depository Limited
7. Reliance Industries Limited
8. Shri Dilip Shantilal Shanghvi
9. Paytm Payments Bank Limited
10. Tech Mahindra Limited
11. Vodafone m-pesa Limited
List of entities those commenced operations
1. Airtel Payments Bank
2. India Post Payments Bank
3. Fino Payments Bank
4. Jio Payments Bank
5. Paytm Payments Bank
6. NSDL Payments Bank
7. Aditya Birla Payments Bank
List of entities those surrendered licenses due to economic feasibility
1. Cholamandalam Distribution Services
2. Sun Pharmaceuticals
3. Tech Mahindra
1. Aditya Birla Payments Bank
2. Internet Speed – The Internet is the backbone of e-commerce transactions. Low bandwidth would pose the serious challenge of reversing back to the cash economy.
3. Cyber Attacks – Any technology-based applications are posed to a serious threat of cyber attacks. A phone loss or theft may leave our personal banking and financial data with strangers.
4. Digital Literacy – To operate in a technology-driven environment, digital literacy is essential which is not 100% in rural and semi-urban areas.
5. Trust and Reliability – Customers accustomed to physical branch banking may not be willing to rely on mobile and internet-based e-banking facilities.
Demonetization has boosted digitalization in India and reduced the dependence on cash. It is one of such significant initiatives of RBI, promoting twofold objectives of digitalization and financial inclusion.
Increased bandwidth speed, digital literacy, reduced cyber risks, and higher profit margins can increase the penetration of this model, which is essential for the country to be on par with global technological advancements.