A Warm Welcome to Payment Banks

Smrithi Punnoose

January 4, 2016

The Reserve Bank of India (“RBI”), in August 2015 granted in-principal approval and licenses to 11 applicants to begin operations as payment banks. It is interesting to note that the recipients of the licenses include individual persons, namely, Mr. Vijay Shekhar Sharma and Mr. Dilip Shantilal Shanghvi, entities such as the Department of Posts and the National Securities Depository Limited, conglomerates and multinationals such as Reliance Industries Limited and Tech Mahindra Limited, as well as existing payment system providers such as Vodafone m-pesa Limited and Airtel M Commerce Services Limited, amongst others. The grant of such approvals has been orchestrated by the RBI with the intent to meet credit and remittance needs of small businesses, unorganized sector, low-income households, farmers, and migrant work force.

As per the Guidelines for Licensing of Payments Banks (“Guidelines”), payments banks are not permitted to undertake lending activities. However they shall be permitted to set up outlets such as branches, set up automated teller machines, and business correspondents through which they may accept demand deposits and savings bank deposits. It is interesting to note that such banks will have to have at least 25% of physical access points (including business correspondents) in rural centers. Payment Banks are not permitted to accept deposits from non-resident Indians, and neither are they permitted to hold a balance of greater than INR 100,000 per individual customer. While payment banks are permitted to issue ATM and debit cards, they are not permitted to issue credit cards. Further, they are permitted to accept remittances to be sent to or receive remittances from multiple banks under a payment mechanism approved by the RBI; they are also permitted to handle cross border remittance transactions in the nature of personal payments and remittances on current accounts. It must be noted that all foreign exchange transactions will have to be approved by the RBI upon an application made by the payment bank for such activities.

As the RBI’s primary intent for setting up such payment banks was financial inclusion, the Guidelines have specified that payment banks are expected to leverage technology to offer low cost banking solutions and also invest in technological infrastructure for its operations. All payment banks are required to have a minimum paid-up equity capital of INR 1 billion. Further, foreign direct investment (“FDI”) is permitted in payment banks and the conditions stipulated for private sector banks would be applicable to such FDI. While FDI up to 49% is permitted via the automatic route, FDI beyond 49% and up to 74% is permitted via the government approval route. Additionally, at all times at least 26% of the paid-up capital of the payment banks will have to be held by Indian residents.

While there were fears that payment banks would serve as a threat to other banks as they would impact the business of full-service banks, proponents of payment banks, including Mr. Raghuram Rajan, the Governor of the RBI, argue that such institutions would only complement

the existing system as they have a very limited scope of services. The cap of accepting deposits only till INR 100,000 and the mandatory provision to invest excess cash in low-yielding government bonds are limiting factors curbing the extent of permissible activities of such differentiated banks, which are set up to offer basic services such as acceptance of demand deposits, remittance services, internet banking, and so on to the unbanked sectors.

The licenses have been granted to these 11 applicants for a period of 18 months, during which period each recipient will have to comply with the requirements and conditions stipulated by the RBI. Subsequent to this, the RBI will grant the eligible persons a license to begin banking operations as stipulated under the Guidelines. Thus, we will have to wait until the first payment bank commences operations to comment on whether this move by the RBI is a hit or a miss, how far the government’s goal of financial inclusion is fulfilled, and whether other banks have to up their ante as they face stiff competition from these institutions, or whether they had no cause to worry at all.