In the dynamic financial world, one of the intricate and closely related developments to the Reserve Bank of India is the emergence and appearance of payment banks, which is intricate and closely related to the RBI. These payment banks have carved out a unique niche market in the financial ecosystem, introducing innovative models and methods. In this comprehensive article, we will delve into what a payment bank actually is. We will conduct an in-depth study of their operation mechanism, the services they provide, and the differences between them and traditional banks. Furthermore, we will carefully study the nature of their relationship with RBI. This will involve understanding the regulatory framework that the RBI imposes on payment banks, the licensing procedures they must comply with, and the supervisory mechanisms established to ensure compliance. Finally, we will analyze and assess the significance of payment banks in India’s vast and evolving financial ecosystem, and explore how they promote financial inclusion, enhance the efficiency of the payment system, and drive grassroots economic development.
Learn about the Reserve Bank of India (RBI)
A Brief History
The Reserve Bank of India has a long and legendary history. It was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act of 1934. It was originally privately owned and nationalized in 1949. Since then, it has been fully owned by the Indian government. Its headquarters was originally located in Kolkata, but later moved to Mumbai in 1937.
Organizational structure
The affairs of the Reserve Bank of India are supervised by the Central Committee. The Central Committee consists of one governor, no more than four deputy governors, ten directors appointed by the government from different fields, one government official and four directors elected by four regional committees. These regional committees are located in Mumbai, Kolkata, Chennai and New Delhi, each consisting of five members, appointed by the central government for a four-year term. They offer valuable advice on regional economy and banking affairs.
What is a payment bank?
Concept and Origin
The payment bank is a new banking model conceptualized by the Reserve Bank of India. This idea was proposed by the Nachiket Mor Committee established by the Reserve Bank of India on September 23, 2013, aiming to study the provision of comprehensive financial services for small businesses and low-income families. The committee submitted its final report on January 7, 2014, recommending the establishment of a new category of banks, known as payment banks.
Licensing process
Application and Evaluation: In February 2015, the Reserve Bank of India released a list of 41 entities that had applied for payment banking licenses. An External Advisory Committee (EAC) led by Nachiket Mor was established to evaluate these applications. The EAC reviewed the financial records and governance issues of the applying entity.
In principle Licensing: On August 19, 2015, the Reserve Bank of India “in principle” issued licenses to 11 entities to initiate payment banking. The validity period of this “principle” license is 18 months. During this period, entities are not allowed to engage in banking activities, but certain requirements must be met. Once the Reserve Bank of India is convinced that these conditions have been met, it will grant a full license in accordance with Section 22 of the Banking Supervision Act 1949.
The characteristics of payment banks
Deposit acceptance: The paying bank can accept deposits. However, initially, the deposit limit for each customer was set at 100,000 rupees, and now it has been increased to 200,000 rupees. This limit may be further increased based on the performance of the banks. They can accept deposits in current accounts and savings accounts.
Payment and remittance services: They mainly focus on providing payment and remittance services. This includes promoting services such as utility payment, mobile wallet operation and remittance. They can issue ATM cards or debit cards, and also provide online or mobile banking services to facilitate customers’ transactions.
Restrictions: The payment bank has some significant restrictions. They can’t issue loans and credit cards. This distinguishes them from traditional commercial banks. Furthermore, they are not allowed to establish subsidiaries to engage in non-banking activities. Furthermore, 25% of its branches must be located in rural areas without bank accounts to promote financial inclusion in these regions. They must use the term “payment bank” in their names to clearly distinguish themselves from other types of banks.
The relationship between payment banks and RBI
Supervision and regulation
Licensing and Compliance: The RBI is the regulatory body for payment banks. Just as we saw in the licensing process, it is responsible for issuing licenses to these banks. After obtaining the permission, the payment bank must comply with a series of regulations formulated by the RBI. These regulations cover areas such as capital adequacy ratios, among which the minimum capital requirement for payment banks is 1 billion rupees.
Governance and Shareholding: The Reserve Bank of India also supervises the governance and shareholding of payment banks. During the first five years, the initiator’s shares should remain at least 40%. According to the FDI rules of Indian private banks, foreign shareholding is allowed. Voting rights are regulated by the Banking Supervision Act of 1949. The upper limit of voting rights for any shareholder is 10%, and the Reserve Bank of India can increase it to 26%. Any acquisition exceeding 5% requires the approval of the Reserve Bank of India. The majority of the members of the bank’s board of directors shall consist of independent directors appointed in accordance with the RBI guidelines.
Strategic guidance
Business operations: The RBI provides policy guidance to payment banks regarding their business operations. For instance, it guides them on how to manage risks related to payment services, especially in the digital age when cybersecurity is a major issue. It also sets out guidelines on the types of customers they can target and the services they can provide to promote inclusive finance.
Financial Inclusion Goals: Payment banks play a crucial role in the RBI’s efforts to achieve financial inclusion. The RBI encourages payment banks to reach out to the unbanked and under – banked population. By having a significant presence in rural areas and providing basic banking and payment services at affordable costs, payment banks are helping the RBI in its mission to ensure that every Indian has access to financial services.
Monitoring and Supervision
Performance Monitoring: The RBI continuously monitors the performance of payment banks. It looks at factors such as the growth of deposits, the volume of transactions, and the profitability of these banks. If a payment bank is not performing well, the RBI may step in and ask the bank to take corrective measures. For example, if a bank’s customer base is not growing as expected, the RBI may suggest marketing and outreach strategies.
Risk Management: Payment banks are also supervised by the RBI in terms of risk management. Since payment banks deal with a large volume of digital transactions, they are exposed to various risks such as fraud and operational risks. The RBI ensures that payment banks have proper risk management systems in place to mitigate these risks.
Examples of Payment Banks in India
Airtel Payments Bank
Airtel Payments Bank was the first payments bank to be launched in India in January 2017. It has a wide network, leveraging Airtel’s existing customer base and infrastructure. Airtel Payments Bank offers services such as mobile wallet facilities, where customers can store money and use it for various transactions like recharging their mobile phones, paying utility bills, and making purchases at merchant outlets. It also provides savings accounts with competitive interest rates. In 2019, it contributed more than 5% to the 867 million mobile – banking transactions in a particular month.
Paytm Payments Bank
Paytm Payments Bank is another well – known payment bank in India. It has a large customer base, especially among the younger generation and small merchants. Paytm’s mobile wallet is extremely popular, and the bank has also been actively involved in promoting digital payments in rural areas. It offers features like cash – back offers on transactions, which attract a large number of customers. In 2018, Paytm Payments Bank and Airtel Payments Bank together commanded over 88% of the deposits in payment banks in India.
India Post Payments Bank
India Post Payments Bank is unique as it has a vast network of post offices across the country, including in remote rural areas. This gives it an edge in reaching out to the unbanked population. It offers services such as savings accounts, money transfer services, and also facilitates government – related transactions like pension payments. The bank has been successful in leveraging the trust that people have in the postal department to promote financial inclusion.
Significance of Payment Banks in India’s Financial Landscape
Promoting Financial Inclusion
Reaching the Unbanked: Payment banks have been instrumental in reaching the unbanked population in India. With their focus on providing basic banking services at low costs and their presence in rural areas, they have made it possible for people who were previously excluded from the formal banking system to access financial services. For example, in many remote villages, people can now open a savings account with a payment bank and carry out basic transactions.
Increasing Financial Literacy: As payment banks interact with a large number of new customers, they also play a role in increasing financial literacy. They educate customers about concepts like savings, interest rates, and digital payments, which helps in building a more financially aware population.
Boosting Digital Payments
Encouraging Cashless Transactions: In a country that has traditionally been a cash – based economy, payment banks have been a major driver of digital payments. By providing easy – to – use mobile wallet and payment services, they have encouraged people to move away from cash transactions. This has not only made transactions more convenient but has also helped in curbing the circulation of black money and reducing the costs associated with handling cash.
Innovation in Payment Technologies: Payment banks have also been at the forefront of innovation in payment technologies. They have introduced features like QR – code – based payments, which have become extremely popular in India. These innovative payment methods have made transactions faster and more secure.
Competition in the Banking Sector
Forcing Traditional Banks to Innovate: The entry of payment banks has increased competition in the banking sector. Traditional banks now have to innovate and improve their services to stay competitive. For example, they are now focusing more on providing digital services and improving their customer experience to match the offerings of payment banks.
Expanding the Banking Ecosystem: Payment banks have expanded the banking ecosystem in India. They have created new opportunities for partnerships between banks, fintech companies, and other financial institutions. This has led to the development of new financial products and services that benefit the customers
Conclusion
Payment banks and the RBI are closely intertwined in India’s financial system. The RBI, with its regulatory and supervisory powers, has enabled the creation and growth of payment banks. These payment banks, in turn, are playing a crucial role in promoting financial inclusion, boosting digital payments, and increasing competition in the banking sector. However, they also face several challenges, such as achieving profitability, complying with regulations, and building customer trust. As the financial landscape in India continues to evolve, the relationship between payment banks and the RBI will be crucial in determining the future of banking and financial services in the country. It is essential for payment banks to overcome their challenges and for the RBI to continue providing a supportive regulatory environment to ensure the long – term success of payment banks and the overall growth of the financial sector.
Related topics
