A New Concept of Banking System: Payments Bank

The Reserve Bank of India (RBI) issues licences to entities to carry on the business of banking and other businesses in which banking companies may engage as per the Banking Regulation Act, 1949. It was observed by RBI in the discussion paper on Banking Structure in India – The Way Forward placed on its website on August 27, 2013 that there is a need for niche banking in India, and differentiated licensing could be a desirable step in this direction.

Similarly, ‘the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households’ chaired by Dr. Nachiket Mor in its report released in January 2014 examined the issues relevant to an ubiquitous payments network and universal access to savings and recommended, that given the difficulties being faced by the Pre-paid Payment Instruments Issuers (PPI issuers), and the underlying prudential concerns associated with this model, the existing and new PPI issuer applicants should instead be required to apply for a payments bank licence or become Business Correspondents (BCs).

(Explanation: Prepaid payment instruments are methods that facilitate purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holder, by cash, by debit to a bank account, or by credit card. The prepaid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, online wallets, mobile accounts, mobile wallets, paper vouchers and any such instruments used to access the prepaid amount. Examples of such instruments are Bigbasket Wallet, Mobikwik Wallet, Visa, Rupay, Mastercard etc.)

In order to serve need for niche banking in India, RBI came up with Guidelines for Licensing of Payments Bank on Nov 27, 2014. It is a new model of banks conceptualized by the Reserve Bank of India (RBI).

Bharti Airtel set up India’s first live payments bank known as Airtel Payments Bank. India Post Payment Bank (IPPB) is the latest Payments bank inaugurated on September 1, 2018. The list of active Payments Bank includes Jio Payments Bank, Paytm Payments Bank.

Main features of Guidelines for Licensing of Payments Bank:

1. Registration, Licensing and Regulations:

• The payments bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949.

• It will be governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007 (PSS); Deposit Insurance and Credit Guarantee Corporation Act, 1961; other relevant Statutes and Directives issued by RBI and other regulators from time to time.

2. Objectives:

To further financial inclusion by providing:

• small savings accounts and

• payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

(Explanation: ‘small account’ means a savings account in a banking company where:

• the aggregate of all credits in a financial year does not exceed rupees one lakh;
• the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand; and
• the balance at any point of time does not exceed rupees fifty thousand.)

3. Eligible promoters:

• Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents (BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.

• A promoter / promoter group can have a Joint Venture with an existing scheduled commercial bank to set up a payments bank. However, scheduled commercial bank can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949.

• If a Government entity desires to set up a payments bank, it should first obtain necessary approvals from the Government and submit its application.

• Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or running their businesses for at least a period of five years in order to be eligible to promote payments banks.

Note: Existing PPI licence holders could opt for conversion into payments banks. It is not mandatory for an existing PPI issuer to apply for a payments bank licence and it may continue as a PPI issuer as per the guidelines issued by RBI from time to time.

4. Scope of activities

• Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.

• Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.

• Payments and remittance services through various channels including branches, Automated Teller Machines (ATMs), Business Correspondents (BCs) and mobile banking

• Internet banking – The RBI is also open to payments bank offering Internet banking services. Such a bank should ensure that it has all enabling systems in place including business partners, third party service providers and risk management systems and controls to enable offering transactional services on the internet.

• Business Correspondents (BCs) of another bank, subject to the Reserve Bank guidelines on BCs.

• The payments bank may undertake utility bill payments etc. on behalf of its customers and general public.

Note: The payments bank will be required to use the words “Payments Bank” in its name in order to differentiate it from other banks

5. Capital requirement:

The minimum paid-up equity capital for payments banks shall be Rs. 100 crore. The payments bank should have a leverage ratio of not less than 3%, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

6. Promoter’s contribution:

The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.

7. Foreign shareholding:

The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

8. Corporate governance:

• The Board of the payments banks should have a majority of independent Directors.

• The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.

9. Voting Rights:

The voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10%, which can be raised to 26% by Reserve Bank of India. Any acquisition of more than 5% will require approval of the RBI.

10. Other conditions:

• The payments bank shall operate in remote areas mostly through BCs, ATMs and other networks. the payments bank will be required to have at least 25 per cent of physical access points including BCs in rural centres.

• The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms.

• The bank should have a high-powered Customer Grievances Cell to handle customer complaints.

Note: The compliance of terms and conditions laid down by RBI is an essential condition of grant of licence. Any non-compliance will attract penal measures including cancellation of licence of the bank.

(The author of this article is a Practicing Company Secretary located at New Delhi and can be reached at ankitasinglaandassociates@gmail.com)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this document should be distributed or copied without express written permission of the author.