Payment Banks

What are Payment Banks?
Payment banks are non-full service banks, whose main objective is to accelerate financial inclusion. These banks have to use the word ‘Payment Bank’ in its name which will differentiate it from other banks
What will they do?
  • Collect deposits ( up to 1 Lakh/individual)
  • Offer Internet banking
  • Facilitate money transfers
  • Sell insurance & mutual funds
  • Issue ATM/Debit card but not Credit Card
  • Will not lend but deposit their funds in govt papers and bank deposits
  • Will transform rural remittances market. Entry of new players is likely to increase competition, lower remittance costs and extend the formal market for remittances.
What are various provisions related to Payment Banks?
  • Capital requirement: The minimum paid-up equity capital for payments banks is 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).
  • Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40% for the first five years from the commencement of its business.
  • 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.
  • Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
Why it is going to be difficult for Payment Banks to do business?
  1. No lending permitted: These banks are not allowed to lend their money as other commercial banks do.
  2. High SLR requirements: Besides maintaining CRR with RBI, these banks have to keep 75% of their deposits in government securities or golds as SLR.
  3. Limit on deposit: Only Rs 1 lakh per individual is permitted to be kept in saving account.
  4. No issue of credit card
  5. Increased competition from PSBs and private banks who has expended their reach in remote areas in recent years
So why do payments banks have to maintain such a high CAR?
The regulator is more concerned about the operational risks that such banks will face than the credit risks.
  • Payments banks are expected to provide small savings accounts and payments/remittance services to migrant labourers, low-income households, small businesses and other unorganized sector entities, and expand financial inclusion in Asia’s third largest economy.
  • Since nothing prevents regular commercial banks from offering such services, the payments banks will have to spend tons of money to create the right infrastructure to be in the business. The RBI is apprehensive that the payments banks will end up burning too much capital in building their franchises.
  • Also, more than the protection of the depositors, the regulator is concerned about the future of the payments banks themselves
What can be done?
  • Payment banks will have to deepen their understanding of the unique needs of base of pyramid (BOP) consumers and develop products and customer experiences tailored to these needs.
  • Payment Banks will need to develop new products that are better suited to the financial lives of BOP consumers, for example, daily micro-saving products and micro-loans that rely on non-traditional data.
  • They will need to develop partnerships with other financial institutions to meet the full scope of customer needs. They will need to embed within their organization the ethos of providing a respectful and positive customer experience to BOP customers to earn their trust and loyalty.
  • Technology is, of course, going to be key to keeping costs low. The use of Aadhaar-linked authentication, know-your-customer and e-sign and the proliferation of mobile/online payment systems hold special promise for reducing the cost of delivery.
  • Since Smartphone penetration is low and digital literacy is a major challenge among the BOP, payments banks will need to rely on physical agent networks, at least in the foreseeable future, to serve this segment.
  • Currently, banks largely rely on Business Correspondents (BCs) who are dedicated to the financial services business. To achieve scale and keep costs manageable, players will need to harness the potential of varied agent models—ranging from dedicated ‘wealth advisors’ at one end of the spectrum to ‘lite’ BC agents who just focus on a few simple transactions while doing core businesses at the other.
  • Players will also need to harness the potential of the neighbourhood store, by making it worth their while to accept digital payments. They will need to rely heavily on small-ticket transactions for revenues, given limitations to their net interest income.
  • Government has in-principle agreed to the entry of Postal Dept. in banking service through payment bank route.
  • RBI given in-principle approval to 10 firms to start small finance banks.
Major setback:
  • Tech Mahinda and Cholamandalam Investment have announced their plan to back off from this payment bank thing citing competition and viability issue.
  • 3 out of 11 applicants who got the licenses have surrendered them.
How will the Payment Banks affect other banks and consumers?
Critically examine. (200 Words)
Payment bank is concept initiated and proposed by Nachiket Mor committee. It is effort to promote financial inclusion and mainly targeted at migrant labours , low income households, small businesses, and other unorganized sector entities. RBI has issued licenses to entities to launch payment banks. It will create better access to banking facilities in rural area and improve mobile banking.
Effects on banks: –
  1. The payments banks can deprive regular banks of the fee income they earn from customers, Example- cash transfers, remittances, cash withdrawal through cheques and ATM transaction fees
  2. In long term, regular banks having large customer base can adopt many practices and technologies adopted by payment banks.
  3. Competition would increase and regular banks have to ensure fast and smooth functioning of banking facilities to customers.
Effects on consumers:-
  1. The medium of payment banks provide easy access of banking facilities to consumers. Costs for payments banks could be lower and through mobile banking , it can reach unbanked rural areas.
  2. Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries accounts.
  3. The customer can efficiently utilize various facilities and has various choices. Customer can easily transfer the amount to their relatives and family members.
  4. PB may not be able to offer high interests on its deposits as it has to invest mostly in govt securities.
Thus, the initiative of payments banks would ensure that financial inclusion agenda must be increased with new technology and better cost structures . It can enhance and expand banking facilities to backward rural areas and encourage customers to utilize the platform.

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