A nation’s level of development is often attributed to the degree by which its banking system has been progressed. A robust banking system is one of the major components of a sterling infrastructure. This being one of the major reasons why the government of almost all nations invests heavily in banking structure and why developed nations have flourished banking systems. Banks do a plethora of functions. They accept deposits, advances loans, provide debit and credit card facilities and countless subsidiary operations. However, in a growing country like India with more than 125 crore population, it becomes somehow difficult for the banks to entrench themselves deep down into the countryside and open branches in order to provide services. Despite being a part of the service sector, the banks anyhow, have to operate tangibly. These factors have widened the gap for the poor section of the society to access the banking services. In order to deal with this contradiction, on 23rd September 2013, the Reserve Bank of India formed a committee headed by Nachiket Mor. The committee recommended forming a new type of bank called payments bank. Ten months later, the RBI released complete guidelines for payment banks.
What is a Payment Banks?
Payment banks are an entirely new type of banks that can accept a limited deposit from the customers. As per the guidelines of the RBI, these banks require minimum capital of 1 billion to operate and are entitled to receive foreign shareholdings as per the rules. One of the highlighting parts is that the banks must have 25% of their branches in unbanked rural areas. Moreover, they call themselves a full-fledged bank and need to add a suffix or prefix of ‘payment banks’ with the rest of the name. The main objective of the banks is to assist low-income households, provide financial help to small businessmen and promote digital banking environment.
Initially, the RBI received 41 applications for the license of payment banks but approved only 11 of them to launch their payments bank. In the course of years, there are now seven active payment banks, in which the Airtel payment bank was the first payment bank, launched in March 2017.
Functions of Payment Banks
A payment bank can perform most of the primary functions of a full-fledged bank. However, it lugs certain limitations in order to check its misuse. Furthermore, these banks have to compliance themselves with a number of guidelines as issued by the RBI. These constraints at one point compel them to fulfill a few minimum criteria and operating in limitations on the other point. They also need to be completely networked from the beginning. Nonetheless, payment banks proffer enough services to quench the void of a growing economy.
Benefits of Payment Banks
- Payment banks can accept deposits up to 1,00,000 INR. Although, this limit can be increased by the Reserve Bank of India if it discerns that the particular bank is performing well in delivering services and is continuously striving to work towards the destined goal of payment banks in general. This is also supplemented by the fact that the payment banks open zero-balance accounts and doesn’t compel account holders to maintain a minimum balance. Maintaining a minimum balance has been the main reason after poor infrastructure, that has widened the gap between people and the banking system.
- Just like the traditional banks, these payment banks also offer interest on saving deposits.
- A payment bank can furnish services like debit cards (both virtual and physical), mobile-banking and net-banking. The cards can be used to make payments to most of the vendors and almost all online shopping portals. It is hard to differentiate between a payment bank’s debit card and a regular bank’ debit card.
- They also issue services like maintaining a passbook and cheque books (on demand). What ornaments this feature the more is that the passbook facility can be availed without any separate registration for net-banking.
- Payment banks can also partner with other traditional banks to dispense the features which are not available for them. This includes lending money as loans and selling investment products.
- Since the process is entirely digital in the first instance, it pushes towards the digitalization of the banking system. This will also help in overcoming the vapid and supine nature of the economy.
However, it goes without saying that the payment banks do carry a number of limitations. These limitations also serve as their founding base and differentiate them from other commercial banks.
- The amount that can be deposited per account holder is limited to 1,00,000 INR as per now. Reiterating, the RBI can increase the limit but only in accordance with the performance of the particular bank.
- A payment bank is not allowed issue credit cards or any credit facility under a different garb. Unlike the deposit limit, this limitation can’t be removed with performance in the future.
- Moreover, payment banks are also not allowed to advance loans to its customers in any case. This restriction is objective and cannot be effaced with performance.
- Aforementioned, a payment bank must use ‘payments bank’ to address itself, which is a part of its differentiating feature from regular banks.
- In the course of its operation, it is compulsory for a payment bank to have 25% of its branches in unbanked rural areas.
Undoubtedly these are at first the founding features of a payment bank then the limitations. However, this doesn’t hinder the payment banks to offer a surfeit of utilities.
Payment banks are in existence to serve the unbanked and underbanked part of the population. This largely includes migrant labourers, small businessmen, farmers and the places with poorly developed banking infrastructure. This also has been the motivating factor behind the setup of ‘Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households’ (which was headed by Nachiketa Mor). A judgment about the payment banks being made solely on its limitations would be venal without any dispute. It is also important to understand the difference between ‘limitations’ and ‘demerits’, as in this case, the limitations are the characteristic features of payment banks.
The urban population, particularly the well established and opulent part of the population are well connected to the banking system. Though the services of payment banks are also available for them, however, its fundamental goal is to reach out to those people who are yet to receive the fruits of the banking system.