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What is Payment Bank License

Demonetization has entirely recast the Indian economic system. Nowadays, people rely more on paperless transactions and prefer using digital payment portals. It has given a sudden boost to E-wallets or Mobile wallets that were outcast earlier. The primary niche of such online gateways is payment banks. To start any payment gateway, one needs to acquire a payment bank license.

An overview of Payments Banks

Payments bank refers to a new bank model that got conceptualized by the Reserve Bank of India (RBI) in 2014. Such banks can accept a restricted deposit of up to a maximum limit of ₹100,000 per customer, which shall increase further. Though payment banks are a new addition to the banking sector, it does not avail the issuance of loans and credit card facilities. While payment banks render an array of other services like debit cards, ATM cards, mobile-banking, net-banking, etc. Moreover, by procuring payment bank license, a bank can operate both current and saving accounts. 

As per the Banking Regulation Act, 1949, payment bank or differentiated bank has the permit to establish new outlets such as Automated Teller Machines (ATMs), Business Correspondents (BCs), but cannot commence the activities of banks. Also, the minimum paid-up capital of payment bank should be 100 crores or more.

Key features of a Payments Bank 

Payments banks are generally variant from the traditional banks. Before you apply for a payment bank license, it's essential to perceive its fundamental characteristics:

  • Offers Deposits up to 1 lakh : - Payments banks can only accept deposits up to a limit of 1 lakh. The customers have to abide by the prescribed limit, and nobody can exceed that limit at any point in time. One can choose to deposit an amount either fully or partially. RBI has set that limit to protect customer interest and in regards to the relatively new nature of such banks.
  • Virtual Debit Card Facility : - Another peculiar aspect of the payments bank it that it offers both physical and virtual debit cards. The debit cards give an edge to the users to utilize all ATMs in the domestic boundaries as well as in abroad. The virtual debit cards do not demand any extra charges on cash withdrawal. Also, the physical debit cards are accompanied by an annual fee only. 
  • Smooth Transactions via an online portal : - Unlike the traditional banks, payment banks streamline the process of making and receiving money through digital platforms. It facilitates online fund transfer services like NIFT, IMPS and many others to the customers.
  • Feasible mode of making payment : - Regardless of where you live, you can easily access the services of payment banks as it runs digitally. Payments Banks eliminates the need to visit a physical bank for depositing or withdrawing cash. Anybody can start with payments bank business online without having a physical outlet by merely attaining a payment bank license.

Fundamental Objective of the Payment Banks

The central objective of payments bank is to enlarge the payment and financial services to all low-income households, small businesses, and migrant labour workforce in a secured technology-driven environment. The Reserve Bank of India seeks to penetrate the financial support to all the remote areas of India by underpinning payment banks. It aims to redefine the Indian economy with a secure payment gateway for all transactions.

Who is eligible to acquire a Payment Bank License?

Have a look at the list of applicants who fits well in the eligibility criteria of acquiring payment bank license:

  • Individuals/professionals
  • Mobile telephone companies
  • Non-Banking Financial Company (NBFCs)
  • Real sector cooperatives
  • Supermarket chains
  • Public sector entities
  • A promoter or group of promoters who have a joint venture with an existing scheduled commercial bank
  • Existing non-bank prepaid payment instrument under the Payment and Settlement Systems Act, 2007.
  • Corporate Business Correspondence
  • Public companies

A peek into the future of Payments Banks 

Before you step into the hassle of documentations and the elongated procedure of payment bank license, it is essential to determine the position of payment banks in the upcoming years.  

  • Payments banks are indeed a robust system that offers a great deal of convenience to its customers. Even though you have an existing account with a traditional bank, a payments bank will enable you to access banking services and carry out transactions. 
  • Since the traditional bank's functions in a particular time frame, one has to stick around the regular banking hours; however, payments banks discard any such limitations and provide seamless transactions at any time.    
  • Thus, the payment banks eliminate the need to be time-specific while travelling to a branch for making any transactions.
  • Another apparent benefit that payments banks provide is cash digitalization. About 90% of transactions in India were cash-based before demonetization. Its after-effects have uplifted the growth of payments banks with its emphasis on digitalizing transactions.
  • Thus, the payment banks are expected to be a game-changer and revolutionize the current banking system. It will bring the banking on a broader scale. 

Step by Step Procedure to obtain the Payment Bank License

Now that you have perceived a comprehensive knowledge about the payments banks, you must be eager to set one. So follow these steps to get payment bank license:   

Step-1:  Firstly, as per RBI regulations, the applicant has to incorporate a Public Limited Company under the Companies Act, 2013, wherein the main objective should remain to act as a payments bank.

Step-2: Now, file an application to Chief General Manager of RBI to grant the payment bank license. 

Step-3: Thereby, the External Advisory Committee (EAC) shall assess the application, and summon applicant to validate the information given by him.

Step-4: If an applicant successfully meets the eligibility criteria, then RBI shall grant him the license.  

Step-5: Subsequent to the previous step, the name of the concerned applicant shall be displayed on the official RBI site.

Step-6: Lastly, after getting the principle approval to operate as a payment bank from the Reserve Bank of India, the bank has to be set up within 18 months.

Frequently Asked Questions (FAQs)

The main objective to establish a payments bank is to ensure financial inclusion by offering remittance/payment services to underprivileged sections. The focus of payments bank revolves around strengthening the migrant labour workforce, opening small savings accounts of small business holders, supporting workers of the unorganized sector and low-income households.

A payment bank can accept current and saving deposits of up to Rs 1 lakh per customer. Also, such banks can issue ATM or debit cards, but no credit cards. Payments banks can provide non-risk sharing simple financial products such as mutual funds and insurance products.

The biggest aspect which differentiates a payment bank from a commercial bank is that the commercial banks can accept any amount of money as a deposit per customer. However, payments banks can only accept deposits up to a maximum limit of Rs. 1 lakh per customer.

As per RBI, the minimum capital requirement to open a payment bank is 100 crore. Further, the promoter needs to contribute at least 40% for the first five years of establishment. Foreign shareholding shall be allowed in payments banks for FDI in private banks in India.

According to the final RBI guidelines, payments banks will require to invest at least 75% of their demand deposits in (SLR) Statutory Liquidity Ratio, eligible government securities or treasury bills with maturity up to a year. Apart from that, they can invest the remaining 25% of their fixed deposits with other scheduled commercial banks for operational objectives and liquidity management.

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