Table of Contents
- 1 Payment Bank License in India
- 1.1 1. Payment Bank License: What is it and Why is it Necessary?
- 1.2 2. Procedure to Apply for a Payment Bank License in India
- 1.3 3. Minimum Paid-Up Capital Required for Obtaining a Payment Bank License
- 1.4 4. Who Can Obtain a Payment Bank License?
- 1.5 5. Activities Permitted by a Payment Bank in India
- 1.6 6. Requisites for Setting up a Payment Bank in India
- 1.7 7. Understanding the Payment Bank Business Model
- 1.8 8. Foreign Investment Restrictions for Payment Banks in India
- 1.9 9. NRI Holding Limits for Payments Banks in India
- 1.10 10. Documents required for Payment Bank License in India
- 1.11 11. Disadvantages of Payment Bank License in India
- 1.12 12. Frequently Asked Questions about Payment Bank License in India
Payment Bank License in India
In a country where a significant portion of the population is unbanked, the introduction of payment banks is being hailed as a game-changer. These banks have been designed to cater specifically to the needs of the unbanked and underbanked population of India, allowing them to access basic banking services at minimal cost. The introduction of payment bank license in India is expected to revolutionize the banking sector, bringing financial inclusion to millions of people who have been excluded from the mainstream banking system. In this post, we will delve deeper into the concept of payment banks and explore how they are poised to bring about a financial revolution in India.
1. Payment Bank License: What is it and Why is it Necessary?
Payment Bank License is a crucial requirement in India for setting up a Payment Bank. To apply for the license, the applicant needs to accumulate a paid-up capital of 100 Crores and incorporate a Public Limited Company under the Companies Act of 2013. The foreign investment in private sector banks is subject to certain restrictions, with a maximum of 74% allowed from all sources, and at least 26% must be held by an Indian Resident. The Payment Bank model was introduced by the Reserve Bank of India (RBI) in 2013, providing a range of financial services except for credit cards and loans. The objective behind the introduction of Payment Banks was to increase financial penetration in remote areas and provide better payment facilities to small businesses and income groups. Bharti Airtel was among the first Payment Banks established in India. The benefits of a Payment Bank License include a zero account balance requirement, operational efficiency and cost savings passed to the customer, and a secure online transaction model with 4-factor authentication.
Benefits of obtaining a Payment Bank License
A Payment Bank License is a mandatory requirement to establish a Payment Bank in India. Accumulating 100 Crores of paid-up capital and incorporating a Public Limited Company under the Companies Act 2013 are prerequisites before applying for the license. The applicant must adhere to the policy specified for private sector banks, which is amended from time to time. Benefits of obtaining the Payment Bank License include having wider access and reach to small businesses and income groups in remote areas. Payment Banks are not obliged to maintain a specific minimum balance. Due to operational efficiency, customers can enjoy higher interest rates, and the cost-saving benefits are passed onto them. Payment Banks have a secure model of online transactions with four-factor authentication. Also, a significant feature is having the same mobile number as the account number. It is an attractive opportunity for telecoms and mobile wallet service providers since they can convert their retail outlets to banking points.
Roles and responsibilities of a Payment Bank
Payment Bank License in India is a mandatory requirement for opening a Payment Bank. Before applying for this license, the applicant needs to accumulate at least 100 Crores paid-up capital and incorporate a Public Limited Company under the Companies Act 2013. To apply for the license, policy specified for private sector banks needs to be followed which is amended from time to time. This license is essential in India as it allows payment banks to operate current and saving accounts. A payment bank has the permit to establish new outlets such as Automated Teller Machines (ATMs) and Business Correspondents (BCs) but cannot commence the activities of banks.
The primary objective of payment banks in India is to extend payment and financial services to all low-income households, small businesses, and migrant labor workforce in a secured technology-driven environment. They aim to redefine the Indian economy with a secure payment gateway for all transactions. Payment banks can only accept deposits of up to a limit of 1 lakh, and customers have to abide by the prescribed limit. The virtual and physical debit cards provided by payment banks facilitate easy fund transfer services and access to ATMs domestically and abroad.
Unlike traditional banks, payment banks streamline the process of making and receiving money through digital platforms. This facilitates the online transfer of funds through NIFT IMPS and other similar services to customers. Payment Banks eliminate the need to visit a physical bank branch to operate accounts or to make transactions. Payment banks also extend services to remote areas in India, providing financial assistance to many sectors of society. Hence, payment banks play a crucial role in extending financial assistance and promoting the digitization of payment and banking solutions in India.
Steps to apply for a Payment Bank License in India
The Reserve Bank of India introduced the concept of Payment Bank, which has gained significant importance in recent times due to its ability to amplify financial targets. To operate an online Payment Bank in India, a company or an NBFC needs to acquire a Payment Bank License from the RBI. To obtain the license, the applicant must have a paid-up capital of INR 100 crores and incorporate a Public Limited Company under the Companies Act 2013. Additionally, the applicant should prepare the necessary application policies and adhere to the FDI policy guidelines. For private sector banks, the aggregate foreign investment can be up to a maximum of 74% of the paid-up capital, with at least 26% held by Indian residents. The maximum deposit amount for each customer is INR 1 lakh, but the account holder need not maintain a minimum balance, making it a cost-efficient and secure option.
2. Procedure to Apply for a Payment Bank License in India
To apply for a Payment Bank License in India, a company or NBFC needs to follow certain procedures regulated by the Reserve Bank of India (RBI). Firstly, the applicant must obtain the license from RBI based on the provisions of section 22 of the Banking Regulations Act 1949. It is necessary to note that the license is mandatory to carry out banking activities. The regulatory structure of the Payment Bank License includes the Deposit Insurance & Credit Guarantee Corporation Act 1961 and the Payment & Settlement System Act 2007. The main objective of a Payment Bank is to amplify the reach of payment facilities to small businesses and income groups, stretching financial support to remote areas. Payments Banks can also operate both saving and current accounts, and the minimum paid-up capital should be 100 crores or more. By streamlining the process of making and receiving money through digital platforms, Payment Banks facilitate online fund transfer services to customers. The unique aspect of Payment Banks is that customers can have zero account balance.
3. Minimum Paid-Up Capital Required for Obtaining a Payment Bank License
To start a Payment Bank in India, it is mandatory to obtain a Payment Bank License. According to the Banking Regulation Act 1949, the minimum paid-up capital of the payment bank should be 100 crores or more. This means that an applicant company must have at least 100 crores of capital to be eligible for a Payment Bank License. This high capital requirement ensures that only serious and established companies can operate a Payment Bank in India. The Reserve Bank of India has set this limit to ensure the stability and security of the banking sector. By fulfilling this requirement, companies can acquire the license to operate both current and saving accounts and establish new outlets such as Automated Teller Machines (ATMs) and Business Correspondents (BCs).
4. Who Can Obtain a Payment Bank License?
To obtain a Payment Bank License in India, one must qualify under specific criteria. In general, the minimum required paid-up equity capital is Rs 100 crore, with at least 40% of the paid-up equity capital to be contributed by the promoter for the initial five years. The list of qualified players includes existing non-bank Pre-paid Payment Instrument issuers authorized under the Payment and Settlement Systems Act 2007. Moreover, they should be registered as a public limited company under the Companies Act 2013 and comply with the Section 22 of the Banking Regulation Act 1949. The Reserve Bank of India conducts an initial screening, and if the applicant qualifies, an External Advisory Committee assesses the application. Finally, the RBI issues an in-principle approval valid for 18 months, which means the bank has to be set up within such period.
5. Activities Permitted by a Payment Bank in India
A Payment Bank is a specialized bank model introduced by the Reserve Bank of India (RBI) in 2013. The main objective of Payment Banks is to increase the penetration of finances to remote areas and smaller businesses. Payment Banks provide a range of financial services similar to regular banks, except for offering credit cards and facilitating loans. Payment Banks in India are not mandatory for account holders to maintain minimum balance, and the cost-saving benefit is passed to customers through higher interest. The account number in Payment Banks is the same as the mobile number, making it easy to remember. The model of Payment Banks is one of the most secure for online transactions in India, thanks to four-factor authentication.
Accepted demands deposits are up to INR 1 lakh per customer, and Payment Banks cannot lend money or issue credit cards. They can act as a business correspondent of another bank and distribute financial products such as mutual funds and insurance or pay bills on behalf of customers. Payment Banks must invest at least 75% of demand deposit balances in securities issued by the Government or Treasury Bills permitted by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR). An additional maximum of 25% can be kept in current and time deposits with other scheduled commercial banks.
Payment Bank requires a minimum of INR 100 crore paid-up capital, and the promoter must contribute at least 40% of the paid-up equity capital for the first five years of establishment. Foreign shareholding is permitted in Payment Banks for Foreign Direct Investment (FDI) in private banks in India as per the Foreign Direct Investment Policy. To obtain a Payment Bank License, the payment bank must register as a public limited company under the Companies Act 2013 and make an application using Form III for a Payment Bank License. The application needs to be addressed to the Chief General Manager of the Department of Banking Regulation, RBI. An External Advisory Committee will assess the applications, consisting of eminent professionals like Chartered Accountants, Bankers, Finance Professionals, etc.
The Payment Bank model in India has received significant importance due to its ability to help in the Government’s Financial Targets. They also help in achieving the motive of Digital India. The first Payment Bank that got established in India is the Bharti Airtel. Other Payment Banks operating in India include Paytm Payment Bank, Airtel Payments Bank, and Fino Payments Bank, among others.
6. Requisites for Setting up a Payment Bank in India
To set up a Payment Bank in India, a company or an NBFC must acquire the Payment Bank License from the Reserve Bank of India (RBI). The minimum required paid-up equity capital is Rs 100 crore, and for the first five years, the promoter must contribute at least 40% of the paid-up equity capital. Existing non-bank prepaid payment instrument issuers authorised under the Payment and Settlement Systems Act 2007 are qualified promoters for the Payment Bank License procedure. Additionally, the payment bank shall be required to invest a minimum of 75% of its demand deposit balances in securities issued by the government or Treasury Bills having maturity up to 1 year and maintain a maximum of 25% in current and time deposits with other scheduled commercial banks for Statutory Liquidity Ratio (SLR) maintenance.
7. Understanding the Payment Bank Business Model
A Payment Bank License is a mandatory requirement for opening a Payment Bank in India. To obtain this license, the applicant needs to accumulate 100 Crores paid-up capital and incorporate a Public Limited Company under the Companies Act 2013. The Payment Bank License Application policy is specified for private sector banks, which is amended from time to time. The license allows the bank to perform certain banking operations, such as accepting deposits, fund transfers, and issuance of ATM and debit cards. However, the payment banks are not allowed to carry out lending activities such as advancing loans or issuing credit cards.
The Payment Bank is a new category of banks conceptualized by the Reserve Bank of India (RBI), which operates at a smaller scale than an actual bank and doesn’t involve any credit risk. Unlike commercial banks, Payment Banks operate digitally and don’t have physical branches. The RBI introduced Payment Banks to increase the penetration of financial services by reaching remote areas where actual banks can’t reach and provide banking services to low-income households, small businesses and others who don’t have access to them.
Unlike commercial banks, Payment Banks cannot earn by lending money. Payment Banks make money through activities such as depositing the money with another bank or government deposit, which provides interest rates greater than that provided by the Payment Bank. The Payment Bank charges customers for certain transactions, such as transferring funds and cash withdrawals. Additionally, Payment Banks sell third-party financial products like insurance and mutual funds.
The Payment Bank License was granted to 11 out of 41 companies that applied to obtain it. The network and reach of the company was one of the major factors for granting the Payment Bank License. Payment Bank Licenses were granted to companies dealing in mobile telecommunication services, supermarket services, and prepaid wallet services, to cater to individuals and small businesses who otherwise have limited access to banks.
To be eligible for the Payment Bank License, the companies must fulfill certain conditions set by RBI, such as a minimum capital investment of ₹100 crores and 25% of the Payment Bank branches must be in unbanked rural areas. A payment bank should also ensure that the stake of the promoter is a minimum of 40% for the first five years of operation.
The Payment Bank Business Model is unique, which makes it different from commercial banks. Payment Banks cannot perform lending activities; thus, they don’t involve any credit risks. They make money through activities such as depositing money with other banks and charging customers for certain transactions. Payment Banks aim to provide financial services to people living in remote areas who don’t have access to banks. Payment Banks operate digitally and offer simple banking services.
8. Foreign Investment Restrictions for Payment Banks in India
The Reserve Bank of India introduced the concept of payments bank in 2014, allowing special banks to operate in India. Such banks offer limited deposit services of up to INR 1 lakh per customer and do not offer credit card facilities or loans. To operate such a bank, an applicant company needs to obtain a payment bank license from the Reserve Bank of India. The legal provisions regulating payment banks in India include the Payment and Settlement System Act 2007 and the Deposit Insurance and Credit Guarantee Corporation Act 1961.
Foreign investment restrictions exist for payment banks in India. Payment banks that want foreign investment would need to adhere to the Foreign Direct Investment (FDI) regulations of the Government of India. Two of the restrictions under FDI policy include prohibiting foreign airlines from investing in payment banks and foreign entities owning more than 50% of the paid-up capital of such banks. However, the Indian government may increase this cap in the future based on the recommendations of the RBI. As of now, foreign investment is restricted to 74% for private banks in India.
9. NRI Holding Limits for Payments Banks in India
The increasing demand for improved financial inclusion and digital payments in India has led to the establishment of payment banks. These banks were introduced by the Reserve Bank of India (RBI) in 2014 to cater to the banking needs of underserved segments of the population. Payment banks offer savings accounts, remittance services, and payment services to individuals, small businesses, and other unorganized sector entities. They cannot offer loans or credit cards, but they can issue ATM/debit cards. Payments banks, like regular banks, have deposit limits per individual customer.
As per the extant Guidelines for Licensing of Payments Banks, payments banks can hold a maximum balance of Rs 1 lakh per individual customer. However, due to long-standing demand from payments banks, the RBI has recently increased this limit to Rs 2 lakh per individual customer. This hike is a welcome move for payments banks and their customers, especially since they have been requesting this increase for some time.
Non-Resident Indians (NRIs) are not allowed to hold deposits in payment banks in India. The payments banks aim to make access to banking services more widespread and affordable, which makes them a valuable tool for achieving greater inclusion. Overall, the increase in deposit limits and the flexibility offered by payment banks will help to further the goal of financial inclusion in India.
10. Documents required for Payment Bank License in India
To operate a Payment Bank in India, it is mandatory to obtain a Payment Bank License from the Reserve Bank of India (RBI). This license allows the applicant to carry out various banking activities. However, to get the Payment Bank License, one has to submit several documents, including those related to individual promoters, company promoting the bank, and members in the promoter’s group. The documents include details such as name, address, PAN card details, bank and branch details, credit facilities, and financial records of the company. Further, the eligibility criteria are checked, and the external advisory committee verifies the documents for Payment Bank License and other compliances. If approved, the applicant has to start the business within 18 months. The minimum paid-up capital that is mandatory for the Payment Banks is Rs. 100,00,000, and it is governed by various legislation such as the Banking Regulation Act 1949, RBI Act 1934, etc.
11. Disadvantages of Payment Bank License in India
Payment bank license in India was introduced with the aim of promoting financial inclusion in the country. However, the model has proved to be broken with a number of disadvantages. One major issue with payment banks is the restricted business model, which has driven out stakeholders even before the launch of the banks. This has resulted in very limited players in the sector. The few remaining stakeholders seem to be addressing different use cases instead of savings and investments, which the payment banks were initially designed for. Despite having good intentions, the lack of proper revenue generation for the payment banks has become a major disadvantage. As a result, these banks are currently facing a revenue crunch and require an aggressive revenue-focused strategy to save them from extinction.
12. Frequently Asked Questions about Payment Bank License in India
What is Payment Bank License in India?
Payment Bank is a newly introduced model by the Reserve Bank of India (RBI). To start an online Payment Bank in India, a company or NBFC needs to acquire Payment Bank License from RBI. It provides a range of financial services except for credit cards and loans.
What are the benefits of Payment Bank License?
One of the major benefits of Payment Bank is that the account holder is not forced to maintain a certain amount as the minimum required amount. Zero balance accounts are also possible. Due to its operational efficiency, higher interest is offered to the customers. Another benefit is its wide distribution network, which helps in converting retail outlets to separate banking points.
What are the laws governing Payment Banks in India?
According to the Banking Regulations Act 1949, the Reserve Bank of India issues Payment Bank License to the applicant company. Banking activities are carried out under this license. The regulatory structure of Payment Bank License includes the Deposit Insurance & Credit Guarantee Corporation Act 1961 and Payment & Settlement System Act 2007.
What is the main objective of Payment Bank concept in India?
The Payment Bank concept was introduced in 2013 with the objective to amplify the reach of payment facilities to small businesses and income groups. The Reserve Bank of India wants to increase the penetration of finances in remote areas by using the Payment Bank concept.
What are the documents required to obtain a Payment Bank License in India?
The required documents include a professional tax registration certificate, proof of address, a copy of the Aadhaar card, and a PAN card. The detailed list of documents can be obtained from Meerad.
Which are the Payment Banks operating in India?
The first-ever Payment Bank established in India is the Bharti Airtel. Other Payment Banks include Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, and Paytm Payments Bank, among others.