The Reserve Bank of India (RBI) released the guidelines for licensing of payments banks on its website on Nov 27, 2014. The move aimed at promoting financial inclusion by providing small savings accounts and payment/remittance services to various sectors of the society.
RBI Guidelines Keypoints:
- RBI released the Guidelines for Licensing of Payments Banks on Nov 27, 2014
- Objectives of payments banks are to further financial inclusion and provide small savings accounts and payments/remittance services
- Eligible promoters include non-bank pre-paid payment instrument issuers, individuals/professionals, NBFCs, corporate business correspondents, mobile telephone companies, etc.
- Payments banks can accept demand deposits and issue ATM/debit cards, but cannot issue credit cards.
- They can provide payments and remittance services through various channels and act as business correspondents for other banks.
- Payments banks can distribute non-risk sharing simple financial products like mutual fund units and insurance products. (RBI guidelines)
- They cannot undertake lending activities.
- Minimum paid-up equity capital for payments banks is Rs. 100 crore.
- Payments banks should have a leverage ratio of not less than 3%.
- Promoter’s minimum initial contribution to the paid-up capital should be at least 40% for the first five years.
- Foreign shareholding in payments banks follows the FDI policy for private sector banks.
- Operations of the bank should be technology-driven and have a high-powered Customer Grievances Cell.
- Applications for payments bank licenses can be submitted to the Reserve Bank until Jan 16, 2015, and afterward on a continuous basis.
- An External Advisory Committee will evaluate the applications, and the decision to issue in-principle approval will be taken by the RBI.
- In-principle approval will be valid for eighteen months.
- The limit of maximum balance per customer for payments banks was increased from Rs. 1 lakh to Rs. 2 lakh on April 8, 2021.
According to the RBI guidelines, eligible promoters for setting up payments banks included existing non-bank Pre-paid Payment Instrument (PPI) issuers, individuals/professionals, Non-Banking Finance Companies (NBFCs), corporate Business Correspondents (BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities. Additionally, a joint venture between a promoter/promoter group and an existing scheduled commercial bank was allowed.
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Payments banks were authorized to accept demand deposits, issue ATM/debit cards (excluding credit cards), provide payments and remittance services through various channels, act as Business Correspondents of other banks, and distribute non-risk sharing financial products such as mutual fund units and insurance products. However, lending activities were not permitted for payments banks.
In terms of funds deployment, payments banks were required to maintain a maximum balance of Rs. 100,000 per individual customer. They were also accountable for investing a minimum of 75% of their “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with a maturity of up to one year. The remaining 25% could be held in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
The RBI guidelines also stated that the minimum paid-up equity capital for payments banks should be Rs. 100 crore. Furthermore, the leverage ratio for a payments bank should not be less than 3%, meaning that its outside liabilities should not exceed 33.33 times its net worth. Promoters were required to contribute a minimum of 40% of the paid-up equity capital for the first five years. Foreign shareholding in payments banks was subject to the Foreign Direct Investment (FDI) policy for private sector banks.
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To ensure operational efficiency, payments banks were expected to have fully networked and technology-driven operations from the start, in compliance with accepted standards and norms. They were also required to establish a robust Customer Grievances Cell for addressing customer complaints.
Interested parties were encouraged to submit their applications, along with the necessary documentation, by January 16, 2015. An External Advisory Committee (EAC) comprising professionals from the banking and finance industry evaluated the applications. The Reserve Bank made the final decision on issuing an in-principle approval for setting up a payments bank.
These RBI guidelines were part of the RBI’s efforts to create a framework for differentiated banks, such as payments banks, that catered to the specific credit and remittance needs of small businesses, unorganized sectors, low-income households, farmers, and migrant workers. The RBI periodically reviewed and revised these RBI guidelines based on the experience gained in dealing with payments banks.
In a related development, the new RBI guidelines recently enhanced the limit of the maximum balance per customer at the end of the day from ₹1 lakh to ₹2 lakh for payments banks on Apr 8, 2021. This decision aimed to provide more flexibility to payments banks in furthering financial inclusion and expanding their services.
Press Release Sources: (RBI Guidelines)
RBI Guidelines for Licensing of Payments Banks (Nov 27, 2014)
Enhancement of Limit of Maximum Balance per Customer for Payments Banks (Apr 8, 2021)
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