Payment Banks

In News

The Reserve Bank of India (RBI) has increased the maximum balance limit for payments banks to Rs 2 lakh from Rs 1 lakh earlier.

About

• The extant ‘Guidelines for Licensing of Payments Banks’ issued on November 27, 2014 allow payments banks to hold a maximum balance of Rs 1 lakh per individual customer.
• Need for increase in limit: This will further encourage their efforts for financial inclusion and to expand their ability to cater the needs of their customers, including MSMEs, small traders and merchants.

Payments Bank

• A Payments Bank is similar like banks, but they are operating on a smaller scale without involving any credit risk.
• They can operate both current as well as saving accounts and can provide all other services like ATM cards, fund transfers, bill payments, recharges, net banking among others to the account holders.

Difference from Traditional Banks

• They can’t advance loans or issue credit cards, and cannot accept deposits from the Non-Resident Indians (NRIs).

Deployment of funds

• They are not authorised to get involved in lending activities. It is mandatory for the payments bank to maintain Cash Reserve Ratio (CRR) with the Reserve Bank of India.
• The payments bank has to invest at least 75% of its demand deposit balance in the Government security or Treasury Bills.

Objectives

• To provide financial inclusion to the following sections:
  • Low-income household
  • Migrant labour workforce
  • Small business
  • Unorganized sector

Background

• In September 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket Mor to study ‘Comprehensive financial services for small businesses and low income households’.
• In August 2015, RBI had given in-principle approval to 11 entities to start payments banks.
• The Airtel Payments Bank was the first one to launch payments banks in the country.
• India Post Payments Bank (IPPB) had started operations at two pilot branches in January 2017.
• Some other popular payments banks are Paytm Payments Bank and Fino Payments Bank.

Benefits of Payment Banks

• Financial Inclusion: They provide people with a savings account, which can be opened by them easily and it has tie-ups with commercial banks which provide ATM. Thus making money transfer easy and smooth for poor people.
  • As maintaining a savings account used to cost a lot if minimum balance is not attained.
  • They provide higher rates of interest than other commercial banks.
• Alternative of traditional banks: Rural areas have always been neglected and thus the people of rural areas face a lot of problems. Village people need to travel to cities to get their money transactions done. This is because traditional banks do not open branches in small villages.

Source: LM