All about Payments Banks in India

The Reserve Bank of India (RBI) during July 2014 had issued the draft guidelines for licensing of Payments Banks and Small Banks in India. We hereby provide brief information about nature of Payments Banks and what would be the proposed structure of these banks.

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What is a Payments Bank?

As the name suggests, Payments Bank is a specialized bank which provides wide array of payment facilities to customers and users. Payments Banks would help a common person to make payments through an easy mode, to a wide array of institutions/people in a cost effective manner. They are expected to emerge as specialized banks to provide services to small businesses and persons. Payments banks will be used only for transaction purposes and for deposits. Unlike small banks, payments banks can’t lend money to people.

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Have we seen any model of Payments Bank till now?

Yes, we have actually seen so many models that are quite similar to Payments Banks. A very common example in India would be India Post’s Money Order service. The Money Order service is very similar to the service of a Payments Bank. It facilitates a person to make payment to a person or institution far away. It charges a fee for making available this service. However, as can be seen, the Money Order service is quite an expensive service and a user has to make hefty payments as commissions for using the service. With the Payments Bank this payment service would be more affordable, more flexible, faster and more reliable.

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RBI-proposed model of Payments Banks is based on the recommendations of which Committee?

Nachiket More Committee. The official name of this committee is ‘Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households’.

The Nachiket More Committee recommended that Payments Bank should be formed as to provide a limited range of products, such as, acceptance of demand deposits and remittances of funds. The Committee expected that these banks would contribute in increasing ‘Financial Inclusion’ and bringing more and more un-banked people and areas into the banking stream.

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Main Objectives of Payments Banks

- To provide specialized activities related to retail payment and remittance and focus on unbanked areas

- Catering to the banking needs of migrant workers in metros or Tier-I cities who need to send money to their families at their native places. These banks will also offer services like utility bill payments.

- Include more and more people in ‘Financial Inclusion’ initiative presently undertaken in the Indian banking sector.

- Making available a cheap and cost-effective payment system by making extensive use of Internet, mobile and other ‘Internet of things’ devices and services

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Which entities have been allowed by the RBI (in draft proposals) to open Payments Banks in India?

- The entities proposed to be eligible to set up a Payments Bank includes following :

- Existing non-bank Pre-paid Instrument Issuers (PPIs)

- Non-Banking Finance Companies (NBFCs)

- Corporate BCs

- Mobile telephone companies

- Super-market chains

- Corporate companies

- Real sector cooperatives

- Public sector entities, etc.

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What will be the main proposed functions of Payments Banks?

- Accepting demand deposits (Subject to a maximum balance of Rs. 1,00,000)

- Providing Payment and Remittances services

- Providing Internet and Mobile Payment services

- Issuing pre-paid instruments like prepaid cards

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What would be the Business Model for Payments Banks?

The main business model for Payments Banks is expected to be the amount charged by them as ‘transaction fee’ to execute payments transactions. The income from Net Interest Margin (NIM) is expected to be very slim or almost nil. And since RBI in its guidelines for Payments Banks has clearly stated that Payments Banks would not be allowed to issue asset/credit products (loans) and will need to maintain adequate CRR and SLR, it remains to be seen as to how Payments Banks build a pure transaction fee income based business.

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(Note : Dear Readers the above article is based on Draft Guidelines issued by the RBI on 17 July 2014. Since it has sought feedback from the public by 28 August 2014, the actual provisions, functions and conditions for Payments Banks can change. We have, however, tried to give a general outline of Payments Bank and its functioning in this article)