On August 19, 2015 the RBI had granted ‘in principle’ approval to 11 entities for establishment of payment banks, which include established ones like Reliance Industries, Aditya Birla, Tech Mahindra, Airtel and Vodafone. The 'in-principle' approval shall be valid for a period of 18 months during which the applicants shall have to comply with the stipulated guidelines and fulfil other conditions as may be laid down by the RBI.
A payment bank is a type of non-full service niche bank in India. It can only receive deposits and provide remittances. It cannot carry out lending activities.
Payment banks are created to help a country to reach its financial inclusion targets. It is expected of payment banks to target migrant labourers, low-income households and small businesses by offering small savings accounts and remittance services with a low transaction cost.
What services payment banks can render?
§ Accept demand deposits of upto Rs. 100,000 per individual customer.
§ Issue ATM/debit cards usable on ATM networks of all banks.
§ Make payments and provide remittance services through various channels.
§ Act as a Corporate Business Correspondents of another bank (BCs), subject to the RBI’s guidelines on BCs.
§ Distribution of mutual fund units and insurance products, etcWhat activities payment banks cannot undertake
§ The payments bank cannot undertake lending activities; they cannot offer loans and cannot raise a deposit exceeding Rs. 1 lakh
§ Payments banks cannot issue credit cards.
How payment banks will benefit people?
RBI has granted in-principle approval to entities which have experience in different sectors and which possess different capabilities so that different models could be tried. All selected entities would have wide reach and adequate technological and financial strength to service customers across the country. Their likely impact on Indian banking system is listed out hereunder:Cash less banking: The 11 approved entities include phone companies which have large distribution networks throughout India, including in rural remote locations. The phone companies will essentially rely on technology to provide banking services to all customers, using mobiles as the vehicle of banking which will help them to reach people living in remote areas. They will be able to easily convert cash into virtual money and vice versa.
They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a simple phone. They can transfer money directly to bank accounts at nearly no cost acting as a part of the gateway that will connect with banks.
Cheaper banking services: Cheaper baking services will be available for people as banking costs will come down due to intense competition in banking sector after introduction of 11 new entities as payment banks. At present private banks like HDFC Bank, ICICI Bank and Axis Bank make huge profits from their low-cost current and savings bank accounts. Now a big chunk of their banking services will move to payment banks, who will offer higher savings bank rates of 5 to 7 %.
Facilitation of Government’s subsidy schemes: Government subsidies like subsidy on LPG, kerosene or food and fertiliser will be routed through payment banks which would have a greater reach.