In this article, Kashish Khattar of Amity Law School, Delhi discusses the RBI’s Guidelines related to Payment Banks.

Introduction

Payment Banks (“PB”) are to be registered as public limited companies under the Companies Act, 2013 and are to be licensed under Sec 22 of the Banking Regulation Act, 1949. PBs are to be given the status of scheduled banks under the section 42 (6) (a) of the Reserve Bank of India Act, 1934. However, the words “Payments Bank” have to be used by the companies in their name in order to differentiate it from other banks.

They will be governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Deposit Insurance and Credit Guarantee Corporation Act, 1961; and other relevant Statutes and directives. The guidelines will be reviewed by the RBI regularly. RBI’s main aim to push for payments bank is to serve the need of different banking activities in the rural areas. This has both micro and macroeconomic benefits and serves the general public at large.

History of Payment Banks

RBI on 23rd September 2013 constituted a committee on Comprehensive Financial Services for Small businesses and Low-Income Households that was headed by Nachiket Mor. The committee submitted its report on 7th January 2014 and also recommended the formation of a new category (Payment Banks) among its other recommendations.

Draft guidelines for the license of Payment Banks and their list were released by RBI in February 2015. The license applications were evaluated by External Advisory Committee headed by Nachiket Mor who submitted its report on 6th July 2015 after examining the financial track record as well as governance issue on applicant entities.

On 19th August 2015, RBI gave the in-principle license to 11 entities to launch Payment Banks. The In-Principle License is valid for a period of 18 months and the concerned entities are required to fulfil entities are required to fulfil all the requirements within this period. They are not allowed to engage in Banking activities in this period. After the fulfilment of all the conditions which are required to set up a Payment Bank, RBI will grant licenses under S. 22 of the BR Act, 1949.

The advantage of Payment Banks over Traditional Banks

1. Interest Rates: The interest rate for a commercial bank is between 3.5 and 6 per cent. Payment banks are offering a really good deal in the case of interest rate with the highest being a 7.25%. Payment banks have a statutory limit of Rs. 1L per account from individuals and small businesses.
2. Zero balance account: Payment banks offer a zero balance account or a no minimum balance account without any extra or hidden charge, unlike a commercial bank who levy charges if the customer doesn’t hold a minimum balance in their account.

Small Banks v. Payment Banks

Small Finance Banks (“SB”)	Payment Banks
SBs can accept deposits and can offer loan products.	PBs can open small saving accounts and accept deposits of upto Rs. 1 lakh per individual.
SBs can provide debit card facilities.	PBs can issue debit cards but they are not allowed to provide credit card facilities.
SBs are allowed to set up their own ATMs.	PBs are allowed to set up their own ATMs.
SBs can lend money.	PBs cannot lend any money to the general public.
SBs can accept all types of deposits – fixed deposits, term deposits, recurring deposits etc.	PBs cannot accept fixed deposits, term deposits, recurring deposits etc.
The main objective of SBs is to provide banking services to small farmers, micro and small industries, and the unorganized sector.	The main objective of a PB is to provide banking services to the migrant labour workforce, low-income households, small businesses and other unorganised sectors.

Guidelines for Licensing

Let us now analyse the guidelines for licensing of PBs issued by the RBI to govern the PBs.

The scope of Activities

1. Acceptance of demand deposits: A maximum balance of Rs. 1L per customer is allowed.
2. Issuance of ATM/debit cards. Cannot issue credit cards.
3. Payments and remittance services through various channels.
4. PBs can act as Business Correspondents (“BCs”) of another bank, subject to the Reserve Bank guidelines on BCs.
5. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.
6. Internet Banking: RBI is open to PBs offering Internet Banking services, they are required to comply with RBI instructions on internet banking and all the other related guidelines.
7. PBs can undertake utility bill payments etc. on behalf of its customers and the general public.

Deployment of Funds

1. PBs cannot undertake lending activities.
2. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the RBI on its outside demand and time liabilities. PBs are also required to invest minimum 75 per cent of its “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

Capital requirement 

1. The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.
2. The payments bank will have a leverage ratio of not less than 3%  which basically mean that its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

Promoter’s contribution

The promoter’s minimum initial contribution to the paid-up equity capital of the payment bank has to be at least 40% for the first five years after the commencement of business.

Foreign shareholding

It will be according to the FDI Policy for private sector banks which is notified from time to time. The permitted limit right now is 74% out of which 49% can be through the automatic route and the remaining 25% beyond 49% will be through the government route.

Other Conditions

Operations have to be technology and network driven from Day I. Conforming to generally acceptable standards is a given.

PBs should have a Customer Grievances Cell which is able to handle the customer complaints.

Procedure for Application

Applications should be in conformity with Rule 11 of the BR (Companies) Rules, 1949. They should be in the format as given in Form III and should be submitted to the Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai – 400 001.

Procedure for RBI Decisions

1. An External Advisory Committee (EAC) which will consist of eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications.
2. The decision to issue an in-principle approval for setting up a PB will be taken by the RBI. The RBI’s decision in this regard will be final.
3. The validity of the in-principle approval issued by the RBI will be 18 months.
4. The names of applicants for bank licences will be placed on the RBI’s website.

Stringent KYC Norms

The RBI has updated the Operating Guidelines for PBs with respect to KYC in the wake of  Airtel Payments Bank rerouting of subsidies by creating Payments Bank accounts for subscribers validating mobile phone numbers.

The updated guidelines stand as follows

“For the purpose of verifying the identity of customers at the time of commencement of an account-based relationship, Regulated Entities (“RE”), shall at their option, rely on customer due diligence done by a third party, subject to the following conditions:

1. Necessary information on such customers’ due diligence carried out by the third party is immediately obtained by REs.
2. Adequate steps are taken by REs to satisfy themselves that copies of identification data and other relevant documentation relating to the customer due diligence requirements shall be made available from the third party upon request without delay.
3. The third party is regulated, supervised or monitored for, and has measures in place for, compliance with customer due diligence and record-keeping requirements in line with the requirements and obligations under the PML Act.
4. The third party shall not be based in a country or jurisdiction assessed as high risk.
5. The ultimate responsibility for customer due diligence and undertaking enhanced due diligence measures, as applicable, will be with the RE.”

This is Section 14 of the Master Directions on KYC from Feb 25, 2016, by RBI which will now be used to regulate the PBs.

The previous operating guidelines for PBs allowed them to utilise the same KYC details as “of the same quality as prescribed for a banking company.” However, the PBs have to follow the RBI Master Direction of KYC, and any amendments made to the same. This update has been mainly done to prevent the piggybacking that was seen in the case of Airtel Payments Bank accounts being opened with no discretion given to the customer. This was done by interpreting the previous guidelines that allowed the reuse of the authentication done by telecom companies by the associated Payments Bank with an intention to simplify account opening.

List of Payment Banks in India

1. Aditya Birla Nuvo
2. Airtel M Commerce Services
3. Cholamandalam Distribution Services
4. Department of Posts
5. FINO PayTech
6. National Securities Depository
7. Reliance Industries
8. Sun Pharmaceuticals
9. Paytm
10. Tech Mahindra
11. Vodafone M-Pesa
12. India Post ( Starts operation by 21 Aug )

*Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licenses.

Conclusion

The primary objective of setting up payments banks was to “further financial inclusion by providing small savings accounts and payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology-driven environment.”

Payment banks, which were supposed to be the next big thing, sadly have not lived up to the hype so far. The jury is still out on whether the PBs will ever succeed in the country, but one thing is clear: it won’t be easy for them to survive.