What is Payment Banks? - Definition, Features, Objectives

By Shubhra Anand Jain|Updated : November 24th, 2022

Payment banks are special types of banks created by the Reserve Bank of India. Payment Banks in India are not authorized to issue credit or loans to any of their customers. Payment banks, however, are allowed to accept the restricted deposit of up to 2 lakh per customer. Some common payment banks are India Post Payments Bank, Fino Payments Bank, etc.

Payment Bank is an important topic in the economy section, which comes under General Studies 3 of UPSC CSE Exam, which is equally important to both Prelims and Mains Exam points of view. Here we provide comprehensive notes on Payment Banks and their related topics such as their history, features, objectives, comparison between Payment Banks and Commercial Banks, etc.

Table of Content

What are Payment Banks?

A payment bank is a new form of bank constituted by the Reserve Bank of India on the recommendation of Dr. Nachiket Mor committee to widen the spread of payment and provide financial services to low-income households, small businesses, and the migrant labor workforce.

  • There are 6 payment banks in India: Airtel Payments Bank, Jio Payments Bank, NSDL Payments Bank, Paytm Payments Bank, India Post Payments Bank, and Fino Payments Bank.
  • Payment Bank can accept demand deposits up to 2 lakh. Payment banks provide services like- net banking, mobile banking, debit Banks, and ATM cards, but they cannot lend loans and issue credit cards.

Download Short Notes on Payment Banks

List of Payment Banks in India

There are 6 payment banks in India and are listed below:

S.No.

Name of Bank

Headquarters

Features

1

Airtel Payment Bank

New Delhi

First payment bank in India which was incorporated in January 2017.

2

Fino Payment Bank

Mumbai, Maharashtra

It was incorporated in April 2017

3

India Post Payment Bank

New Delhi

It was launched in September 2018.

4

Paytm Payment Bank

Noida, Uttar Pradesh

It is India only first mobile bank with zero balance-zero digital transaction to charge accounts

5

NSDL Payment Bank

Mumbai, Maharashtra

It was set up in 2018

6

Jio Payment Bank

Navi Mumbai, Maharashtra

It is the sixth payment bank in India

History of Payment Banks

To study 'Comprehensive financial services for small businesses and low-income households', the RBI constituted a committee headed by Dr. Nachiket Mor in September 2013 to propose measures to increase access to financial services and achieve financial inclusion.

  • In January 2014, the committee submitted its report to the Reserve Bank of India, and one of the key recommendations of the committee was to introduce a specialized bank or "Payment Banks".
  • The Reserve Bank of India prepared a draft to govern the payments Bank in the same year (July), and on 27th November 2014, the final guidelines were issued.
  • Reserve Bank of India released the list of 41 entities that had applied for a payment Bank license and evaluated the application. The RBI announced an External Advisory Committee(EAC) headed by Nachiket Mor. The External Advisory Committee examined the applicant entities based on their financial track record and governance issues.
  • On July 6, 2015, the External Advisory Committee submitted its finding, and finally, 11 entities got the 'in-principle' license to launch the Payment Banks by the Reserve Bank of India for 18 months, within which the entities have to fulfill the requirement, and after satisfied, the condition has been fulfilled by the section 22 of the Banking Regulation Act, 1949 RBI grant the full licenses.

Features of Payment Banks

The function of Payment banks and Commercial banks are almost the same. However, there are some restrictions on Payment banks as follows-

  • There is a limitation on saving deposits in the Payment Bank that a maximum limit of saving deposit in a Payment bank is up to 1 lakh per person.
  • The customers can open both savings and current accounts in the Payment Banks.
  • Payment Banks provide services like ATM or debit cards but not credit cards to the customer.
  • Non-Resident Indians cannot deposit in the Payment Banks.
  • Customers of the Payment Banks are not provided services like lending a loan.
  • The customers of such Banks cannot receive remittances on the current accounts from the cross border.
  • Like the other commercial banks, they are required to deposit amounts with the Reserve Bank of India in the form of the Cash Reserve Ratio(CRR).
  • Payment Bank also provides the facility to pay utility bills online to their customers, i.e., mobile banking and net banking services.
  • To differentiate itself from the other banks, the word 'Payments Bank' must be included in their names.
  • Payment Banks can work as partners with the other commercial banks and sell mutual funds, insurance, etc., only by prior approval from the RBI.
  • Payment banks are prohibited from Undertaking any activities affiliated with Non-Banking Financial Services.

Objectives of Payment Banks

Payment bank is set up to achieve financial inclusion and increase access to financial services by providing small savings deposit accounts and payments/remittances services to low-income households, migrant labor workforce, and other unorganized sector entities.

Scope of Activities in Payment Banks

  • They do not provide services for loans.
  • Issuing of ATM/debit card.
  • They do not issue credit cards.
  • Accept for demand deposits up to 1 lakh per customer, initially rejected.
  • Mutual fund units and insurance products distribution.
  • They are allowed to invest only that money into the Government Securities received from the customer's deposit.
  • The Payment Banks do not accept NRI deposits.
  • The account holder of the Payment Bank would be able to deposit and withdraw money through any ATM.

Regulations under Payment Banks

  • At least 40% of the promoter's stake should remain for the first five years according to the rules for the FDI in private banks in India. These banks allow foreign shareholding.
  • Banking Regulation Act, 1949 regulates voting rights.
  • To differentiate it from other types of banks, the term 'Payment Bank' must be used in the name of the banks.
  • Under section 22 of the Banking Regulation Act, 1949, the banks will be licensed as payment banks, and under the Companies Act, 2013, Payment banks will be registered as a public limited company.

Significance of Payment Banks

  • Payment banks increased access to financial services and helped achieve financial inclusion.
  • It helps to increase financial literacy, which helps in the fight against poverty through the spreading of Banking.
  • Expansion of the formal financial system.
  • Helps in the expansion of rural banking.
  • Variety of the services provided by the Payment Banks.
  • More money flows into the banking system through the Payment banks.
  • Payment Banks help in achieving the goals of the big banks like SBI to expand their rural reach.
  • Deals with the transaction of low value and high volume.
  • Payment Banks are an effective substitute for Commercial Banks.

Limitations of Payment Banks

  • Payment Banks cannot provide services such as lending loans and credit cards.
  • As they can't lend money, they cannot earn high interest as commercial banks did.
  • There is intense competition between the Payment banks and the Unified Payment Interface (UPI) system.
  • There is a lack of awareness about how to access the services among the public.
  • Poor infrastructure and poor operational resources.
  • Issues related to various techniques.

Payment Banks vs Commercial Banks

  • The main aims of the payment banks are to widen the spread of payment and provide financial and remittance services to small businesses, low-income households, and the migrant Labour workforce.
  • There are two types of banking licenses- Universal bank licenses and Specialized bank licenses issued by the Reserve Bank of India.
  • Payment banks also provide services similar to the commercial bank with some exceptions such as cannot lend loans, issue a credit card, it can accept demand deposits only up to 1 lakh, etc. Such exception criteria do not apply to Commercial banks like ICICI Bank or SBI Bank.

Payment Banks- Important Points for UPSC Prelims

  • FDI is responsible for governing the foreign shareholders of the payment banks.
  • The promoter (person who assists in funding new business) must contribute at least 40% of the paid-up equity capital for the first five years after the company begins operation.
  • Paid-up capital- The amount of money that company receives after issuing shares to its shareholders.
  • Credit Risk- The risk of the debtor's inability to repay the loan.

Payment Banks UPSC

Payment Banks are an important topic of the Economy, which is recently seen frequently in the news, so it has become important for both UPSC Prelims and Mains paper perspective. Here we provide comprehensive notes of the Payment Banks UPSC. To prepare this or other relevant topic related to the economy or current affairs. You can also download the NCERT Books for UPSC and Economy UPSC Books.

The Aspirants who are going to appear at UPSC-CSE can also get UPSC Syllabus and UPSC Notes for Economy. Here aspirants are also facilitated with UPSC Previous Year Question Paper and Other Study Materials.

Download Short Notes on Payment Banks for UPSC Exam

Payment Banks UPSC Prelims Question 2016

Question- Find the correct statements about Payment Banks.

  1. Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
  2. Payment Banks can issue both credit cards and debit cards.
  3. Payment Banks cannot undertake lending activities.

Select the correct code from below:

  1. 1 and 2 only
  2. 1 and 3 only
  3. 2 only
  4. 1, 2 and 3

Answer- B

Payment Banks UPSC Question

Question- Prelims 2017- Which of the following is the most likely consequence of implementing the 'Unified Payments Interface (UPI)?

  1. Mobile wallets will not be necessary for online payments.
  2. Digital currency will totally replace physical currency in about two decades.
  3. FDI inflows will drastically increase.
  4. The direct transfer of subsidies to poor people will become very effective.

Answer- A

Other Important UPSC Notes
Comptroller and Auditor General of IndiaEmployees State Insurance
Sustainable Development Goals (SDGs)Collegium System
French RevolutionWorld Heritage Sites in India
BiodiversityBattle of Buxar
Freedom fighters of IndiaForeign Direct Investment
2nd ARC ReportRowlatt Act
Preamble of Indian ConstitutionConstituent Assembly of India

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FAQs on Payment Banks

  • A payment bank is a new form of bank constituted by RBI to widen the spread of payment and provide financial services to low-income households, small businesses, and the migrant labour workforce.

    • Payment Banks provide services like ATM or debit cards but not credit cards to the customer.
    • Non-Resident Indians cannot deposit in the Payment Banks.
    • Customers of the Payment Banks are not provided services like lending a loan.
    • There is a lack of awareness about how to access the services among the public.
    • Poor infrastructure and poor operational resources.
    • Issues related to various techniques.
  • Payment banks also provide services similar to the commercial bank with some exceptions such as cannot lend loans, issue a credit card, it can accept demand deposits only up to 1 lakh, etc. Such exception criteria do not apply to Commercial banks like ICICI Bank or SBI Bank.

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