Access to banking services has always been inadequate for lower income groups. In order to dispense financial services to people in the lower strata at reasonable costs, the government of India introduced the distinct concept of payment banks in 2014.

Payment banks can provide banking services such as issuance of ATM/debit cards and sale of mutual fund units and insurance products, and can accept deposits to a maximum limit of ₹100,000 (US$1,500) per customer. They also render foreign exchange services at lower costs than scheduled commercial banks. However, payment banks are distinct from commercial banks as they cannot provide lending facilities to their customers. These banks principally enable the customers to make transfers and remittances through different channels such as mobile phones.

This is not the government’s first initiative to encourage cashless transactions. Earlier Pradhan Mantri Jan Dhan Yojana was introduced to advance the provision of banking services to people who do not have any bank accounts. These strategies show that the government is endeavouring to encourage the notion of a cashless economy and improve the availability of banking services to lower income households.

Payment banks are governed by guidelines for the licensing of payment banks issued by Reserve Bank of India (RBI). Promoters that are eligible to acquire payment bank licences include existing non-bank issuers of prepaid payment instruments. Others such as individuals/professionals, non-banking finance companies, corporate business correspondents, mobile telephone companies, supermarket chains, other companies, real estate sector cooperatives that are owned and controlled by residents, and public sector entities may also apply to set up payment banks.

The guidelines further prescribe that promoters/promoter groups with a sound track record of professional experience of running their businesses for at least five years can have a joint venture with an existing scheduled commercial bank to set up a payment bank.

The minimum paid-up capital requirement for a payment bank is ₹1 billion. Under the RBI guidelines, it is mandatory for a payment bank to ensure that a minimum of 75% of its “demand deposit balances” is held in statutory liquidity ratio eligible government securities/treasury bills which have a maximum maturity of only one year. Payment banks are further required to hold a maximum 25% in the form of current and time/fixed deposits with scheduled commercial banks for the purposes of operations and liquidity. These obligations are in addition to the amounts held in cash reserve ratio with the RBI.

To facilitate and foster the business of payment banks, digital signatures are encouraged instead of wet (physical) signatures for opening of accounts with payment banks. In addition, regulations pertaining to know your customer requirements for commercial banks are applicable to payment banks.

The reason behind the setting up of payment banks is to enable the customers to go cashless and transform the existing economic diaspora into a digital economy, providing ready access to any demographic of the population irrespective of their physical location.

As mentioned above, while payment banks provide several financial services, they do not offer lending facilities, which is the primary function of commercial banks. Another striking distinction between the two is distribution of credit cards, which can only be undertaken by commercial banks. There is also a differentiation between the paid-up capital requirements of commercial banks and payment banks, which reflects these distinct functions. The requirement for commercial banks is ₹5 billion, compared with ₹1 billion for payment banks.

Through the introduction of payment banks, private players have been brought in to provide a boost to the availability of financial services to lower income households and make India a cashless economy. Recently the RBI gave in-principle approval to eight entities to operate payment banks, out of which two entities, i.e. Airtel and India Post, have started their operations. Airtel’s payment bank is providing interest of 7.25% and India Post is providing 4.5-5.5% interest on their customers’ deposits.

Paytm, which is already popular among the population of India, is set to enter the field and will be launching a payment bank shortly. It is expected that Paytm’s involvement will encourage Indians to avail themselves of the benefits provided by payment banks.

Although payment banks are expected to serve the purpose of making India a cashless economy, the lack of lending services may limit their success.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Kanika Malhotra and Pran Malik are associates.