payment banks in India. a new paradigm for rural development

The guidelines for licensing of payment banks were announced in November 2014 and on Wednesday the Reserve Bank of India (RBI) gave an in-principle approval to 11 of the 41 applicants. The full list includes Reliance Industries, Aditya Birla Nuvo, Vodafone, and Airtel, with the RBI adding it will move to give such licences more regularly in the future. "The 'in-principle' approval granted will be valid for a period of 18 months, during which time the applicants have to comply with the requirements under the guidelines and fulfil the other conditions as may be stipulated by the Reserve Bank," the RBI stated. The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for anyone to get a bank account. That's also why the cash limit in the accounts is set to just Rs. 1 lakh - it might seem like a very low limit to most people reading this, but if you're typically outside the banking system, then it is a fairly comfortable amount. The real effect will come to remittances within the country, as it will become easier for people to send money home to smaller towns and villages while working in the city. " The new payment banks will also make people less dependent on cash, even for small sums, and since a mobile wallet could be a bank account soon, this move could, over time, have a big impact on m-commerce. Payment banks can accept deposits restricted to Rs. 1 lakh per customer, and are allowed to pay customers interest on the money that is being deposited. They can be used for either current accounts or savings accounts. For companies that have operated as mobile wallets (which are a type of Pre-Paid Instrument aka PPI), this is a big step forward as it raises the funds limit, and allows interest to be paid on the deposits, making it more attractive for users to store their money with a Paytm or m-Pesa. Unlike a regular bank however, a payment bank can't extend loan to people, or issue credit cards. Also, the payment banks are only allowed to invest the customers deposit into government securities. While the payment banks can't issue credit cards, they can issue ATM and debit cards. Since many of the 11 new license holders already operate mobile wallets, the ability to issue an ATM card helps close the loop and makes it easier to convert virtual money into cash, and vice versa. This is also very important when considered from the perspective of financial inclusion, as someone could now fill cash into a m-Commerce bank account from Delhi, and a relative in a small town who holds the debit card could withdraw cash from any ATM frictionless, or even in a more rural location, through any point of sale terminal with a "business correspondent", essentially an authorised partner for the bank. It's these partners - and theoretically the small convenience shop in a village that sells mobile recharges could be one of them - that will serve the purpose of bank branches, though the payment banks can set up branches if they want. Payment banks can be integrated with your savings bank accounts via IMPS and NEFT transfers. As already mentioned, the payment banks ATM or debit cards will also work on all banks' machines. Payment banks can't accept NRI deposits, which makes sense considering the goal of financial inclusion. The RBI guidelines say that payment bank licenses would be granted to mobile firms, supermarket chains, and others, to cater to individuals and small businesses. The goal is to provide small savings accounts, and payments and remittance services to a migrant labour workforce, low income households, small businesses, and others. Of the 41 companies and individuals that applied, only 11 have been selected. Interestingly, some of the companies that did not make the cut for now, such as Oxygen services, already see a large chunk of their business coming through remittances, and have worked on a four-month pilot project for the RBI, using the Adhaar card to enable cash payments for government schemes. • Key features of the Payments Banks guidelines are: • Objectives: • The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users. • Eligible promoters : • Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks. • A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank. However, scheduled commercial bank can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949. • Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or running their businesses for at least a period of five years in order to be eligible to promote payments banks. • Scope of activities : • Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer. • Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards. • Payments and remittance services through various channels. • BC of another bank, subject to the Reserve Bank guidelines on BCs. • Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc. • Deployment of funds : • The payments bank cannot undertake lending activities. • Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be 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 : • The minimum paid-up equity capital for payments banks shall be Rs. 100 crore. • The payments bank should have a leverage ratio of not less than 3 per cent, i.e., 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 such payments bank shall at least be 40 per cent for the first five years from the commencement of its business. • Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time. • Other conditions : • The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms. • The bank should have a high powered Customer Grievances Cell to handle customer complaints. • Procedure for application: In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted in the prescribed form (Form III) to the Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai – 400 001. In addition, the applicants should furnish the business plan and other requisite information as indicated. Applications will be accepted till the close of business as on January 16, 2015. After experience gained in dealing with payments banks, applications will be received on a continuous basis. However, these guidelines are subject to periodic review and revision. • Procedure for RBI decisions: • An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications. • The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank. The Reserve Bank’s decision in this regard will be final. • The validity of the in-principle approval issued by the Reserve Bank will be eighteen months. • The names of applicants for bank licences will be placed on the Reserve Bank website. • Background • It may be recalled that in the Union Budget 2014-2015 presented on July 10, 2014, the Hon’ble Finance Minister announced that: • “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”. • Accordingly, the Reserve Bank formulated and released for public comments draft guidelines for licensing of payments banks in the private sector on July 17, 2014. • Several comments and suggestions were received from interested parties and public on the draft guidelines. Considering the feedback received, the guidelines on payments banks have been finalised. • • Press Release : 2014-2015/1089 • Related Press Releases • Feb 04, 2015 • RBI releases Names of Applicants of Small Finance Banks and Payments Banks • Feb 04, 2015 • RBI announces External Advisory Committee for evaluating Applications of Small Finance Banks and Payments Banks • Jan 01, 2015 • RBI extends last date of receipt of applications for Licensing of Small Finance Banks and Payments Banks • Jan 01, 2015 • Clarifications to the queries on the Guidelines for Licensing of Small Finance Banks and Payments Banks • Form III - Form of application for a licence to commence banking business by a company incorporated in India and desiring to commence banking business • Dec 08, 2014 • RBI to post on its Website Clarifications on Guidelines on Licensing of Small Finance Banks and Payments Banks • Nov 27, 2014 • RBI releases Guidelines for Licensing of Small Finance Banks in the Private Sector • Jul 17, 2014 • RBI releases Draft Guidelines for Licensing of Payments Banks and Small Banks On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to eleven entities to launch payments banks:[13][14] 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. Dilip Shanghvi, founder of Sun Pharmaceuticals 9. Vijay Shekhar Sharma, CEO of Paytm 10. Tech Mahindra 11. Vodafone M-Pesa 12. The "in-principle" licence is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licences under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.[13]