RBI’S Guidelines with respect to Payments Banks

By Ananya Agarwal

1. What are Payment Banks?

Reserve Bank of India had issued guidelines on November 24, 2014, for setting up payment banks in the country[1]. A Payment Bank is governed by the Apex or Central Bank of India, the RBI. They are much like traditional banks but differ in services, inasmuch, they cannot issue credit cards. A payment bank has been categorised as a “Scheduled Bank”. However, it is mandatory for the companies to include the word “Payment Bank” in its name in order to differentiate it from other regular banks.[2]

1. Objectives of Payment Banks:

According to the Reserve Bank of India (RBI) data, almost 60% of the people of the country are still not connected with the banking sector.[3] The main objectives of setting up of payment banks are to ensure the financial inclusion of the underprivileged by providing payments/remittance services to migrant labour workforce, opening up small savings accounts of small business holders, low-income households, workers of the unorganised sector.[4]

1. Key Features of Payment Banks:
2. Payments banks can accept deposits up to a maximum of Rs. 1 lakh from a customer and will be authorised to open both savings and current accounts of their customers. They cannot accept deposits from the Non-Resident Indians (NRIs) and will have to deposit the amount in the form of a Cash Reserve Ratio (CRR) with RBI as other commercial banks do.[5]
3. Payments Banks will have to invest a minimum of 75% of its demand deposits in government treasury/securities bills with maturity up to one year and hold a maximum of 25 %in currents and fixed deposits with other commercial banks for operational purposes.
4. Payments banks will be entitled to issue ATM or debit cards to their customers but cannot issue a credit card. They cannot provide loans or lending services to customers. However, they will be allowed to provide internet banking and mobile banking facility to their customers.[6]
5. Payments banks can become a business representative of any other bank, but it will have to comply with the guidelines of the Reserve Bank of India. In lieu of the same, with approval from RBI, Payment Banks can work as a partner with other commercial banks and also can sell mutual funds, pension products, and insurance products.[7]

CURRENT SCENARIO OF PAYMENT BANKS IN INDIA

The Reserve Bank of India (RBI) had in 2015 issued 11 licences to entities to start payments banks. Today, there are only four serious players left in the market. Therefore, some questions have been raised if the model can succeed. Many have blamed RBI’s restrictions for the payments bank model not taking off.[8] These are:

Airtel was the first payment bank to start its nationwide operations in November 2016 and is presently providing services to customers. Airtel Payment Bank is providing 7.25% interest rate on deposits made in a Savings account.[9] IndiaPost was the second payment bank to start its functioning in January 2017 and is offering an interest rate of 4.5-5.5% on deposits in a savings bank account. Paytm Payment bank was launched officially in May 2017 inviting limited users initially to open a bank account. It is likely to expand its horizon in the coming months. Fino Payment Bank also started its banking operations in the month of July 2017.[10]

RBI GUIDELINES FOR PAYMENT BANKS

1. LICENSING GUIDELINES[11]

The Reserve Bank of India (RBI) issues licences to entities to carry on the business of banking and other businesses in which banking companies may engage, as defined and described in Sections 5 (b) and 6 (1) (a) to (o) of the Banking Regulation Act, 1949, respectively[12]. The RBI realised that there exists a need for niche banking in India, and differentiated licensing could be a desirable step in this direction, particularly for infrastructure financing, wholesale banking and retail banking[13]. In lieu of the same, draft guidelines for licensing of payments banks in the private sector were formulated and released for public comments on July 17, 2014[14]. Based on the comments and suggestions received on the draft guidelines, the following guidelines for licensing of payments banks were finalised:

1. The payments bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services. The payments bank will be given scheduled bank status once it commences operations, and is found suitable as per Section 42 (6) (a) of the Reserve Bank of India Act, 1934.
2. Existing PPI licence holders could opt for conversion into payments banks. It is not mandatory for an existing PPI issuer to apply for a payments bank licence and it may continue as a PPI issuer as per the guidelines issued by RBI from time to time. A promoter / promoter group can have a Joint Venture with an existing scheduled commercial bank to set up a payments bank. If a Government entity desires to set up a payments bank, it should first obtain necessary approvals from the Government and submit its application.
3. If the promoter succeeds in obtaining a payments bank licence from the RBI after due process, it would be required to set up the payments bank under a separate corporate structure unless it is an existing PPI licence holder opting for conversion into a payments bank.
4. The payments bank will be set up as a differentiated bank and shall confine its activities to further the objectives for which it is set up. Therefore, the payments bank would be permitted to set up its own outlets such as branches, Automated Teller Machines (ATMs), Business Correspondents (BCs), etc. to undertake only certain restricted activities permitted to banks under the Banking Regulation Act, 1949, as explained above[15].
5. The minimum paid-up equity capital of the payments bank shall be Rs. 100 crores. The payments bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. Tier I capital should be at least 7.5 per cent of RWAs. Tier II capital should be limited to a maximum of 100 per cent of total Tier I capital. As the payments bank will not have significant risk weighted assets, its compliance with a minimum capital adequacy ratio of 15 per cent would not reflect the true risk. Therefore, as a backstop measure, 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).
6. Since a payments bank cannot undertake lending activities, it is not mandatory for it to have a diversified ownership structure. Therefore, no maximum shareholding limit for promoters is prescribed. However, the promoters of the payments bank should hold at least 40 per cent of its paid-up equity capital for the first five years from the commencement of its business. If the payments bank is set up as a joint venture with equity partnership with a scheduled commercial bank, the scheduled commercial banks can take equity stake in a payments bank[16].
7. 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. As per the current FDI policy, the aggregate foreign investment in a private sector bank from all sources will be allowed upto a maximum of 74 per cent of the paid-up capital of the bank (automatic upto 49 per cent and approval route beyond 49 per cent to 74 per cent). At all times, at least 26 per cent of the paid-up capital will have to be held by residents.
8.  The payments bank shall operate in remote areas mostly through BCs, ATMs and other networks. Therefore, the requirement of opening at least 25 per cent of branches in unbanked rural centres (population up to 9,999 as per the latest census), is not stipulated for them. However, the payments bank will be required to have at least 25 per cent of physical access points including BCs in rural centres.

• OPERATING GUIDELINES[17]

The need for separate Operating Guidelines for payments banks was examined, considering the differentiated nature of business and financial inclusion focus of these banks. Accordingly, the Operating Guidelines for payments banks were formulated. These will be supplementary to the Licensing Guidelines.

1. The prudential regulatory framework for payments banks (PBs) will largely be drawn from the Basel standards. However, given the financial inclusion focus of these banks, it will be suitably calibrated
2. PBs shall, on any given day, maintain a minimum investment to the extent of not less than 75 per cent of demand deposit balances (DDB). Further, PBs shall, on any given day, maintain balances in demand and time deposits with other scheduled commercial banks, which shall not be more than 25 per cent of its DDB (including the earnest money deposits of BCs) as on three working days prior to that day. The investments and deposits made according to the conditions above, together shall not be less than 100 per cent of the DDB (including the earnest money deposits of BCs) of the PB unless it is less to the extent of balances kept with RBI.
3. PBs will not be permitted to lend to any person including their directors. However, PBs may lend to their own employees out of the bank’s own funds, as per a Board approved policy outlining the caps on such loans.
4. At the time of submitting application for licence, the PBs should submit to RBI a list of financial products they intend to offer with a clear description. Any new products proposed to be introduced thereafter should be intimated to RBI for information
5. For PBs, the CRR and SLR requirements and the various disclosures and statutory/regulatory reports will be as applicable to commercial banks[18].
6. Constitution and functioning of board of directors, Constitution and functioning of committees of the board, management level committees and remuneration policies as applicable to banking companies shall be applicable to PBs as well.
7. The annual plans for opening of physical access points by the PBs for the initial five years would need prior approval of RBI. The first of such plan shall be submitted to RBI before commencement of business. After the initial stabilisation period of five years, and after a review, RBI may liberalize the requirement of prior approval.
8. An employee of the PB should be available for sufficient duration, at a fixed location known to the customers at the district level, to attend to customer grievances and support the agent supervision.
9. The PBs can engage all permitted entities including the companies owned by their business partners and own group companies on an arm’s length basis as Business Correspondents (BCs). Inter-operability of the BCs will be allowed except for opening of savings and current accounts.
10. As provided in the current RBI directions, PBs can accept only savings and current deposits. The aggregate limit per customer shall not exceed `100,000, as provided in the Licensing Guidelines. This limit shall apply to customer deposits and not to any security/earnest money deposit the bank may collect from any of its service providers in the ordinary course of business
11. At their discretion, PBs may (like all other banks) decide not to take the wet signature while opening accounts and instead rely upon the electronic authentication. However, all the extant regulations concerning KYC including those covering the Central KYC Registry, and any subsequent instructions in this regard, as applicable to commercial banks, would be applicable to PBs.
12. PBs may, at their option, exchange mutilated and defective notes at their branches, subject to compliance with RBI norms.
13. Rules regarding outsourcing of operations, internet banking and mobile banking shall be the same as those applicable to scheduled commercial banks.
14. Loading of PPI balances through other bank credit cards will be permitted.

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[1] Guidelines for Licensing of Payment Banks, Reserve Bank of India, (Last Accessed: June 6, 4:15PM), https://www.rbi.org.in/scripts/bs_viewcontent.aspx%3FId%3D2900#:~:text=100%20crore.,7.5%20per%20cent%20of%20RWAs.

[2] Payment Banks In India: Meaning, Interest, Services & List, Fintrakk, (Last Accessed on: June 6, 4:30 PM),  https://fintrakk.com/payment-banks-in-india-meaning-interest-rate-services-list-of-payment-banks/

[3] Supra, at 1

[4] What are the key features of Payments Banks in India?, Jagran Josh, , (Last Accessed: June 6, 4:45PM) https://www.jagranjosh.com/general-knowledge/what-are-the-key-features-of-payments-banks-in-india-1520858287-1

[5] Id.

[6] How payments banks are different from regular banks, LiveMint, (Last Accessed: June 7, 11:15AM),

https://www.livemint.com/Money/tSMsNn4AKWlrr9JH2KeVQK/How-are-payments-banks-difference-from-regular-banks.html

[7] Operating Guidelines for Payments Banks. Reserve Bank of India, (Last Accessed: June 7, 11:30AM), https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT8012D3D3858D194184981CAF033321AA26.PDF

[8] India’s payments bank space: A case of near yet too far, The Economic Times, (Last Accessed: June 7, 11:45AM)

https://economictimes.indiatimes.com/industry/banking/finance/banking/indias-payments-bank-space-a-case-of-near-yet-too-far/articleshow/70621525.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[9] Supra, at 2

[10] Supra, at 2

[11] Supra, at 1

[12] Id.

[13] RBI releases Discussion Paper on ‘Banking Structure in India – The Way Forward’, Press Release, Reserve Bank of India, (Last Accessed: June 7, 2:45PM)

https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29405

[14] RBI releases Draft Guidelines for Licensing of Payments Banks and Small Banks, Press Release, Reserve Bank of India, (Last Accessed: June 7, 3:45PM)

https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=31646

[15] Paragraph 1.3.

[16] Section 19 (2) of the Banking Regulation Act, 1949

[17] Supra, at 7

[18] Master Circular – Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), Master Circulars, Reserve Bank of India, (Last Accessed: June 7,4:50PM)

https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9905