What is Payment Bank?
The Reserve Bank of India first proposed the idea of payment banks in 2015. A dedicated committee named "The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households," formed by former Reserve Bank of India Governor Raghuram Rajanwhich and headed by noted economist Nachiket Mor, approved the idea of a payment bank after thorough research into the saving trends of low-income Indians.
The Reserve Bank of India used the research to establish the rules for a payments bank and issued notices of application to Indian businesses who wished to create a payments bank.
An external advisory group was established to investigate and evaluate the license applications from 41. Post this vetting process, the RBI granted' in-principle' licenses to 11 businesses out of the 41 who had applied for it.
This license was valid for 18 months, during which time the entities were required to set up their banking process and meet all mandatory compliance requirements. No banking activities were permitted during these 18 months; these could only commence when RBI gave the payment banks a Full Licence under Sec.22 of the Banking Regulation Act of 1949. Otherwise, the license would expire.
Example of Payment Bank
An example of a payment bank in India is Airtel Payments Bank, which was launched in 2017 by the telecom giant Airtel. It claims to have over 40 million customers and more than 500,000 banking points across the country. It offers interest rates of up to 6% on deposits, free personal accident insurance cover of Rs. 1 lakh and cashback on transactions.
Advantages of Payment Banks
The impoverished lower-income class in India has historically had many difficulties with banking and financial transactions. It is well known that many village dwellers relocate to bigger towns to find better employment. Sending money to their families in the village is difficult for multiple reasons, the primary one being the lack of access to a bona fide bank account.
This is where payment banks are a big help. A payment bank allows clients to have a savings account without the expenses associated with a traditional bank. A savings account in a normal bank can be quite expensive to maintain, and a fine is imposed if the required amount is not kept up. As a result, many lower-income and daily-wage workers cannot create savings accounts with national and commercial banks.
Moreover,
Payment banks can operate with low costs and offer low or no fees to customers. They can leverage existing infrastructure such as mobile phones, post offices, retail outlets, and business correspondents to reach out to customers. They can also offer other services such as insurance, mutual funds, pension products, and bill payments.