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Payment Banks

The Reserve Bank of India first proposed the idea of payment banks in 2015. A dedicated committe 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 economict 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 business who wished to create a payments bank.

An external advisory group was established to investigate and evaluate the licence applications from 41. Post this vetting process, ‘in-principle’ licences were granted by the RBI to 11 businesses out of the 41 who had applied for it.

This licence 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 the payment banks were given a Full Licence by RBI under Sec.22 of the Banking Regulation Act of 1949. Otherwise, the licence would expire.

How payment banks work

A payment bank does not take on any credit risk. Customers are also not given credit cards or advance loans.

It does however, make it easier for smaller units including low-income households, migrant labourers, small business units, and unorganised sectors to open an account and use other banking services. 

The following are the services that the payments bank offers:

  • Remittance service

  • Automated Teller Machine Service

  • Debit cards for money transactions

  • Net banking service

  • Bill payments service

  • Mobile banking service

  • Third-party fund transfer

Payment banks: Objectives and inclusion goals

The main objectives of the payment banks are to provide financial inclusion to the following sections:

  • Low-income household

  • Migrant labour workforce

  • Small business

  • Unorganised sector

It intends to offer savings accounts to people who cannot open one because they are hesitant to pay high maintenance fees.

Why India needs payment banks

The impoverished lower-income class in India has historically 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; primary of which is 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 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, a payment bank has connections to commercial banks and their ATM system. This makes money transfers easier and smoother for the lower-income class, many of whom travel regularly from city to city.

In comparison to other commercial banks, payment banks also offer greater interest rates. This is a big incentive for the pooer class to save their hard-earned cash and become a part of the banking community in India.