Prelims Bits: Payment Banks in India

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03 Sep Prelims Bits: Payment Banks in India

Posted at 03 Sep 2024 in Current Affairs by
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This article covers “Daily Current Affairs” and topic details of the Payment Bank In India.

Syllabus mapping:

GS-3: Indian Economy- Banking and financial sector.

For Prelims:

What are the payments Banks? Features of The payment banks, eligibility for establishment, and how they are different from other banks.

Why in the News?

India Post Payments Bank Celebrates 7th Foundation Day: Reinforcing Commitment to Financial Inclusion. India Post Payments Bank (IPPB) celebrates its 7th Foundation Day today, highlighting its pivotal role in advancing financial inclusion across India. Launched nationwide in 2018 by Prime Minister Shri Narendra Modi, IPPB has been transforming India’s financial sector by offering accessible and affordable digital banking services to underserved and unbanked communities right at their doorsteps. Over the past seven years, IPPB has made significant progress in bridging the financial inclusion gap, utilizing India Post’s extensive network of over 161,000 post offices and 190,000 postal employees. Through its innovative approach, IPPB has provided essential banking services to millions, particularly in rural and remote areas, contributing to the socio-economic development of the nation and empowering households with Doorstep Digital Banking Services.

 

What are payment banks?

Historical Background: The Reserve Bank of India (RBI) oversees the issuance of banking licenses in India, as detailed in Sections 5(b) and 6(1)(a) to (o) of the Banking Regulation Act, 1949. The most recent set of guidelines for licensing new private-sector banks was issued in February 2013. The process culminated in April 2014, with the RBI granting “in-principle” approval to two applicants to establish new private sector banks.
Committee Recommendations: The Dr. Nachiket Mor Committee’s January 2014 report recommended transitioning Pre-paid Payment Instruments (PPIs) to payments bank licenses or Business Correspondents (BCs) due to prudential concerns.
Budget Announcement: Union Budget 2014-15: The Finance Minister’s July 2014 budget speech included plans for a continuous authorization framework for universal banks and differentiated banks, including payments banks, to address the needs of small businesses, low-income households, farmers, and migrant workers.

Objectives

Financial Inclusion: Aim to provide small savings accounts and payment/remittance services to underserved populations including migrant workers, low-income households, and small businesses.
Cost Reduction: Focus on reducing transaction costs for remittances and providing secure, technology-driven financial services.

Key ASPECTS RELATED TO PAYMENT Banks:

Registration, Licensing, and Regulations

Registration: Payments banks must be registered as a public limited company under the Companies Act, 2013.
Licensing: Licensed under Section 22 of the Banking Regulation Act, 1949, with conditions restricting activities to demand deposits and payment/remittance services.
Regulation: Governed by the Banking Regulation Act, of 1949, the Reserve Bank of India Act, of 1934, and other relevant statutes, including periodic directives from the RBI.

Eligible Promoters
Entities: Non-bank Pre-paid Payment Instrument (PPI) issuers, individuals, professionals, NBFCs, mobile companies, super-market chains, and public sector entities.
Conversion: Existing PPI issuers can opt for conversion to payment banks but are not mandated to do so.
Joint Ventures: Promoters can form joint ventures with scheduled commercial banks, with equity stakes subject to RBI regulations.

Scope of Activities
Deposits: Acceptance of demand deposits from individuals and businesses, with a maximum balance limit initially set at ₹100,000 per customer. Now it is increased at ₹ 2,00,00 per customer.
Cards: Issuance of ATM/Debit cards, but not credit cards.
Services: Payments and remittance services via branches, ATMs, Business Correspondents (BCs), and mobile banking.
Other Activities: Issuance of PPIs, internet banking, functioning as a BC, handling cross-border remittances, and offering simple financial services with prior RBI approval.

Deployment of Funds
Investment: 75% of demand deposit balances in Government securities/Treasury Bills; 25% in deposits with other banks.
Operational Funds: Investment of PPI balances in Government securities and bank deposits to meet regulatory requirements.

Capital Requirement
Minimum Capital: ₹100 crore for payments banks.
Capital Adequacy: Minimum capital adequacy ratio of 15%, with Tier I capital at least 7.5% of risk-weighted assets.
Leverage Ratio: A minimum of 3% leverage ratio, ensuring outside liabilities do not exceed 33.33 times the net worth.
Promoters’ Contribution
Equity Holding: Promoters must hold at least 40% of paid-up equity for the first five years.
Diversification: No maximum shareholding limit unless the bank becomes systemically important, requiring diversified ownership and possible listing if net worth exceeds ₹500 crore.

Foreign Shareholding
FDI Limits: Foreign investment up to 74% of paid-up capital (49% automatic, 49-74% through approval). NRIs can hold up to 24% of the capital.
Restrictions: Individual FII/FPI holdings are capped at 10%, with aggregate limits adjusted by resolutions.

 

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PRELIMS QUESTION:

Q. With reference to the Payment Banks in India, Consider the following statement:
1. Payments banks must be registered as a public limited company under the Companies Act, 2013.
2. Indian Post Payments Bank is the first payment bank established by the government of India.
3. Payment banks help to reduce transaction costs by providing technology-driven financial services.

How many of the above-given statements are correct?
A. Only one
B. Only two
C. All three
D. None

ANSWER: C

Munde Dhananjay Navnath
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