Prospects of Payment Banks in India

Group-1Anurag Kunnel PGP/01/12J.Shiva Kumar PGP/01/23

Manvender Dagar PGP/01/31

Introduction

• In order to speed up financial inclusion, finance minister Mr. Arun Jaitley said in his budget speech (July,2014) that:

"RBI will create a framework for licensing small banks and other differentiated banks.”• These local area banks, payment banks and Small Banks are

expected to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.

• Within a week of the budget, RBI (Reserve Bank of India) had already issued guidelines for licensing Payments and Small Banks.

What is a Payment Bank.• A payments bank is a type of non-full service function bank  of India.

• A bank licensed as a payments bank can only receive deposits and provide remittances.

• The banks can offer issuance of prepaid payment instruments, internet banking, functioning as business correspondent for other banks.

• It cannot carry out lending activities. No credit lending is allowed for Payments Banks.

• Payments Banks cannot set up subsidiaries to undertake NBFC business. 

Vijay Shekhar Sharma

Dilip Shantilal Shanghvi

In July, 2015 ,RBI gave license to 11 entities out of total 41 applicants

Objectives of a Payment Bank• The main objective of Payments Banks is to increase

financial inclusion (to get more people into the banking system) by providing Small Savings Accounts, Payment or remittance services to low income households / Labour, small businesses etc.

• Payments banks will provide basic banking services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked.            

RBI Guidelines for setting up a Payment Bank• Eligibility criteria of Applicants – Prepaid payment instruments

issuers, NBFCs, Telecom companies, Supermarket Chains, Corporates etc.,• The minimum capital requirement is Rs 100 crore• They cannot issue Credit Cards.• Payment Bank can not undertake Lending activities. They should not

offer loans.• A Payments bank will be required to invest 75% of its demand

deposits balances in Government Securities (G-Sec) & Treasury Bills. • They have to meet Cash Reserve Ratio (CRR) and Statutory

Liquidity Ratio requirements set by RBI.

Operation Guidelines by RBI• The Payments Bank will be required to use the word “Payments” in its

name.

• The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under the Banking Regulation Act, 1949.

• Maintain Cash Reserve Ratio (CRR)

• Invest all its money in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR).

Scope of Activities• Acceptance of demand deposits, i.e., current deposits, and savings bank deposits

restricted to holding a maximum balance of Rs. 100,000 per customer. • Payments and remittance services through various channels including branches, BCs and mobile banking • Issuance of Pre-Payment Instruments• Issue ATM / Debit cards• Internet banking• Functioning as Business Correspondent (BC) of other banks – A Payments Bank

may choose to become a BC of another bank for credit and other services which it cannot offer.

Level of Penetration

Payment Bank

Remittances

Bharat Bill Payment System

Merchant Transaction

Financial Products

RFID Tag for Toll Plaza

Mutual funds, insurance and

pension products

Payment & Deposit

Product Strategy

Key Considerations for Payment Bank Players

Purpose

• Last mile gap between Bank Branch and customer.

Technology• Mobile Banking to reduce cost of

customer acquisition and service delivery.

Target Customer

• Migrant labour workforce, low income households, small businesses, other unorganised sector

Pillars of Future Prospects

Payment Banks

Strengths• Deposits up to 100,000- Low

cost of funds• Low funds involve- hence fraud

risk minimal• Innovative delivery

Weaknesses• Nothing new to offer• Lack of awareness• No existing customer base to

leverage• For new players- start from

scratch

Payment Banks

Payment Banks

Opportunities Threats• Technological threat• Operational risks- cyber threat• Interdependence upon

efficiency of auxiliary services• Competition

• Large untapped market• Low cost transactions• Innovative products

1. Customer friendly and tailor made interfaces - public perception

2. Tie up with entities with local feel3. Multi product and multi service BC model4. Sharing of Government business of DBT on

fair sharing business model5. Cyber strength

Pillars of Future Prospects

Recent Launches

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