Understanding Payment Banks

Recently India has opened up a new category of Financial Institutions called Payment Banks and it is good to understand them and how they function. A Payments bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regulation Act of 1949 allows.It is just like any other bank but operating on a very lower scale without involving any credit risk. In simple words, we can say that the banks which carry out almost all the operations which traditional banks perform except advance loans and issuing credit cards.

The activities which payments banks are supposed to carry out are acceptance of deposits, payments and remittance services, internet banking and function as business correspondent of other banks. At present, payments banks are allowed to collect deposit up to Rs. 1 lac per individual. Although several entities have received the license to start a payments bank, at the time of writing, Airtel and India Posts have started payment banking operations. Payments banks are a new concept for making banking accessible for people who are staying in small towns and villages by integrating with already established distribution networks. They are expected to boost small scale businesses established in areas with low or null banking facilities.

The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, and migrant labor workforce in secured technology-driven environment. Even though having the status of a bank the payments banks have some limitations with compare to traditional banks. Also, as every coin has two sides likewise payments banks have its own pros & cons.

Let's see what facilities these banks offer & don't offer. Like all other banks payments banks can take deposits from Indian residents but the maximum amount per person is restricted to Rs. 1 Lac. The payments banks pays interest on those deposits which is usually higher than other traditional banks. These deposits must be invested either in Government Bonds or to be deposited with commercial banks.

With payments banks customer can open only current and saving accounts. There is no restriction on any income level or minimum mandatory balance. Advances Loans & Issuing Credit Cards services are not allowed to perform to payments banks. Payments banks are allowed to issue ATM and debit cards. These cards can also be used to withdraw money from other traditional banks' ATMs.

Like other traditional banks payment bank offers option of online bill payment but in more convenient way. An individual can do cashless transactions as payments banks also offers net & phone banking facilities. Money can be transferred from a payments bank account to other account using NEFT, IMPS and RTGS mechanisms. Compared to traditional banks, the cost of transfer is much less. Payments banks can distribute only risk-free simple financial product like insurance and mutual fund units. Forex service is also available at these banks. In addition, they perform as a bank correspondent of other banks.

Payments banks cater to the banking needs of low-income households, small businesses, the unorganized sectors of the economy. The start-up capital required opening a payments bank is much lower than that of a full-service bank. However, they must fulfill some other criteria like percentage of rural branches, minimum reserve requirement and promoter's holding to get the full license of a payments bank. These banks are not allowed to have subsidiaries or to perform non-banking activities. They must have highly efficient Customer Grievance Cells. They must also distinguish themselves carrying the phrase payments bank always with their name.