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Payments Banks: A Closer Look at Their Features and Objectives

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Payments Banks

Mains level : Read the attached story

Introduction

  • The Reserve Bank of India (RBI) imposed additional curbs on Paytm Payments Bank Ltd (PPBL), prohibiting it from operating its mobile wallet after February.
  • This article provides insights into what payments banks are, their objectives, features, and the regulatory framework governing them.

Understanding Payments Banks

  • Definition: Payments banks are financial institutions similar to regular banks but operate on a smaller scale without engaging in credit risk.
  • Origin: The concept of payments banks was recommended by the Nachiket Mor Committee.
  • Objective: The primary goal is to advance financial inclusion by providing banking and financial services to unbanked and underbanked areas, catering to migrant laborers, low-income households, small entrepreneurs, and more.
  • Legal Framework: Payments banks are registered as public limited companies under the Companies Act 2013 and licensed under Section 22 of the Banking Regulation Act 1949.
  • Regulation: They are governed by various legislations, including the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, among others.

Key Features of Payments Banks

  • Differentiation: Payments banks are distinct entities, not universal banks.
  • Scale: They operate on a smaller scale compared to traditional banks.
  • Capital Requirements: Payments banks are required to have a minimum paid-up equity capital of 100 crores.
  • Promoter Contribution: The promoter must contribute at least 40% of the paid-up equity capital for the first five years from the commencement of business.

Permissible Activities

  • Accept deposits up to Rs. 2,00,000.
  • Offer demand deposits in the form of savings and current accounts.
  • Invest deposits in secure government securities as Statutory Liquidity Ratio (SLR), accounting for 75% of the demand deposit balance.
  • Place the remaining 25% as time deposits with other scheduled commercial banks.
  • Provide remittance services, mobile payments/transfers/purchases, ATM/debit cards, net banking, and third-party fund transfers.
  • Act as a banking correspondent (BC) for other banks to offer credit and services beyond their capabilities.

Activities Not Permitted

  • Loans and Credit Cards: Payments banks cannot issue loans and credit cards.
  • Time and NRI Deposits: They are not authorized to accept time deposits or NRI deposits.
  • Non-Banking Subsidiaries: Payments banks cannot establish subsidiaries to engage in non-banking financial activities.

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