Payments Banks

Payments banks are a specialised category of banks introduced in India to promote financial inclusion, expand access to digital payments, and provide basic banking services to underserved sections of the population. They were conceptualised as low-risk, technology-driven institutions focused primarily on payments, remittances, and deposit services rather than traditional lending. In the Indian banking and financial system, payments banks represent an important structural innovation aimed at deepening financial access while maintaining systemic stability.
Payments banks play a distinct role within India’s diversified banking architecture, complementing commercial banks, regional rural banks, and cooperative institutions.

Concept and objectives of payments banks

Payments banks are designed to provide simple and affordable banking services such as acceptance of deposits, facilitation of payments, and money transfers. Unlike traditional banks, they are not permitted to undertake lending activities. Their core objective is to enable secure and efficient movement of money, especially for low-income households, migrant workers, small businesses, and people in remote areas.
The primary objectives of payments banks include promoting financial inclusion, reducing dependence on cash, improving access to digital payments, and integrating informal economic participants into the formal financial system.

Regulatory framework and oversight

Payments banks operate under a dedicated regulatory framework prescribed by the Reserve Bank of India. They are licensed as banks under the Banking Regulation Act, subject to specific conditions and operational restrictions.
Key regulatory requirements include limits on deposit balances per customer, prohibition on lending and credit card issuance, maintenance of high levels of liquidity, and investment of a significant portion of deposits in safe government securities. These norms ensure that payments banks remain low-risk institutions focused on transaction services.

Permitted activities of payments banks

Payments banks are allowed to accept demand deposits, issue ATM and debit cards, provide domestic remittance services, and facilitate digital payments through various channels. They may offer internet banking, mobile banking, and wallet-based payment services.
They can also act as business correspondents for other banks, distribute financial products such as insurance and mutual funds, and provide utility payment and merchant payment solutions. These activities enable payments banks to generate fee-based income while expanding financial service access.

Prohibited activities and limitations

A defining feature of payments banks is the prohibition on lending. They cannot extend loans or advances, nor can they issue credit cards. This restriction is intended to insulate them from credit risk and ensure financial stability.
Payments banks are also subject to deposit caps per customer and must maintain a high proportion of deposits in liquid, low-risk instruments. These constraints limit profitability but reinforce their role as safe transaction-oriented institutions.

Role in financial inclusion

Payments banks have been instrumental in advancing financial inclusion in India. By leveraging technology, mobile connectivity, and existing distribution networks, they have enabled millions of individuals to open basic accounts with minimal documentation.
They are particularly effective in serving migrant workers, small merchants, and beneficiaries of government welfare schemes. By facilitating direct benefit transfers and low-cost remittances, payments banks reduce transaction costs and improve transparency in fund flows.

Contribution to the digital payments ecosystem

Payments banks are key enablers of India’s digital payments ecosystem. Their focus on mobile-first platforms and real-time transactions has supported the rapid growth of electronic payments across urban and rural areas.
By onboarding small merchants and facilitating peer-to-peer transfers, payments banks help reduce cash usage and encourage adoption of digital financial behaviour, contributing to economic formalisation.

Impact on the banking sector

From a systemic perspective, payments banks complement traditional banks rather than compete directly with them. They expand outreach and transaction volumes, while commercial banks continue to focus on lending and complex financial intermediation.
Payments banks also act as feeders to the broader banking system, familiarising customers with formal financial services and potentially facilitating migration to full-service bank accounts over time.

Challenges and sustainability issues

Despite their developmental role, payments banks face challenges related to profitability and sustainability. The absence of lending income, combined with regulatory constraints and high technology costs, places pressure on business models.
Achieving scale, increasing transaction volumes, and expanding fee-based services are critical for long-term viability. Regulatory flexibility and innovation in product offerings continue to shape their evolution.