Payments Banks

Payments Banks are another new category of banks conceptualized by the Nachiket Mor Committee and introduced by RBI in 2014 to further financial inclusion. RBI’s goal with Payments Banks was to harness the reach of telecom companies, fintech, postal networks, etc., to provide basic banking – especially payments and savings – to the unbanked.

In August 2015, RBI granted in-principle approval to 11 entities to launch payments banks. These included telecom operators (Bharti Airtel, Vodafone), tech firms (Paytm), a postal department proposal (India Post), finance companies (Fino PayTech), and others.

By 2017–2018, most had launched operations. Some entities (Tech Mahindra, Cholamandalam, Dilip Shanghvi of Sun Pharma) backed out, and one (Aditya Birla Idea Payments Bank) shut down after a brief run.

Today, there are 6 licensed payments banks, of which 5 are operational. They are:

• Airtel Payments Bank (operational since 2017, promoted by Bharti Airtel)
• India Post Payments Bank (IPPB) (government-owned, launched 2018, leveraging the postal network)
• Paytm Payments Bank (launched 2017, by fintech Paytm)
• Fino Payments Bank (launched 2017, by Fino Paytech, an remittance and tech company)
• Jio Payments Bank (launched 2018, a JV of Reliance Jio and SBI – operational but relatively limited rollout)
• NSDL Payments Bank (launched 2018, by NSDL, providing primarily digital payment accounts)

(Aditya Birla Idea PB launched in 2018 but ceased in 2019 due to business model issues.)

Permissible Activities and Limits

Payments Banks are niche banks – they can accept deposits and facilitate payments but have stringent limits:

• They can accept demand deposits (savings and current accounts) but each customer’s balance is capped at ₹2,00,000 (₹2 lakh) at end of day. (Initially ₹1 lakh, RBI doubled the limit to ₹2 lakh in April 2021 to enhance their utility.)
• They cannot accept time deposits of maturities (no fixed or recurring deposits beyond the limit; practically, they offer only savings accounts and sometimes term deposits in partnership with other banks).
• They cannot lend money or issue loans from their own books. This is the most crucial restriction – PBs are not allowed to extend credit, hence they also cannot issue credit cards. Their revenue model must rely on fees and deployment of deposits in safe instruments, not on loan interest.
• They must invest a large portion of customer deposits in safe assets. Specifically, at least 75% of demand deposit balances must be invested in Government securities or T-bills with up to 1-year maturity (to ensure liquidity and safety), and up to 25% can be parked as deposits with other commercial banks. This effectively means the deposit money is not lent to public but kept in risk-free or low-risk avenues.
• They must maintain CRR (Cash Reserve Ratio) with RBI, just like other banks, on their deposits.
• They can participate in payment systems (like issuing ATM/Debit cards, offer internet banking, mobile banking, UPI, NEFT/RTGS, etc.) but with no credit risk exposure.

Payments Banks offer services such as:

• Savings accounts (often with interest, albeit modest).
• Remittance services: one of the primary uses – allowing migrant workers or unbanked individuals to send money domestically. Many PBs tie up with BC (Business Correspondent) networks or retail outlets for cash-in, cash-out.
• Utility and bill payments: through the Bharat Billpay system, UPI, etc.
• Third-party financial products: They often distribute insurance, mutual funds, or other financial products for commission (since they cannot use deposits for loans, this is an income source).
• Debit Cards and QR payments: They issue RuPay debit cards or provide QR code-based payment solutions for merchants (Paytm PB and Airtel PB have been particularly active in merchant payments).
• Mobile wallets integration: Paytm PB grew out of a mobile wallet; it links wallet to PB account enabling easier KYC-compliant usage. Airtel PB links with Airtel’s mobile services.

Key Players and Their Strategies:

• Airtel Payments Bank leveraged the telecom retail outlets of Airtel to rapidly open accounts. It focuses on digital payments (it was the first to enable cashless payments via a USSD-based system even on basic cellphones) and on salary payments in rural areas. Airtel PB has also integrated UPI and QR codes at kirana stores.
• India Post Payments Bank (IPPB) is a game-changer due to the vast postal network. With over 155,000 post offices and 300,000 postal workers acting as access points, IPPB provides doorstep banking – especially for DBT (Direct Benefit Transfer) payments in villages. For instance, IPPB has disbursed over ₹45,000 crore in DBT benefits by leveraging postmen as banking correspondents. IPPB also serves as an on-ramp for small savings (it links with postal savings accounts) and financial literacy in remote areas.
• Paytm Payments Bank built on Paytm’s digital ecosystem. It has a large customer base via the Paytm app, offering quick wallet-to-bank conversions, UPI handle, and high-volume digital transactions. It positions itself as a convenient payments platform for youth and small merchants (QR code payments).
• Fino Payments Bank emerged from a remittance service provider; it focuses on migrant remittances, micro-ATM services through partnerships, and has agent networks in villages for cash deposits/withdrawals.
• Jio Payments Bank has the backing of Reliance Jio’s subscriber base and SBI’s banking experience, but it has been relatively low-profile. It’s expected to integrate with Jio’s digital apps and perhaps relaunch in a bigger way.
• NSDL Payments Bank focuses on digital accounts, especially for securities investors (leveraging NSDL’s depository clients) and has a smaller presence.

Regulatory Overview

Payments Banks, although limited, are banking entities and supervised by RBI (Department of Regulation) like other banks. They must comply with KYC norms fully (a lesson learned when some PBs faced penal action for certain lapses in account verification). RBI monitors their Net-worth (they need ₹100 crore capital; also if a PB’s negative carry or losses erode capital, that’s a concern). DICGC insurance applies to PB deposits up to ₹5 lakh as well, giving comfort to depositors.

RBI has gradually allowed PBs more flexibility – e.g., increasing deposit limits to ₹2 lakh, permitting them to offer internet banking (initially there was a question if PBs should have checkbooks – most PBs still don’t issue cheques, they focus on digital). Interoperability was mandated: PB accounts are part of the NEFT/RTGS network, and PB-issued wallets/cards must be interoperable with other banks’ ATMs and UPI.

That said, PBs are still finding sustainable business models. By design, they operate on thin margins. One advantage is lower operational cost and no legacy burdens. Many collaborate with fintech startups to develop innovative services (for example, Paytm PB and Airtel PB have both introduced digital gold investments on their platform, albeit not core banking). The postal Payments Bank (IPPB) has a government mandate and may be leveraged to push further inclusion (there are proposals to convert IPPB into a full small finance bank to allow credit – under consideration).

Significance

Payments Banks have contributed to increased digital transaction volumes and have brought millions into some form of formal banking. For example, IPPB alone opened 5 crore accounts in a short span through Aadhaar-eKYC and the postal network. They target population segments like migrant labor, low-income households, and small merchants for whom handling cash digitally or having a basic savings account was previously difficult. The presence of PBs has also spurred traditional banks to improve their digital offerings and reach (competition in remittances, UPI, etc.).

Moreover, PBs complement other banks – since they can’t lend, some have partnered with SFBs or NBFCs to source loans (e.g., PB gathers data and refers customers to a partner for credit, earning a referral fee). This synergy is gradually developing an ecosystem bridging the gap between having an account and accessing credit.

SFB vs Payments Bank

It’s useful to compare Small Finance Banks with Payments Banks– SFBs are allowed to lend and have no cap on deposits, whereas Payments Banks cannot lend and have limits on deposits. SFBs essentially function as full banks for the small sector, whereas Payments Banks are more like transaction-focused banks. The comparison table below summarizes differences:

SFBs are “full-service” banks for the small segment, while PBs are “narrow banks” focusing on deposits and payments.