Payments Banks

Payments Banks are a specialized category of niche or differentiated banking institutions in India. The Reserve Bank of India (RBI) introduced them based on the recommendations of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, chaired by Dr. Nachiket Mor in 2014. The primary objective is to deepen financial inclusion by providing small savings accounts and payments or remittance services to low-income households, small businesses, and migrant workers.

Evolution and Current Operational Status

In August 2015, the RBI granted in-principle approval to 11 entities to establish payments banks. This list included telecom operators, fintech firms, public sector undertakings, and non-banking financial companies (NBFCs). Several approved entities, including Tech Mahindra, Cholamandalam Distribution Services, and Dilip Shanghvi, chose not to launch operations due to structural profitability concerns. Aditya Birla Idea Payments Bank started in 2018 but closed its business in 2019. In April 2026, the RBI formally cancelled the banking license of Paytm Payments Bank Limited under Section 22(4) of the Banking Regulation Act, 1949, due to persistent regulatory non-compliance. Currently, there are 5 operational payments banks in India.

Permissible Activities and Operational Limits

Payments Banks operate as narrow banks. They face rigid regulatory barriers to eliminate the risk of capital loss.

Deposit Collection Framework

• Balance Ceilings: They can accept demand deposits through savings and current accounts. The maximum daily end-of-day balance per customer is restricted to ₹2,00,000. The RBI raised this from the original ₹1,00,000 cap in April 2021.
• No Term Deposits: They cannot accept fixed deposits (FDs) or recurring deposits (RDs) on their own balance sheets.
• Inward Remittances: They can process inward cross-border remittances through the Money Transfer Service Scheme (MTSS).
• Foreign Exclusion: They cannot accept any deposits from Non-Resident Indians (NRIs).

Lending and Credit Bans

• Zero Loans: They cannot advance any loans, overdraft facilities, or lines of credit.
• No Credit Cards: They are barred from issuing credit cards because they do not have credit deployment powers.
• No Corporate Subsidiaries: They cannot set up subsidiaries to offer non-banking financial services.

Investment and Liquidity Mandates

• Government Securities: They must invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) eligible Government Securities or Treasury Bills with a maturity up to one year.
• Commercial Parking: They can park the remaining 25% as current account balances or term deposits with other commercial banks.
• Statutory Reserves: They must maintain the Cash Reserve Ratio (CRR) with the RBI on their complete Net Demand and Time Liabilities (NDTL).

Services and Product Distribution

• Card Issuance: They can issue ATM and Debit cards for cash withdrawals and retail transactions.
• Payment Gateways: They participate directly in payment systems like UPI, NEFT, RTGS, and mobile banking.
• Cross-Selling: They act as corporate agents to distribute mutual funds, insurance policies, and third-party financial products to earn fee income.

Small Finance Banks vs. Payments Banks

The core difference between these two differentiated banking categories centers on credit disbursement and asset placement capability.

Impact on Financial Inclusion

Payments banks have altered the retail banking landscape by increasing transaction velocity. India Post Payments Bank employs over 3,00,000 postal workers and Gramin Dak Sevaks to handle Direct Benefit Transfer (DBT) welfare payouts directly at rural doorstep locations. Telecom-backed entities have onboarded millions of unbanked users through basic mobile applications and USSD codes, converting small corner stores into cash-in and cash-out points. This system shifts cash into formal channels and builds digital footprints for under-banked citizens.

Important Facts for Civil Services Exams

Payments Banks are registered as public limited companies under the Companies Act, 2013, and hold licenses under Section 22 of the Banking Regulation Act, 1949. They do not automatically receive Scheduled Bank status unless the RBI inserts them into the Second Schedule of the RBI Act, 1934. They must maintain a Capital to Risk-Weighted Assets Ratio (CRAR) of 15% of their risk-weighted assets, even though their credit risk exposure is minimal. The single shareholder voting rights are restricted to 10% under the Banking Regulation Act, 1949, though the RBI can permit an increase up to 26%. Any entity looking to acquire 5% or more of shares or voting control in a payments bank must secure prior written approval from the RBI. The regulations state that payments banks must open at least 25% of their physical access points in unbanked rural centers. Depositors receive a capital safety net up to ₹5,000,000 through the Deposit Insurance and Credit Guarantee Corporation (DICGC). A payments bank can apply for conversion into a Small Finance Bank after 5 years of clean operations if it increases its net worth to ₹200 crore.

Regulatory Actions and Closure

The Reserve Bank of India maintains continuous oversight over all banking entities to protect public funds. When institutions fail to comply with operational guidelines or violate statutory requirements, the central bank exercises its enforcement powers. This regulatory control includes imposing monetary penalties, restricting customer acquisition, and canceling operational licenses to maintain stability across the broader financial system.