How to Start a PAYMENT BANK LICENCE

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Overview of Payment Bank License

Demonetization has significantly transformed the Indian economy, leading to an increased reliance on digital transactions. This shift has provided a major boost to E-wallets and mobile wallets, which were once less popular. A key player in this transition is the concept of payment banks. To operate any payment gateway in India, obtaining a Payment Bank License is essential.

What is a Payment Bank?

A payment bank is a new model introduced by the Reserve Bank of India (RBI) in 2014. These banks can accept limited deposits of up to ₹100,000 per customer, with the potential for this limit to increase over time. However, payment banks do not have the authority to offer loans or credit card services. They provide other banking services such as debit cards, ATM cards, mobile banking, and net banking. By acquiring a Payment Bank License, a bank can operate both savings and current accounts.

Under the Banking Regulation Act, 1949, a payment bank can open new outlets, including Automated Teller Machines (ATMs) and Business Correspondents (BCs), but it cannot engage in full banking activities. Additionally, the minimum paid-up capital for a payment bank must be ₹100 crores or more.

Legal Provisions Governing Payment Banks in India:

  • Companies Act, 2013
  • Banking Regulation Act, 1949
  • Reserve Bank of India Act, 1934
  • Foreign Exchange Management Act, 1999
  • Payment and Settlement Systems Act, 2007
  • Deposit Insurance and Credit Guarantee Corporation Act, 1961

Primary Objective of Payment Banks in India

The main goal of payment banks is to extend payment and financial services to underserved groups, including low-income households, small businesses, and migrant laborers, within a secure, technology-driven environment. The Reserve Bank of India aims to provide financial inclusion in remote areas by supporting payment banks. This initiative is designed to strengthen the Indian economy with a secure and efficient payment gateway for all transactions.

 
 
 

Key Features of a Payments Bank

Payment banks differ significantly from traditional banks. Before applying for a payment bank license, it is crucial to understand their key features:

1. Deposit Limit of Up to ₹1 Lakh

Payment banks can accept deposits only up to ₹1 lakh per customer. This limit is set by the Reserve Bank of India (RBI) to protect customer interests and regulate the relatively new banking model. Customers can choose to deposit either the full amount or a part of it, but the total cannot exceed ₹1 lakh.

2. Virtual Debit Card Facility

Payment banks offer both physical and virtual debit cards. These debit cards allow users to access ATMs both within India and internationally. Virtual debit cards do not incur additional fees for cash withdrawals, while physical debit cards are typically accompanied by an annual fee.

3. Smooth Online Transactions

Unlike traditional banks, payment banks simplify the process of transferring and receiving funds through digital platforms. They provide services like NIFT, IMPS, and other online fund transfer options to customers, making transactions easier and quicker.

4. Convenient Payment Methods

Payment banks offer digital access to their services, eliminating the need to visit a physical branch for depositing or withdrawing money. Individuals can initiate payment bank services online, even without a physical outlet, as long as they acquire the necessary payment bank license.

Who is Eligible to Apply for a Payment Bank License?

The following entities are eligible to apply for a Payment Bank license:

  • Individuals or Professionals
  • Mobile Telecommunications Companies
  • Non-Banking Financial Companies (NBFCs)
  • Real Sector Cooperatives
  • Supermarket Chains
  • Public Sector Entities
  • Promoters or Groups of Promoters in Joint Ventures with Existing Scheduled Commercial Banks
  • Existing Non-Bank Prepaid Payment Instrument Providers under the Payment and Settlement Systems Act, 2007
  • Corporate Business Correspondents
  • Public Companies
 

Capital Requirements to Obtain a Payment Bank License in India

In India, the Capital Requirements to obtain a Payment Bank License are:

  • A Payment Bank must have a minimum of Rs 100 crore as Paid-up Equity Capital;
  • The Payment Bank in India shall be required to invest at least 75% of its demand deposit balances in securities issued by the Government or Treasury Bill having maturity up to 1 year that is recognised by the Reserve Bank of India as eligible securities for maintenance of SLR (Statutory Liquidity Ratio);
  • Maintain at least 25% in current & time deposits with other scheduled commercial banks for its operations & also for the management of liquidity;
  • The FDI Policy for private banks shall be the guiding policy for foreign shareholding;
  • A Capital Adequacy Ratio of minimum of 15% of its risk-weighted assets & a leverage ratio of not less than 3% shall be maintained;
  • As the payment bank may face operational/liquidity risk, they must be required to follow the guidelines prescribed by the RBI concerning liquidity risk management.

What are the Details That Should be Provided to RBI?

In India, the details to be provided to the RBI for obtaining Payment Bank License can be summarised as:

Details of the Individual Partner

  • Name of the Promoter;
  • Date of Birth;
  • Residential Status;
  • Parent’s Name;
  • PAN (Permanent Account Number) No;
  • Branch and the Bank Account Details, together with the Credit Facilities;
  • Experience of the Individual Promoter;
  • Areas of Expertise;
  • Track Record of the Business and Financial Worth.

Details the Entity Promoting the Bank:

  • Shareholder Pattern of the promoter entity;
  • Memorandum of Association (MOA) and Articles of Association (AOA) of the promoter entity;
  • Financial statements for the last five years of the promoter entity;
  • Income Tax Returns (ITRs) for the previous three financial years.

Details of the Individuals and Entities in the Promoter Group:

  • Names of the Individuals and Entities in the Promoter Group;
  • Details of the Shareholding Pattern;
  • Details of the Management;
  • Pictorial Organogram;
  • Total Assets of the Entities;
  • Annual Report for the last five years of all the group entities;
  • Details of Listing Shares in the Recognised Stock Exchanges;
  • PAN(Permanent Account Number);
  • TAN (Tax Deduction and Collection Account Number);
  • CIN (Company Identification Number);
  • Bank Account and Branch Details.

Business Plan Requirements of a Payment Bank in India

The business plan requirements of a payment bank in India include:

  • The applicants for a Payment Bank licences need to furnish their project reports and business plans along with their applications;
  • The business plan must address how the bank proposes to accomplish the objectives and purposes of setting up Payment Banks;
  • The business plan submitted by the applicant must be accurate and practical. Further, first preference will be given to those applicants who offer to set up their Payment Banks with access points mainly in the underdeveloped states or districts in the Central, East and North-East regions of the country;
  • A Payment Bank must ensure a widespread network of access points predominantly to remote areas, either through BCs (Business Correspondents), or their own branch network or by way of networks provided by others;
  • A Payment Bank is expected to adopt technological solutions to extend its network and lower costs;

If a Payment Bank deviates from the stated business plan after the issuance of the licence, the Apex Bank may consider limiting the bank from expansion, effecting change in the management and can also impose other penal measures as it may deem fit.

Procedure for Obtaining a Payment Bank License

If you're interested in establishing a payment bank, follow these steps to acquire the necessary license:

Step 1: Incorporate a Public Limited Company

As per RBI regulations, the first step is to incorporate a Public Limited Company under the Companies Act, 2013. The company's primary objective should be to operate as a payments bank.

Step 2: Submit an Application to RBI

Next, file an application to the Chief General Manager of the Reserve Bank of India (RBI) requesting the payment bank license.

Step 3: Application Evaluation by EAC

The External Advisory Committee (EAC) will review the application and may call the applicant to verify the information provided.

Step 4: Granting of License

If the applicant meets all eligibility requirements, the RBI will issue the payment bank license.

Step 5: Public Disclosure

The RBI will publish the name of the applicant on its official website to make the approval public.

Step 6: Set Up the Bank

Upon receiving in-principle approval from RBI, the applicant must establish the payment bank within 18 months.

 
 
 

Mandatory Compliances for Payment Banks in India

Payment Banks in India are required to comply with the following key regulations:

  • Payment Banks cannot accept NRI deposits.
  • They must maintain a minimum paid-up capital of Rs. 100 crores.
  • Payment Banks are allowed to offer ATMs and debit cards but cannot provide loans or Visa services.
  • Payment Banks can accept current deposits and investment fund bank deposits from private enterprises, subject to limits.
  • They must adhere to RBI compliance standards on web banking, data security, cyber laws, electronic banking, and technology risk management.
  • The name of the bank must include the term "Payments Bank" to distinguish it from other types of banks.

Scope of Activities of a Payment Bank in India

The scope of activities for a Payment Bank in India includes:

  • Payment Banks can accept deposits up to prescribed limits, including current deposits from small businesses and savings deposits from individuals.
  • NRIs are not permitted to deposit in Payment Banks.
  • They can issue ATM and debit cards.
  • Payment Banks are prohibited from engaging in lending activities.
  • Payment Banks must carry out KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Combating Financial Terrorism) processes.
  • They can provide payment and remittance services through ATMs, BCs (Business Correspondents), and mobile banking, including fund acceptance and cash disbursement.
  • Payment Banks can issue Prepaid Payment Instruments as per the Payment and Settlement Systems Act, 2007.
  • They can offer internet banking services.
  • Payment Banks can operate as Business Correspondents (BCs) of other banks, as per RBI guidelines.
  • They can accept remittances via systems like RTGS, NEFT, and IMPS.
  • Payment Banks are authorized to handle cross-border remittance transactions for personal payments.
  • They are not allowed to set up subsidiaries to operate as Non-Banking Financial Companies (NBFCs).
  • Payment Banks can process utility bill payments on behalf of customers and the general public.
  • They may engage in other non-risk sharing financial activities with prior RBI approval, subject to sector regulatory requirements.

Future of Payment Banks in India

As you prepare to navigate the documentation and application process for a Payment Bank License, it's important to consider the future of payment banks in India.

Payment banks are poised to play a pivotal role in India's financial ecosystem. Despite having an account with a traditional bank, payment banks allow users to access banking services and conduct transactions with greater ease. Unlike traditional banks, which operate during specific hours, payment banks provide 24/7 transaction capabilities, removing the need to visit a branch during set hours.

Moreover, payment banks have played a key role in the digitalization of transactions, especially after the demonetization initiative. Prior to this, a significant portion of transactions in India were cash-based. However, digital payments have rapidly gained momentum, with payment banks contributing to this transformation.

Given their flexibility, convenience, and role in digitizing financial transactions, payment banks are set to revolutionize India's banking sector, bringing banking services to a larger and more diverse segment of the population.