India has four Payment Banks now
Context: There are two kinds of banking licences that are granted by Reserve Bank of India –Universal bank licence and differentiated bank licence. Payment Banks comes under a differentiated bank lincence since it cannot offer all the services that a commercial bank offers.
Difference between payment banks from commercial banks:
- Payment bank comes under a differentiated bank licence since it cannot offer all the services
- Payment bank cannot lend.
- It can take deposit up to Rs 1 lakh per account
- It can issue debit cards but not credit cards.
- Commercial banks in India like State Bank of India or ICICI Bank do not have any such restrictions.
About payment Banks:
- A payment bank can work as a business correspondent (B C) of another bank.
- Payment banks can also distribute simple financial products like mutual fund units and insurance products.
- Out of the 11 entities that received in –principle licence for opening payments bank, 7 entities received the fiscal licence.
- RBI has mandated the minimum paid-up equity capital for payment bank at Rs 100 crore.
- Four payment banks have started operation –Airtel Payment Bank, India Post Payment Bank , Paytm Payment Bank and Fino Payment Bank
- Apart from maintaining Cash Reserve Ratio (CRR), these entities have to invest a minimum 75% of demand deposit balance in Statutory Liquidity Ratio(SLR)
Objectives of a payment bank:
- The main objective is to further financial inclusion by providing small savings account and payments/remittance services to migrant labour workforce, low income households, small businesses and other unorganized sector entities.
Eligibility to set up a payment bank:
- RBI permits non-bank Prepaid Payment Instrument (PPI) issuers, individuals and professionals, non-banking finance companies (NBFCs), corporate business correspondents (BCs), mobile telephone companies, super market chains, companies, real sector cooperatives that are owned and controlled by residents and public sector entities to apply of a payments bank licence.
- Non-Banking financial companies are financial institutions that provide certain types of banking services, but do not hold a banking license.
- These institutions are not allowed to take deposit from the public, which keeps them outside the scope of traditional oversight required under banking regulations.
- NBFCs can offer banking services such as loans and credit facilities, retirement planning, money markets, underwriting and merger activities.
- Non Banking Financial Company is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds hire-purchase, insurance business or chit business but does not include any institution whose principle business includes agriculture, industrial activity or the sale, purchase or construction or immovable property.
- The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 and directions issued by it.
Types of NBFC:
- Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/ economic, such as automobile, tractors, lathe, machine, generator etc.
- Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.
- Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advance or otherwise for any activity other than its own but does not include an Asset Finance Company.
- Infrastructure Finance Company (IFC): IFC is a non-banking company which deploys at least 75 per cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs 300 crores and has a minimum credit rating of ‘A’.
- Infrastructure Debt Fund: It is a registered company as NBFCs to facilitate the flow of long term debt into infrastructure projects.