Payments bank

Indian Economy glossary

Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

A payments bank is a differentiated bank (a bank licensed by the RBI to do only a limited set of activities). It accepts deposits up to Rs 2 lakh per customer and offers payment and remittance (money-sending) services. It cannot give loans and cannot issue credit cards, though it can issue debit cards.

It matters because it gives migrants and low-income households a safe place to save small amounts and a cheap way to send money home. Since it gives no loans, it is also very unlikely to fail because of bad loans.

Asset rule: Investment in SLR government securities ≥ 0.75 × demand deposits

Explanation

Why payments banks were created

  • A universal bank (a full-service commercial bank) takes all kinds of deposits and gives all kinds of loans.
  • Nationalisation (1969) and the 1991 reforms spread bank branches widely. Many poor households, migrant workers and micro firms were still left out:
  • they had no easy place to save small amounts,

  • they had no cheap way to send money home.

  • The Nachiket Mor Committee (2013) studied financial services for small businesses and low-income households. It proposed differentiated banks, which are specialised banks that each serve one need.

  • Timeline:
  • 2014: guidelines issued
  • 2015: first licences given

What a payments bank can and cannot do

  • Can do:
  • accept deposits, up to Rs 2 lakh per customer (the cap was raised from Rs 1 lakh in 2021)
  • offer payment and remittance services

  • issue debit cards

  • Cannot do:

  • give any loans

  • issue credit cards

  • Minimum capital: Rs 100 crore

The asset rule: where the deposits go

  • It must keep at least 75% of its demand deposits in SLR government securities.
  • Demand deposits are deposits a customer can withdraw at any time.

  • SLR (Statutory Liquidity Ratio) is the share of deposits a bank must keep in safe, liquid assets such as government securities.

  • The rest (at most 25%) may be kept as current and time deposits with scheduled commercial banks.

Worked example

  • A payments bank holds demand deposits of Rs 1,000 crore.
  • It must keep at least 0.75 × 1,000 = Rs 750 crore in SLR government securities.
  • It can keep at most Rs 250 crore as current and time deposits with scheduled commercial banks.
  • None of this money goes out as loans, so there is no loan that can turn bad.

Its risk profile: why it cannot fail through bad loans

  • No lending, so almost no credit risk.
  • Credit risk is the risk that borrowers do not repay.

  • A payments bank has no borrowers, so it has almost no NPAs (loans that have stopped being repaid).

  • Its money sits in safe assets. Most of its deposits are in government securities.

  • Its main risks are different:
  • operational risk: its systems or processes fail
  • compliance risk: it breaks rules such as KYC (Know Your Customer, the checks a bank must do to confirm who its customers are)

In India

  • Regulator: the RBI licenses and supervises payments banks under the differentiated banking framework.
  • Origin: Nachiket Mor Committee (2013), guidelines in 2014, licences in 2015.
  • Current deposit cap: Rs 2 lakh per customer, raised from Rs 1 lakh in 2021.
  • Case: Paytm Payments Bank (January 2024)
  • The RBI stopped it from taking fresh deposits and top-ups.
  • The reason was KYC and other compliance failures.

  • Lesson: a bank that gives no loans cannot have an NPA problem, so the supervisor's main worry is governance and compliance.

  • Role in financial inclusion: it serves migrants and low-income users who need a place for small savings and a cheap way to send money, not loans.

Don't confuse with

  • Small finance bank (SFB): an SFB can lend. At least 50% of its loans must be up to Rs 25 lakh [1][2], it has no deposit cap, and it needs minimum capital of Rs 200 crore. A payments bank cannot lend, has a Rs 2 lakh deposit cap and needs Rs 100 crore.
  • Universal bank: it takes all kinds of deposits and gives all kinds of loans, so it creates credit. A payments bank takes capped deposits and gives no loans, so it does not create credit through lending.
  • NBFC: an NBFC lends but cannot take demand deposits and has no DICGC cover. A payments bank takes demand deposits but cannot lend. They are almost opposites.
  • Neobank: a digital-only provider that in India has no banking licence of its own and works through a licensed partner bank. A payments bank holds its own RBI licence.

Prelims Hooks

  • Payments banks and SFBs came from the Nachiket Mor Committee (2013). Guidelines came in 2014 and the first licences in 2015.
  • Deposit cap: Rs 2 lakh per customer, raised from Rs 1 lakh in 2021.
  • Trap: a payments bank can issue debit cards but not credit cards, and it cannot give any loans.
  • At least 75% of demand deposits must be in SLR government securities. The rest (at most 25%) can be kept as deposits with scheduled commercial banks.
  • Minimum capital: payments bank Rs 100 crore vs SFB Rs 200 crore.
  • Paytm Payments Bank (January 2024): the RBI barred fresh deposits because of KYC and compliance failures, not because of NPAs.

Mains Points

  • Inclusion without credit risk:
  • Payments banks bring savings and remittance services to migrants and low-income users.
  • They give no loans and hold mostly government securities, so the inclusion comes with very little risk to depositors' money.

  • The trade-off: they cannot meet the poor's need for small loans without collateral, which SFBs and NBFC-MFIs have to meet instead.

  • Supervision must shift from NPAs to governance:

  • In a bank that gives no loans, the danger lies in weak KYC, poor systems and compliance lapses, not bad loans.

  • The Paytm Payments Bank action (January 2024) shows that fintech-led banks need strong compliance checks, or they can put public trust and payment services at risk.

  • Limited business model:

  • Income comes only from fees on payments and returns on government securities, because there is no lending income.
  • Along with the Rs 2 lakh deposit cap, this makes profits hard to earn. So the policy question is whether the model can grow while it stays safe.

Related concepts

Read more

Sources

  1. 1RBI — Priority Sector Lending – Small Finance Banksrbi.org.in · tier 1
  2. 2RBI — Compendium of Guidelines for Small Finance Banks – Financial Inclusionrbidocs.rbi.org.in · tier 1