Payment Bank License

In the latest times, Payment Banks has got amazing as well as accessible hooks in its banking circle business. It is a new model introduced by the Reserve Bank of India (RBI), which accelerates transactions like a regular bank, except issuing credit cards and lending. Payment Banks is something that has got the potential to give extensions to the Government’s financial targets, which got considered as the next big thing.

Payment Bank brings more flexibility, convenience and eases the banking life. They also offer numerous services to the consumers utilizing a secured digital platform, which helps the Government to achieve “Digital India.” Thus, it is mandatory to obtain a Payment Bank License to open a Payment Bank. You must note that, U/s 22 of the Banking Regulation Act, 1949, the Reserve Bank of India issues the Payment Bank License to the applicants.

What is the Minimum Paid-up Capital needed for receiving a Payment Bank License?

According to the RBI guidelines, the minimum required paid-up equity capital for opening a payment bank and receiving a Payment Bank License is Rs. 100 Cr. Correspondingly; the promoter must contribute at least 40% of the paid-up equity capital for the first five years of establishment. The foreign shareholding will be permitted as per the Foreign Direct Investment Policy (FDI Policy) as amended from time to time in payment banks for FDI in Indian private banks.

What are the Eligibilities for Qualifying Promoters to Get a Payment Bank License?

As we know that it needs a minimum of Rs 100 Cr. in the form of paid-up capital, RBI has well-defined a long list of qualified Promoters for the Payment Bank License. The applicants who qualify for the Payment Bank License procedure are stated below. Those are as follows:-

  • Prevailing and surviving non-bank Pre-paid Payment Instrument issuers, sanctioned under the PSS Act (Payment and Settlement Systems Act), 2007
  • Professionals/Individuals
  • NBFCs (Non-Banking Financial Company)
  • Supermarket chains
  • Corporate Business Correspondents
  • Companies
  • Mobile Telephone Companies
  • Real-Estate sector Co-operatives
  • Public Sector units

Permitted Activities for a Payment Bank License Holder

The activities permitted for a Payment Bank License Holder are given below:-

  • Acceptance of demand deposits to the tune of Rs 1 lakh per customer.
  • Issuance of debit cards
  • Payment and remittance services.
  • Distribution of financial products such as, mutual funds and insurance.
  • Issuance of a prepaid payment instrument.
  • Internet banking services.
  • Acting as a business correspondent of another bank.
  • Utility bill payment on behalf of the customers

Documents and Information to be furnished for the Payment Bank License Application

Existing Structure

Documents And Information On The Individual Promoter:-

Name of the promoter, residential status, date of birth, PAN No., parents’ names, branch, bank account details, and credit facilities.

Comprehensive and detailed information on the experience and background of the individual promoter, track record of business and financial worth, his/her expertise, details of promoter’s direct and indirect interests in several entities/ industries/ companies, etc.

Documents And Information On The Entity Promoting The Bank:-

Memorandum and Articles of Association, Shareholding pattern of the promoter entity, financial statements of the promoter entity for the past 5 years (Include important economic indicators), and income tax returns for the last 3 years.

Documents And Information On The Entities And Individuals In The Promoter Group:-

Names of the individuals and entities, management, and corporate structure of all the entities, details of shareholding, a pictographic organogram representing the structure, shareholding, and total assets of the entities possess.

Submit Annual reports of the past 5 years of all the group entities.

Name of all the Entities and Individuals in the promoter group (including non-financial, financial, and overseas entities) with particulars stated below:-

  • Date of incorporation, 
  • The activity of the entity, 
  • Registered Office address, 
  • PAN Number, 
  • TAN Number,
    •  
  • CIN Number, 
  • Account number,
  • Income Taxation to which the entity belongs,
    •  
  • Branch and its account details of the entities
  • Credit regulators and amenities of the entity (registration details in the case of entities regulated by SEBI)
  • Particulars of the listing (on stock exchanges) of the entities.

Proposed Structure

  • Detailed Information about the persons/entities,
  • A subscriber to 5 % or more of the paid-up equity capital (shareholding arrangement) of the proposed payment bank,
  • Show foreign equity participation,
  • Details of the sources of capital of the proposed investors and proposed bank

Project Report

A project report showing viability of the proposed and bank business potential, the business plan, any other financial services planned to be offered, etc. as per the RBI guidelines, and any other information that is reflected as relevant.

What are the Requisites for Setting up a Payment Bank in India?

  • The payment bank must be required to invest in securities issued by the Government or Treasury Bills - a minimum of 75% of its demand deposit balances having maturity up to 1 year; that is identified by RBI as qualified securities for maintenance of SLR (Statutory Liquidity Ratio).
  • The payment bank must maintain a maximum of 25% in current deposits with other scheduled commercial banks for its processes/operations and the administration of liquidity. It should comprise a minimum paid-up capital of Rs 100 Cr.
  • A capital adequacy leverage ratio of not less than 3% and a minimum of 15% of its risk-weighted assets shall be maintained.
  • The Foreign Direct Investments policy for private banks must be the guiding policy for foreign shareholding.
  • The payment bank shall be required to follow the guidelines laid down by RBI as they may face operational or liquidity risk, concerning liquidity risk management and its administration.

Regulatory Framework for Payment Bank in India

The Regulatory Frameworks for Payment Bank in India are as follows:-

  • Reserve Bank of India, 1934;
  • The Companies Act, 2013;
  • Banking Regulation Act, 1949;
  • Foreign Exchange Management Act, 1999;
  • Payment and Settlement System Act, 2007;
  • Deposit Insurance and Credit Guarantee Corporation Act, 1961.
  • Other Statutes and Directives, Prudential Regulations and other Guidelines issued by RBI that may applicable from time to time.

What are the Scope of Actions and Compulsory Compliances of a Payment Bank in India?

The scope of actions of a Payment Bank in India can be précised as given below:-

  • Any Payment Bank can accept deposits as per the limit prescribed by RBI. The term "deposits" include Saving Bank Deposits from Individual and Current Deposits from Small-level businesses; 
  • NRIs are not permitted to make any deposit in the Payment Banks;
  • A Payment Bank can issue Debit Cards or ATM;
  • The Payment Banks are not permitted to involve in any Lending Activities;
  • A Payments Bank must embark on its own CFT (Combating Financial Terrorism) exercise and KYC (Know Your Customer)/AML (Anti Money Laundering) as any other bank;
  • A Payment bank is not allowed to offer loan and Visa administrations even if they can give ATMs or debit cards;
  • A Payment Bank can involve in remittance and payment services through BCs (Business Correspondent) and ATMs (Automated Teller Machines) and mobile banking.
  • The payments/remittance services may include acceptance of funds at one end through branches Automated Teller Machines (ATMs) and BCs (Business Correspondent), utilizing various channels such as branches and BCs and payments of cash' at the other end.
  • According to the instructions provided under the Payment and Settlement Instrument Act, 2007, a Payment Bank can also issue Prepaid Payment Instruments.
  • A Payment Bank can deal for proposing Internet Banking Services;
  • According to the Reserve Bank of India (RBI) guidelines on BCs, a Payments Bank can also become a BC (Business Correspondent) of another bank, 
  • Under the payment system approval by the Reserve Bank of India, a Payment Bank can operate as a channel of accepting 'remittances' from banks, such as RTGS/IMPS/NEFT;
  • A Payment Bank is allowed to handle Cross-Border Remittance Transactions like remittances on the current bank account or personal payments;
  • A Payment Bank is not permitted to set-up subsidiaries to commence the activities of a Non-Banking Financial Company (NBFC);
  • A Payment Bank can make payment of 'utility bills' on behalf of the general public and its customers;
  • With RBI's prior approval, a Payment Bank is permitted to undertake other non-risk sharing simple financial actions services. It also desires to satisfy all the necessities of the sector regulator for such products.
  • A Payment Bank is legalized to accept current deposits and Investment Funds Bank deposits from the private undertakings up to a quantified limit;
  • A Payment Bank needs to agree to take RBI (Reserve Bank of India) Compliances on Web-Banking, Technology Risk Management, Cyber Laws, Data Security, and Electronic Banking;
  • A Payments Bank should use the words' Payments Bank' to distinguish itself from other banks.

What is the Required Procedure to Apply for a Payment Bank License in India?

  • The payment bank must be issued a license under Section 22 of the Banking Regulation Act, 1949 and must comply to be registered as a public limited company under the Companies Act, 2013.
  • Any company incorporated/established in India and desiring to commence banking business as per Rule 11 of the Banking Regulation (Companies) Rules, 1949 shall make an application using 'Form III' for a payment bank license.
  • The payment bank license application shall be addressed to the "Chief General Manager" of the Department of Banking Regulation, RBI.
  • The RBI's preliminary screening will be conducted to check the prima facie admissibility, and additional criteria may also be applied, if need.
  • An EAC (External Advisory Committee), consisting of distinguished professionals like Chartered Accountants, Finance Professionals, Bankers, etc. shall assess the applications.
  • The EAC (External Advisory Committee) may call for information and have deliberations and negotiations with applicants as may be deemed fit by it.
  • The RBI will make the result to issue an in-principle approval, and it shall be final and concluding. The in-principle approval shall stay binding for 18 months. It means that the bank has to be set up within such a period itself.
  • If any adverse features are detected post-issuance of the in-principle approval, the RBI may execute additional conditions if required. Moreover, it may withdraw the in-principle approval.

RBI Additional Guiding Principles on Payment Bank License in India

Preamble And Suggestion

The Reserve Bank of India (RBI) issues licenses to carry on the business of payment banking and other companies in which banking companies may include, as described and defined in Sections 5 (b), and 6 (1) (a) - (o) of the Banking Regulation Act, 1949, individually. Payment Bank licensing process culminated with the announcement by the RBI "vide its Press Release dated April 2, 2014". It says that it will be granted "in-principle" approval to two applicants who would set up new banks in the private ventures within 18 months, only.

RBI proposes to use the learning experience from this licensing implement to revise the guidelines appropriately while pronouncing the decision to grant "in-principle" approval. It was also to move to grant licenses more frequently. Additionally, RBI would work on a policy of having various groups of "differentiated" bank licenses, which shall allow a wider pool of applicants into the banking sector.

One of the understandings in the discussion paper on Banking Structure in India – The Way Forward on August 27, 2013- was a need for place banking in India. It was also said that distinguished licensing could be a desirable step in this direction, predominantly for infrastructure financing, retail banking, and wholesale banking. Relying on the comments and suggestions received on the draft guidelines the following guiding principle for licensing payments banks has been confirmed.

Objectives

There is a requirement for savings accounts and transactions for the underserved people. Moreover, remittances have both macro-economic profits for the region who receives them, and micro-economic profits to the recipients. Therefore, the primary objective of setting-up of payments banks will be to further financial enclosure by providing (a) small savings accounts and (b) payments or remittance services to low-income households, migrant labor workforce, small businesses, other unorganized sector/entities, and other users.

It will be enabled by enabling high volume-low value transactions in deposits and payments/remittance facilities in a sheltered and protected technology-driven environment.

Eligible Promoters

You must note that the existing PPI license holders could opt for conversion into payments banks also. A current PPI issuer doesn't need to apply for a payment bank license, and it may continue as a 'PPI issuer' as per the guiding principle issued by RBI.

A promoter/promoter group can get a "Joint Venture" with an existing listed commercial bank to set up a payments bank and get a license. Nonetheless, to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949, scheduled commercial banks can take an equity stake in a payments bank. If a government entity needs to set up a payments bank, it must first obtain important approvals from the Government, and submit the application.

Deployment Of Funds

The payments bank will contribute to the 'payment and settlement system.' It will have access to the "interbank uncollateralized - call money market," "collateralized repo," and CBLO market for provisional liquidity management.

Promoters' Contribution

You must note that the RBI prescribes no maximum shareholding limit for promoters. Yet, the payments bank's promoters must hold at least 40% of its paid-up equity capital for the first five years from the beginning of its business. The "scheduled commercial banks" can take an equity stake in a payments bank to the amount permitted U/s 19 (2) of the Banking Regulation Act, 1949 if the payments bank is set up as a joint-venture with equity partnership with a "scheduled commercial bank."

When the payments bank becomes systemically important and reaches the net worth of Rs.500 crore, diversified ownership and listing will be obligatory within 3 years of reaching that net worth of the Payment Bank. Still, payments banks having a net worth of below Rs.500 Cr. could also get their shares registered voluntarily, subject to completion of the requirements of the 'capital markets regulator.'

Foreign Shareholding

The Foreign Direct Investment (FDI) policy will govern foreign shareholding in the payments bank as per private sector banks as amended from periodical basis. The collection of foreign investment in a private sector bank from all bases will be allowed up to a maximum of 74% of the bank's paid-up capital as per the current FDI policy. At least 26% of the paid-up capital will have to be held by residents at all times. Moreover, the individual FII / FPI holding is constrained to below 10 % of the total paid-up capital in the case of 'Foreign Institutional Investors' (FIIs) / 'Foreign Portfolio Investors' (FPIs)

Voting Rights And Transfer/Acquisition Of Shares

It is worth noting that any shareholder's voting rights in private sector banks are capped at 10%, under Section 12 (2) of the Banking Regulation Act, 1949. Moreover, this limit can be raised to 26 % in a phased manner by the RBI guidelines. Additionally, any acquisition of 5 % or more of paid-up share capital in a private sector bank will need prior approval of RBI as per Section 12B of the Act, which will also apply to India's payments banks.

Business Plan

All the applicants for the payments bank's license will be obligatory to furnish their project reports and business plans with their applications. The business plan for the application should address how the bank aims to achieve the purposes of setting up payment banks in India.

Corporate Governance

  • The Board of Committee must have a majority of independent directors of the payments banks.
  • The Payment bank should comply with the corporate governance guidelines comprising 'fit and proper' criteria for Directors as dispensed by RBI from time to time.

Update: - RBI lays down guiding principle for payments banks' SFB (Small Finance Banks) license

In the present times, Payments banks willing to convert themselves into SFBs (small finance banks) can apply for such a license only after 5 years of operations. According to the norms, the Existing Payments banks (PBs), which have completed five years of services and are controlled by residents, are also eligible for conversion into SFBs (small finance banks) after complying with all regulatory and legal requirements of various authorities and guidelines.

According to RBI, the minimum capital for setting up an SFB has been instructed at ₹200 Crore. Distinctly, specific regulations will be amended to strengthen further the role of UCBs in promoting financial inclusion and reduce the concentration risk in the introductions of primary (urban) co-operative banks. Moreover, it decided to bring UCBs with assets of ₹500 Cr. and above, under the reporting framework of the CRILC ("Central Repository of Information on Large Credits").

What is the Future of Payments Banks?

It is essential to define payment banks' position in the upcoming years before you step into the hassle of documentations and the lengthened procedure of payment bank license. The possible future of Payments Banks are hereby given below:-

  • Payments banks are certainly a healthy financial system that offers a great deal of suitability to their customers. A payments bank will permit you to access banking services and carry out transactions even though you have an existing traditional bank account.
  • One has to stick around the regular and customary banking hours since the traditional bank's functions in a particular time frame. But, payments banks provide seamless transactions at any time and discard any such limitations. Consequently, the payment banks remove the need to be time-specific while traveling to a branch for making transactions (Debit or credit).
  • Payments banks provide cash digitalization, which is again another apparent benefit for the customers. Its after-effects have elevated payments banks' growth with its emphasis on digitalizing transactions. It is because 90% of transactions in India were cash-based previous to demonetization. 
  • Accordingly, the payment banks are predictable enough to be a game-changer and transform the current banking system. It will fetch the banking on a broader scale in India.