Payment Bank License in India

A Payment Bank in India is a special type of bank designed to offer basic financial services like payments, money transfers, and savings accounts. Introduced by the Reserve Bank of India (RBI) in 2014, payment banks aim to promote financial inclusion, particularly for people in rural areas, migrant workers, and low-income households with limited access to traditional banks. Unlike regular banks, payment banks do not provide loans or investment products.

They rely heavily on mobile technology to reach underserved populations, making banking services more affordable and accessible. To operate, these institutions must obtain a payment bank license from the RBI, ensuring they meet required safety, capital, and operational standards.

List of Existing Payment Banks in India

Some of the common Payment Banks are mentioned below

• Airtel Payments Bank
• Jio Payments Bank
• India Post Payments Bank (IPPB)
• Fino Payments Bank
• NSDL Payments Bank

How are Payment Banks Different from Other Banks?

While they both handle money, payment banks and traditional commercial banks (like SBI or HDFC) have key differences in their goals and operations. Understanding these differences helps to see the unique role of a payment bank.

Here’s a simple comparison:

A payment bank primarily serves daily transactions, savings, and payment needs. In contrast, a traditional bank offers these services as well as additional financial solutions such as loans and investments.

What Payment Banks Can and Cannot Do

To make it even clearer, let's break down the specific powers of a payment bank. The RBI has set clear rules. These rules ensure that payment banks stick to their main objective of financial inclusion and don't take risky bets with your money.

What a Payment Bank CAN Do:

• Accept Deposits: Payment banks can open savings and current accounts for you. The total balance in these accounts cannot exceed ₹2 lakhs per customer at the end of the day. (This limit was previously ₹1 lakh, but was increased by the RBI to ₹2 lakh in April 2021.)
• Issue Debit Cards: They can give you an ATM/Debit card to withdraw cash and make payments at shops.
• Handle Payments: You can use them to pay bills, send money to others, and receive payments.
• Act as a Partner for Other Banks: They can act as a Business Correspondent (BC) for other banks. This helps them offer more services in remote areas.
• Sell Simple Financial Products: They can sell simple insurance and mutual fund products from other companies. They act as a simple distributor.
• Handle Forex: They can help with currency conversion services for travel or personal use, as per RBI and FEMA regulations.
• e-KYC and Aadhaar-based Onboarding: Payment banks are at the forefront of using electronic Know Your Customer (e-KYC) and Aadhaar-based onboarding, which allows for quick and secure customer verification.

What a Payment Bank CANNOT Do:

• No Lending: This is the biggest rule. They cannot offer loans of any kind – no personal loans, no car loans, and no home loans.
• No Credit Cards: Since they cannot lend, they cannot issue credit cards.
• No High-Risk Investments: They cannot use depositors' money for risky investments. They must invest in very safe government bonds.
• No NRI Accounts: They cannot accept deposits from Non-Resident Indians (NRIs).
• Cannot Create Subsidiaries: They cannot set up other companies to do activities like Non-Banking Financial Company (NBFC) services.

These rules ensure that a payment bank is a safe place for the common person's savings.

The RBI wants serious, capable, and well-intentioned players to enter the banking space. They have created a list of those who are eligible to apply for an RBI license for payment banks. The idea is to bring in entities that already have a large network and experience in reaching people.

Here are the types of companies and individuals who can apply:

• Existing non-bank Prepaid Payment Instrument (PPI) issuers

These are companies that already offer mobile wallets or prepaid cards. Think of companies like Paytm (which started as a PPI). They have experience in digital payments and a large user base. This makes them strong candidates for a payment bank license.

• Non-Banking Finance Companies (NBFCs)

NBFCs are companies that provide some banking services but don't hold a bank license. They have experience in financial services and understand the market. An eligible NBFC can apply to become a payment bank.

• Corporate Business Correspondents (BCs)

Business Correspondents are like agents for banks. They provide basic banking services in areas where a bank branch is not present. Companies that run a large network of these BCs have the right kind of experience to run a payment bank.

• Mobile Telephone Companies

Companies like Airtel and Jio are perfect examples. They have millions of customers and a retail network that reaches every corner of the country. Their expertise in technology and distribution makes them ideal applicants. This expertise in technology and distribution is why several of the most prominent companies in India given a payment bank license, such as Airtel and Jio, come from the telecom sector.

• Supermarket Chains

Supermarket chains with stores across the country can also apply. They have a strong physical presence and a direct connection with millions of customers. They can leverage their locations to offer banking services.

• Public Sector Entities

Government-owned entities can also apply. For example, India Post, with its vast network of post offices, received a license and started the India Post Payments Bank (IPPB).

• Individuals and Professionals

Individuals or professionals with at least 10 years of experience in banking or finance can team up to promote a payment bank. They need to show a strong track record and a clear vision.

Note: Large industrial or business groups cannot promote a payment bank, except for owning up to 10% of the bank's stake. This restriction is in place to avoid excessive concentration of risk.

Meeting the eligibility criteria is just the initial step. The Reserve Bank of India (RBI) carefully evaluates each applicant to ensure that the new payment bank will be safe, stable, and align with national financial goals. The RBI looks for several key qualities in applicants:

• A Sound Track Record

The RBI looks at the promoter's past.

• Has their existing business been successful and well-managed for at least five years?
• Do they have a history of following rules and regulations?
• Do they have a good reputation in the market?

A clean and successful history is very important. It shows the RBI that the promoters are capable of running a bank responsibly.

• Integrity and Credentials

This is about the character of the people behind the application. The RBI does a "fit and proper" check.

• Are the promoters and directors honest and trustworthy?
• Do they have a clean record with no history of fraud or major legal issues?
• Do they understand the responsibility that comes with handling public money?

The RBI will check everything, including their financial and legal history, to ensure they are the right people for the job.

• Financial Standing

Running a bank requires a lot of money. The applicant needs to prove they are financially strong.

• Can they bring in the required minimum capital of ₹100 crore?
• Do they have a clear plan on how the bank will make money and remain profitable?
• Are their sources of funds clean and legitimate?

The RBI needs to be sure that the payment bank will not fail due to a lack of funds.

• Capital Adequacy Norms

The RBI requires payment banks to maintain certain capital adequacy norms to ensure that they have enough capital to cover potential risks. This is critical to safeguard depositors’ interests and maintain the financial health of the bank.

• Foreign Shareholding

The RBI sets limits on foreign shareholding in payment banks to ensure that control remains within India. The foreign ownership in a payment bank is restricted to a certain percentage, typically capped at 74%, to preserve national interest and ensure local accountability.

If you meet the eligibility criteria and align with the RBI’s requirements, obtaining a payment bank license in India is a multi-step journey that demands careful planning and precise execution.

Step 1: Incorporating a Public Limited Company

Before you even apply, you must set up a specific type of company. The payment bank must be registered as a ‘Public Limited Company’ under the Companies Act, 2013. This type of company offers more transparency and is better regulated, which is essential for a bank.

Step 2: Preparing and Filing the Application (Form III)

To apply for a payment bank license, you must submit Form III, prescribed under the Banking Regulation Act, 1949. The application must be submitted to the Chief General Manager of the RBI. The form is detailed and requires the following key information:

• Promoter and Director Information
  • Complete personal and professional background of promoters and directors
  • Details of their prior experience in banking, finance, or related sectors
  • A list of other companies where they serve as directors.
• Financial Details
  • Audited financial statements for the last five years
  • Capital structure of the applicant and its promoters
  • Source of funds and financial stability.
• Business Plan for the Proposed Bank
  • Detailed description of the bank’s services and operations
  • Strategy for customer acquisition and market penetration
  • Financial projections for the first 3-5 years
  • Risk management framework and compliance measures
  • Technology and infrastructure plan, including IT security and data protection
    Plans for achieving financial inclusion and extending services to unbanked areas.

Step 3: The RBI's Initial Screening and EAC Evaluation

Once the application is submitted, the RBI conducts a preliminary screening. They make sure all the required information and documents are there.

After this, the application goes to a special committee. This is called the External Advisory Committee (EAC). The EAC is made up of experienced professionals from banking, finance, and other fields. They carefully review each application. They assess the applicant based on the criteria we discussed earlier: track record, integrity, and the business plan. The EAC then gives its recommendations to the RBI.

Step 4: Receiving the 'In-Principle' Approval

If the RBI is satisfied with the EAC's recommendation and its own review, it grants an ‘in-principle’ approval.

This is not the final license but more of a provisional green light. This approval is valid for 18 months. It means the RBI has found you suitable, and you can now proceed to set up the bank. You need to fulfill all the conditions mentioned in the in-principle approval.

Step 5: Operational Readiness & Final Approval

The 18-month period following 'in-principle' approval is a critical phase for setting up the bank. During this time, promoters must focus on the following tasks:

• Secure the full ₹100 crore capital requirement for the bank.
• Hire key management personnel and operational staff.
• Set up the technology infrastructure, including core banking systems and mobile applications.
• Establish a network of branches or access points to serve customers.
• Obtain all necessary registrations and approvals, such as those under Goods and Services Tax (GST) and Registrar of Companies (ROC).

The RBI will closely monitor your progress during these 18 months. Once you have met all the conditions, the RBI will grant the final license for a payment bank. Only after getting this final license can the company start its banking operations.

Getting a payment bank license involves meeting strict criteria set by the RBI. These requirements are essential to protect both customers and the financial system.

• Minimum Capital Requirement: The ₹100 Crore Mandate

The most important financial requirement is the minimum paid-up equity capital. A payment bank must have at least ₹100 crore. This large amount ensures that the bank has a strong financial cushion from day one. It shows the promoters are serious and have the financial capacity to run a bank. Additionally, the promoter’s contribution must be at least 40% of this capital for the first five years.

• CRR, SLR, and Other Prudential Norms

Payment banks must follow the same rules as other scheduled commercial banks on certain matters.

• Cash Reserve Ratio (CRR): They must keep a certain percentage of their deposits as cash with the RBI. This is for safety.
• Statutory Liquidity Ratio (SLR): They must invest a minimum of 75% of their deposits in safe government securities (like Treasury Bills). This is a key rule that prevents them from taking risks with your money. The remaining 25% can be kept as cash or deposits with other commercial banks.

• Business Plan for RBI Approval

Your business plan is your roadmap. It must be very detailed and realistic. The RBI will scrutinize it to understand your vision. The plan should clearly explain:

• Your target customers and market.
• The technology you will use.
• Your financial projections for the first five years.
• How you plan to achieve financial inclusion.
• Your plan for setting up a network of access points.

A strong, well-thought-out business plan is critical for getting the RBI license for payment banks.

• Technology and Cybersecurity Frameworks as per RBI Guidelines

Since payment banks are heavily technology-driven, the RBI places a huge emphasis on IT systems. You must have:

• A robust and secure IT infrastructure.
• A strong cybersecurity policy to protect customer data from hacking and fraud.
• A disaster recovery and business continuity plan in case of system failures.

Your technology plan must be approved by the RBI.

Preparing the application is a massive documentation exercise. You need to be organized and thorough. Here is a general checklist of the documents required.

• Documents for Individual Promoters

• Detailed professional and personal background information.
• PAN Card and Aadhaar Card.
• Proof of address (like a passport or utility bill).
• Financial statements for the last 5 years (including tax returns).
• A statement showing all assets and liabilities.
• Details of any other companies they are directors of.

• Documents for the Promoting Company or Entity

• Certificate of Incorporation and Memorandum & Articles of Association.
• The company’s financial statements for the past five years.
• A complete list of the company's directors and major shareholders.
• Shareholding pattern of the company.

• Documents for the Promoter Group

• Information about all the companies and entities in the promoter group.
• Their shareholding structures and financial statements.
• This helps the RBI understand the entire corporate structure behind the applicant.

Once a payment bank gets its license and starts operating, it must follow a strict set of rules. These rules are designed to ensure the bank stays true to its purpose.

Permitted Activities

As discussed earlier, payment banks have a limited set of powers.

• Acceptance of Deposits: Up to ₹2 lakhs in savings and current accounts.
• Issuance of Debit/ATM Cards: To allow customers easy access to their funds.
• Payment and Remittance Services: Mobile banking, internet banking, and money transfer services.
• Bill Payment Services: A convenient way for customers to pay their utility bills.
• Acting as a Business Correspondent (BC): Partnering with other banks to expand services.
• Distribution of Third-Party Products: Selling simple insurance and mutual funds as an agent.
• Cross-Border Remittances: Facilitating personal remittances from abroad.

Prohibited Activities

The list of what they cannot do is just as important.

• No Lending: They cannot give any type of loan.
• No Credit Cards: Cannot issue credit cards.
• No NRI Deposits: Cannot open accounts for NRIs.
• No Complex Products: Cannot deal in complex financial derivatives or structured products.
• No Subsidiaries for NBFC Activities: Cannot set up separate companies for lending activities.

Getting the India payment bank license is not the end of the road. It's the beginning of a journey for continuous compliance. The RBI keeps a close watch on all banks, including payment banks.

• Maintaining Prudential Norms: The bank must always maintain the required CRR, SLR, and a minimum capital adequacy ratio. This ensures the bank remains financially healthy.

• KYC/AML/CFT Compliance: Payment banks must strictly follow:

• Know Your Customer (KYC): Verifying the identity of every customer.
• Anti-Money Laundering (AML): Monitoring transactions to prevent illegal activities.
• Combating the Financing of Terrorism (CFT): Reporting suspicious transactions to the authorities.

• Statutory and Regulatory Reporting: Payment banks must submit periodic reports to the RBI, including financial statements, data on deposits, transaction volumes, and compliance certificates, to ensure ongoing oversight of their health and operations.

• Data Security and IT Audits: They must conduct regular IT and security audits by independent auditors. This ensures that their technology systems are secure and customer data is safe.

• Use of Name: A payment bank must use the words "Payment Bank" in its name. This clearly tells customers the nature of the institution, such as 'Airtel Payments Bank' or 'NSDL Payments Bank'.