Why in News?
The Reserve Bank of India (RBI) has cancelled the banking licence issued to Paytm Payments Bank Limited under Section 22(4) of the Banking Regulation Act, 1949.
The RBI will make an application to the High Court for the winding up of the bank.
| UPSC Relevance: GS-3 Economy: Banking and Monetary Policy Prelims: Key facts related to Payments Banks |
Paytm Payments Bank Limited is prohibited from conducting the business of ‘banking’ as defined in Section 5(b) or any additional business specified under Section 6 of the Banking Regulation Act, 1949, with immediate effect.
Why was the license cancelled?
Paytm Payments Bank was not complying with certain norms of the Banking Regulation Act, 1949.
- The bank’s affairs were conducted in a manner detrimental to the interests of the bank and its depositors.
- The general character of the management of the bank is prejudicial to the interest of depositors as well as the public interest.
- The bank failed to comply with the conditions stipulated in the Payments Bank license issued to it.
Paytm app, Paytm UPI, Paytm QR, Soundbox, card machines and Payment Gateway, will continue to operate uninterrupted despite regulatory action against Paytm Payments Bank Limited.
What are Payments Banks?
- Payments Banks are a specialised, differentiated category of banks licensed by the Reserve Bank of India (RBI) under Section 22 of the Banking Regulation Act, 1949.
- Conceptualised on the recommendation of the Nachiket Mor Committee on Comprehensive Financial Services (2014).
- Rationale: To provide basic banking services (primarily payments and remittances) to underserved populations.
- The banks accept deposits and facilitate payments, but cannot undertake lending activities.
Key facts related to Payments Banks:
| Criteria | Payments Bank |
| Registration | registered as a public limited company under the Companies Act, 2013. |
| Licensing | granted a banking license by the RBI under Section 22 of the Banking Regulation Act, 1949. |
| Minimum Paid-up Capital | ₹100 crore |
| Deposit Limit per Customer | ₹2 lakh |
| Activities Permitted | • Accept demand deposits up to ₹2 lakh per customer. • Issue debit cards and prepaid payment instruments. • Provide internet banking and mobile banking services. • Offer remittance and money transfer services. • Distribute mutual funds, insurance & pension products. • Act as Business Correspondents (BCs) of other banks. • Sell government securities & treasury bills |
| Activities Prohibited | • Cannot issue credit cards or extend loans. • Cannot accept time deposits (FDs/RDs). • Cannot set up subsidiaries to undertake NBFC activities. • Cannot lend to individuals or businesses directly. • Cannot hold Non-Resident Indian (NRI) deposits |
| Eligible Promoters (entities or individuals permitted by RBI to establish and own Payments Banks) | Telecom companies, NBFCs, corporate entities, public sector entities, and individuals |
| FDI Limit | Up to 74% (as per private sector bank norms) |
| Deposit Insurance | Applicable (covered under DICGC) |
| SLR Requirement | maintain at least 75% of their deposits in government securities or treasury bills with a residual maturity of up to one year. |
| Priority Sector Lending (PSL) Norms | Not applicable |
| Basel III norms | Not applicable |
| Examples | Airtel Payments Bank; India Post Payments Bank; Jio Payments Bank |
Role in Financial Inclusion:
- Last-Mile Outreach: Financial inclusion in remote villages, serving farmers, MNREGA workers, and pensioners. E.g., India Post Payments Bank backed by the postal network.
- Distribution channels for financial products: Selling insurance, micro-pension schemes like APY (Atal Pension Yojana), and mutual fund units to first-time investors who lack access to full-service branches.
- Digital Payments Infrastructure: Payments Banks have been central to expanding UPI adoption, mobile wallets, and digital payment literacy among low-income households and migrant workers.
- Remittance gateways: Payments Banks have created efficient, low-cost domestic remittance corridors, enabling migrants to send money home affordably and safely.
Challenges facing Payments Banks:
- Unviable Business Model:
- Payments Banks are prohibited from lending, which eliminates their primary source of revenue (interest income).
- With 75% of deposits mandatorily parked in low-yield government securities, net interest margins are thin.
- Revenue depends almost entirely on transaction fees, remittance charges and cross-selling commissions (insurance, mutual funds), which are insufficient to sustain the high costs of customer acquisition and technology infrastructure.
- Low Deposit Cap& Low Engagement:
- With the deposit limit capped at ₹2 lakh per customer, Payments Banks struggle to retain customers as their financial needs grow.
- Low engagement from the “last-mile” customer (primary target). This often traps banks in a high-compliance, low-return equilibrium.
- Competition from UPI & Fintechs has eroded the core payments differentiation and the unique value proposition that Payments Banks once held.
- Regulatory & Compliance Burden: The regulatory compliance cost on payments banks is exceptionally high relative to their restricted revenue streams. Often, banks resort to cutting corners on compliance to remain profitable, which creates a governance-viability issue.
Practice MCQ:
Q. Consider the following statements regarding Payments Banks:
1. At least 75% of their demand deposit balances must be invested in government securities.
2. They can accept deposits from Non-Resident Indians (NRIs).
3. They are required to maintain the Cash Reserve Ratio (CRR) with the Reserve Bank of India.
Which of the statements given above is/are correct?
(a) 1 and 3 only
(b) 1 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer: (a)
UPSC PYQ 2016
Q. The establishment of ‘Payment Banks’ is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context?
1. Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
2. Payment Banks can issue both credit cards and debit cards.
3. Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
Answer: (b)
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