Why in News?
The Reserve Bank of India (RBI) has cancelled the banking licence of Paytm Payments Bank Limited (PPBL), citing persistent non-compliance and management practices that violated the core conditions of its Payments Bank licence and were deemed detrimental to public interest. The cancellation was executed under the Banking Regulation Act, 1949, prohibiting PPBL from conducting any banking or related business with immediate effect. RBI has assured that PPBL possesses enough liquidity to repay its entire deposit liability upon winding up.
What is a Payments Bank?
Background
- Nachiket Mor Committee (2014) recommended the creation of payments banks and small finance banks to promote financial inclusion
- RBI issued licensing guidelines in 2014 and approved 11 payments bank entities
- Objective: Advance financial inclusion by providing small savings accounts and high-volume, low-value payments and remittance services
- Target segments: Low-income households, migrant workers, and small businesses
Key Features of Payments Banks
| Feature | Details |
|---|
| Deposit Limit | Up to Rs 2 lakh per individual customer |
| Minimum Capital | Rs 100 crore |
| Capital Adequacy Ratio (CAR) | At least 15% |
| Investment Mandate | 75% of demand deposit balances in SLR-eligible Government securities (maturity up to 1 year) |
| Permitted Services | ATM/debit cards, mobile banking, internet banking, business correspondent services |
| Prohibited Activities | Lending activities, issuing credit cards |
| Distribution | Can distribute non-risk-sharing financial products (mutual funds, insurance) |
| Exclusions | Cannot accept NRI deposits, cannot set up subsidiaries for NBFC activities |
| Regulation | Governed by Banking Regulation Act, 1949 and RBI Act, 1934 |
Coverage Under DICGC
- Payment banks in India are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC)
- Each bank depositor is insured up to Rs 5 lakh (principal + interest) per bank
- Applicable at the time of liquidation, licence cancellation, or merger/reconstruction
Comparison: Payment Bank vs Small Finance Bank vs Universal Bank
| Feature | Payment Bank | Small Finance Bank | Universal Bank |
|---|
| Primary Objective | Financial inclusion and digital payments | Credit supply to small businesses | Comprehensive banking for all |
| Lending | Not Allowed | Allowed | Allowed |
| Deposit Limit | Up to Rs 2 lakh | No specific limit | No specific limit |
| Credit Cards | Cannot issue | Can issue | Can issue |
| Minimum Capital | Rs 100 crore | Rs 200 crore | Rs 500 crore |
| Examples | Airtel Payments Bank, India Post Payments Bank | AU Small Finance Bank, Equitas | SBI, HDFC, ICICI |
RBI Powers Under Banking Regulation Act, 1949
Section 22: Licensing of Banks
- No company can conduct banking business in India without a licence from RBI
- RBI can cancel licences for non-compliance with stipulated conditions
Section 24: Statutory Liquidity Ratio (SLR)
- Banks must maintain a certain percentage of total demand and time liabilities in liquid assets
Section 10 & 36AA: Management Control
- RBI can remove managerial personnel (Chairman, Directors) if conduct is detrimental to public interest
- RBI can appoint suitable replacements
Section 35: Inspection and Audit
- RBI is authorized to conduct proactive inspections of any bank's books and accounts
Section 45: Moratorium and Resolution
- RBI can apply to Central Government to impose moratorium on a failing bank
- Freezes operations temporarily to prepare a scheme of amalgamation or reconstruction
Key Reforms in Payments Bank Sector
- September 2019: RBI allowed payment banks to apply for small finance bank licences after 5 years
- October 2019: Payment banks permitted to act as authorised foreign exchange dealers for cross-border remittances
- February 2020: RBI introduced on-tap licensing guidelines to promote competition and innovation
Significance for India
- Regulatory Vigilance: Demonstrates RBI's strong enforcement mechanism to protect depositors
- Financial Inclusion: Highlights the balance between promoting inclusive banking and maintaining regulatory compliance
- Consumer Protection: The Rs 5 lakh DICGC coverage ensures depositor protection even in licence cancellation scenarios
- Market Discipline: Sets a precedent for other payments banks to strictly comply with regulatory norms