Guidelines For Licensing of Payments Banks: Press Release
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Langpi Dehangi Rural Bank P&DGuidelines For Licensing of Payments Banks: Press Release
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Powered by AIThe Reserve Bank of India believed that granting 'in-principle' approval to payments banks was significant as it allowed the approved entities to start preparations and fulfill guidelines before obtaining a full banking licence. This step was important as payments banks were seen as an emerging model crucial for financial inclusion. The 'in-principle' approvals were meant to ensure that different business models could be tested and those with technological and financial strength to service excluded customers were allowed to operate .
The Committee of the Central Board (CCB) considered the experience and capabilities of entities across different sectors to ensure diverse models could be tested. The CCB evaluated whether applicants presented any unacceptable risk even in the limited scope of a payments bank, and emphasized selecting those with the technological and financial capacity to extend services to previously excluded customers nationwide. Furthermore, the CCB observed that payments banks would not undertake lending, indicating they would face different risk profiles than traditional banks .
The report by the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, chaired by Dr. Nachiket Mor, highlighted the importance of an ubiquitous payment network and universal access to savings. It recommended the licensing of payments banks to offer financial services to previously excluded segments of the population. This recommendation was a significant foundation for the development and licensing of payments banks as it provided a structured approach to addressing financial inclusion needs, which was later taken up in the Union Budget 2014-2015 announcement .
In the Union Budget 2014-2015, the Hon’ble Finance Minister announced changes to empower the continuous authorization of universal banks in the private sector. The Reserve Bank would create a framework for licensing small banks and other differentiated banks like payment banks to serve niche interests and local areas, aiming to meet the credit and remittance needs of small businesses, unorganized sectors, and low-income households .
The Reserve Bank of India intended to use the learning from the initial licensing round of payments banks to revise the Guidelines appropriately and move towards issuing licences more regularly, potentially "on tap." This approach would allow for continuous adjustments and improvements in the licensing framework, making it more responsive to evolving market conditions and learning from the performance of newly established payments banks .
Payments banks were considered to be subject to different risks compared to full-service banks because they were not authorized to undertake lending activities. This limitation reduced their exposure to credit risk typically associated with loans, thereby simplifying their risk profile. As a result, the focus for payments banks was more on efficiently managing transactions and maintaining financial inclusion services without the complexities associated with credit issuance .
The policy discussion paper by the Reserve Bank of India observed a need for differentiated and niche banking in India to address specific segments like infrastructure financing, wholesale banking, and retail banking. It emphasized the benefits of specialized financial services to better meet the credit and remittance needs of small businesses, the unorganized sector, low-income households, and migrant workforces, thus fostering financial inclusion .
The Internal Screening Committee (ISC) played a crucial role in independently scrutinizing all applications after receiving inputs from the External Advisory Committee (EAC). The ISC prepared a final list of recommendations for the Committee of the Central Board (CCB) to review. The ISC consisted of the Governor and the four Deputy Governors of the Reserve Bank .
The Reserve Bank of India issued clarifications on the guidelines for licensing of payments banks to address queries and provide detailed understanding to potential applicants. This step was necessary to ensure transparency and clarity on regulatory expectations, helping applicants better prepare their proposals in compliance with the guidelines. The clarifications covered 144 queries and aimed to facilitate compliance with the requirements laid out in the draft and final guidelines .
The External Advisory Committee (EAC) considered several criteria while screening applications for payments banks. These included the financial soundness of the promoter with a five-year track record, governance issues focusing on 'fit and proper' criteria for promoters, business model innovation, technological and operational capability to handle high volumes transactions with safety, and a viable financial plan. The EAC also assessed the physical rural reach and the ability to handle low-value, high-volume transactions .
