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सेमिनार: अंग्रेज़ी सीखने का अवसर (23 सितंबर: दोपहर 3 बजे)
Q. Payment Banks: In the backdrop of recent developments, comment on the viability of newly introduced payment banking system.
May 27, 2016 Related to : GS Paper-3

Ans :


Payment Banks are newly introduced stripped-down type of banks, which are expected to reach customers mainly through aid of modern technologies like through mobile phones rather than traditional bank branches. They are mainly intended to extend the banking facility to rural areas and remote places.

Key Features of Payment Banks-

  • They can’t offer loans but can raise deposits of upto Rs. 1 lakh.

  • They can enable transfers and remittances through a mobile phone.

  • They can offer other banking services except loans.

  • They can issue debit cards and ATM cards usable on ATM networks of all banks.

  • They can offer forex services and provide forex cards to travellers.

Recent Developments-

In August 2015, the Reserve Bank of India gave in-principle licences to 11 entities to launch payments banks and these entities were given 18 months within which they have to launch their operations. But recently three entities namely Cholamandalam Investment, Dilip Shanghvi-Sun Pharmaceuticals and Tech-Mahindra have backed out and withdrawn their application in citing competition and a long gestation period as key considerations in reaching the decision.

Viability of payment banks-


  • Payment banks will bridge the last mile between bank branches and the remote customer living in a rural hamlet. And they collect majority of the deposits from these areas.

  • Since they have to maintain only a minimal number of small branches, the running costs are extremely low.

  • Three-fourth of their deposits are invested in government securities, hence chance of losing money under market condition is very minimal. 

  • They can charge to the services provided by them and cross-sell banking products, which also adds revenue in their kitty. 

Weaknesses and issues- 

  • Payment Bank entities are prohibited from lending the loans, hence it leaves limited scope to earn attractive interest rates of the market.

  • As two-third of their investment has to be invested in government securities, it limits banks ability to earn from their deposit base as well.

  • Initially they are restricted to remittances and eventually, they can cross-sell banking products through their reach and earn a fee, but neither of these two streams of revenue are high-margin businesses.

  • As the focus of these banks is unbanked and far-flung rural areas, it would take more than a few years to establish standalone profitability. Long gestation period discourages the entities.

  • Since last few years, large banks, including private lenders, have significantly expanded their networks in rural areas and providing all services that payments banks intended to do. This means that these markets are no longer wide open for new business with limited competition.

  • Catering to a customer base that largely comprises low-income households, farmers and the migrant workforce may not be profitable for these banks.

Way ahead-

  • Even though there are many issues, but Payment Banking services can be easily provided by telecom companies, post offices who already have significant networks in place and incremental cost is very limited and after all it’s an add-on business for them and hence it makes much easier for them. Hence RBI should encourage such entities.

  • Through payment banks RBI wants improve the financial inclusion, hence for that it should take those steps to ensure the viability of payment banking system, so that it will be win-win for all.


When the concept of payments banks was floated two years ago, many felt that it will change the dynamics of banking services and it force banks to work harder to collect deposits in rural areas. But with profits looking like a distant dream, in at least the first three to five years of operations, coupled with the limited scope of business activity many entities are losing enthusiasm and decided to back out. As goal of these payment banks is financial inclusion particularly of rural areas, hence RBI while granting the licences must analyse viability of entities and should ensure win-win situation for all.

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