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How is a Payments Bank different from other banks?

Financial inclusion is a healthy sign that indicates the well-being of a society. In simple terms, it signifies the presence of every citizen on a formal banking platform. The intention is to use people’s earnings as national wealth and propel the country’s progress. With financial inclusion, it also becomes easier to provide government benefits to all citizens. For these reasons, the government of India has been focussing on financial inclusion. Payments banks are a significant initiative in this direction.  

History of Payments Bank

According to a World Bank report published in 2014, 21% of the Indian population is unbanked. Most of this population lives in the interiors where other banks are unable to spread their reach. Traditional banks operate through branches and reaching remote places is sometimes not viable. The RBI formulated a committee headed by Nachiket Mor to study Comprehensive Financial Services for Small Businesses and Low-Income Households. The committee, among its various recommendations, proposed licensing of payments banks. The RBI worked on this recommendation and introduced the model of payments banks.

How does Payments bank differ from other banks?

Payments banks are based on a low-cost and low-risk model. It provides limited banking services and thus differs from regular banks.

Here are notable differences between the two.

• A payments bank must have minimum funds worth Rs. 1 billion. It has to be fully networked from the start and have 25% branches in unbanked rural areas; the capital requirement for commercial banks is much higher.

• Such banks have to use the term “Payments Bank” to differentiate from other banks.

• Payments banks cannot have subsidiaries to extend non-banking services.

• These banks cannot extend credit to its customers. In other words, they cannot provide loans or credit cards to the public.

• Customers can open savings accounts in these banks and deposit a maximum of Rs. 1 Lakh in their accounts. Commercial banks, on the other hand, do not have any such restrictions on deposits. Similar to other banks, payments banks also provide interest on deposits.

• Customers can transfer funds to other accounts using their mobile app. They can also pay their utility bills through cashless and cheque-less transactions. These transactions come at a nominal or no cost to customers.

• Payments banks can issue debit cards for use at ATMs across the country. You can use these cards to withdraw money or pay shopping bills.

• Payments banks also provide Forex services to customers. A principal advantage is that these services are much cheaper to use as compared to other banks.

• Payments banks can work with commercial banks to provide financial products such as mutual funds, insurance etc.

• As opposed to commercial banks, a payments bank does not accept fixed deposits, term deposits, recurring deposits etc.

Conclusion

Payments bank is a vital initiative in providing banking services to migrant workers, poor people and small businesses. Bringing this population onto the banking platform can greatly help in uplifting the economic status of our society.