Payment Banks — RBI Licensing Framework and Compliance Guide
Payment Banks are a differentiated category of banks licensed by the Reserve Bank of India under the Guidelines for Licensing of Payments Banks (November 2014), issued under Section 22 of the Banking Regulation Act 1949. They were introduced based on the recommendations of the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (2013). Payment Banks are designed to further financial inclusion by providing small savings accounts, remittance services, and payment facilitation to migrant labour, low-income households, small businesses, and the unbanked population.
What Payment Banks Can and Cannot Do
Permitted Activities: Accept demand deposits (savings and current accounts) up to Rs. 2,00,000 per individual customer (revised upward from Rs. 1,00,000 to Rs. 2,00,000 by RBI in March 2021). Issue ATM/debit cards and prepaid payment instruments. Provide internet banking and mobile banking. Facilitate domestic remittances and money transfers. Distribute financial products such as mutual funds and insurance (as a corporate agent — not as manufacturer). Act as Business Correspondent (BC) of another bank. Undertake utility bill payments. Provide forex services to customers at the counters of banks which have authorised the payments bank as their agent.
Prohibited Activities: Cannot lend or extend credit in any form — this is the fundamental restriction that differentiates Payment Banks from universal banks and Small Finance Banks. Cannot accept time deposits or fixed deposits. Cannot issue credit cards. Cannot accept NRI deposits. Cannot set up subsidiaries to undertake non-banking financial services. Cannot undertake forex activities independently (only as agent of an authorised dealer bank).
Eligibility Criteria
The following entities are eligible to apply for a Payment Bank licence: existing pre-paid payment instrument (PPI) issuers authorised by RBI, NBFCs, corporate Business Correspondents, mobile telephone companies, supermarket chains, companies and real-sector cooperative organisations, and public sector entities. The promoter or promoter group must have a minimum paid-up equity capital of Rs. 100 crore. The promoter must hold at least 40 per cent of the paid-up voting equity capital for the first 5 years from the date of commencement of business. Foreign Direct Investment (FDI) in Payment Banks is permitted up to 74 per cent under the automatic route (FDI in private sector banks route).
Application and Licensing Process
Step 1: Submit application to RBI in the prescribed format along with detailed business plan, technology plan, financial projections for 5 years, details of promoters and proposed board, capital adequacy plan, and corporate governance framework.
Step 2: The applications are screened by an External Advisory Committee constituted by the RBI. The EAC evaluates applications based on financial soundness, technology capability, customer reach potential, and promoter credentials.
Step 3: RBI grants in-principle approval to shortlisted applicants. The in-principle approval is valid for 18 months, during which the applicant must meet all conditions and commence operations.
Step 4: The applicant must be incorporated as a public limited company under the Companies Act 2013, meet all regulatory requirements, set up technology infrastructure, obtain all necessary licences, and apply for final banking licence.
Step 5: RBI issues the final banking licence under Section 22 of the Banking Regulation Act 1949 after verifying compliance with all conditions of the in-principle approval.
Prudential Norms and Investment Requirements
Payment Banks must invest minimum 75 per cent of their demand deposit balances in Government Securities and Treasury Bills with maturity up to one year. The remaining 25 per cent can be held as deposits with other scheduled commercial banks. This creates an extremely conservative investment portfolio — the entire deposit base is essentially invested in sovereign and near-sovereign instruments, making Payment Banks among the safest deposit-taking institutions in terms of credit risk.
Payment Banks must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as applicable to scheduled commercial banks. Capital adequacy ratio must be maintained at 15 per cent of Risk-Weighted Assets at all times.
Technology and Infrastructure Requirements
Payment Banks are technology-first institutions. They must have robust core banking solutions (CBS), mobile banking platforms, internet banking, UPI integration, Aadhaar-enabled payment systems (AePS), and comprehensive cybersecurity frameworks. The RBI's Guidelines on Information Technology Framework for the NBFC Sector (updated 2024) apply to Payment Banks. All Payment Banks must be part of the UPI ecosystem and must facilitate Aadhaar-based e-KYC for account opening. Real-time fraud monitoring systems are mandatory.
Compliance Framework
Payment Banks are subject to the full range of banking regulation — KYC/AML under PMLA 2002, RBI Master Directions on KYC, Priority Sector Lending norms (applicable selectively), Deposit Insurance (DICGC coverage up to Rs. 5 lakh per depositor), RBI Ombudsman scheme, and periodic RBI inspections. They must file regulatory returns with the RBI and submit to statutory audit. Board must include independent directors with banking experience.
Latest Developments (2024-2026)
The deposit cap increase to Rs. 2,00,000 (March 2021) significantly improved the viability of Payment Banks. The RBI's action on Paytm Payments Bank (January 2024 — restrictions on onboarding new customers due to compliance deficiencies) highlighted the importance of robust KYC and compliance frameworks. The RBI has also clarified that Payment Banks can participate in the Account Aggregator (AA) framework as Financial Information Providers (FIPs). Digital lending guidelines (August 2022, updated 2024) apply to Payment Banks for any BC arrangements.
Disclaimer: This article is for informational purposes only and does not constitute legal or regulatory advice. Please consult a qualified professional for advice specific to your situation.