Context
- Recently, the Reserve Bank of India (RBI) has officially cancelled the banking license of Paytm Payments Bank Limited (PPBL) under Section 22 (4) of the Banking Regulation Act, 1949, effective from April 24, 2026.
- This action follows a series of regulatory non-compliance issues and persistent supervisory concerns observed over the last few years. The RBI has further initiated an application before the High Court for the winding up of the bank.
Regulatory Framework and RBI Powers
- Section 22 of the Banking Regulation Act, 1949: This section grants the RBI the authority to issue and cancel licenses to banking companies in India. A license can be cancelled if the company ceases to carry on banking business or fails to comply with conditions stipulated by the RBI.
- Winding Up Process: Unlike regular companies, the liquidation of a bank is a specialized process involving the High Court and a liquidator, ensuring that depositor interests are prioritized.
- Deposit Insurance: Even in a winding-up scenario, depositors are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which provides insurance cover up to ₹5 lakh per depositor per bank.
Integrated Guide to Payments Banks (PBs) in India
Payments Banks were established based on the recommendations of the Nachiket Mor Committee to further financial inclusion.
1. Key Objectives
- To provide small savings accounts and payments/remittance services to migrant labor workforce, low-income households, and small businesses.
- To enable high-volume, low-value transactions in a secured technology-driven environment.
2. Features and Scope of Activities
- Registration: Registered as a public limited company under the Companies Act of 2013.
- Governance: Governed by the provisions of Banking Regulation Act of 1949.
- Acceptance of Deposits: They can accept demand deposits (savings and current accounts). The maximum balance per individual customer is currently capped at ₹2 lakh.
- No Lending: They are strictly prohibited from undertaking lending activities. They cannot issue credit cards or provide loans.
- Remittance Services: They can facilitate domestic remittances and act as BCs (Business Correspondents) for other banks.
- Issuance of Instruments: They can issue ATM/Debit cards but not credit cards.
3. Regulatory Requirements
- Minimum Capital: The minimum paid-up equity capital for PBs shall be ₹100 crore.
- Capital Adequacy Ratio (CAR): They must maintain a minimum CAR of 15% of its risk-weighted assets.
- Statutory Liquidity Ratio (SLR): They are required to invest minimum 75% of their “demand deposit balances” in Government securities/Treasury Bills with maturity up to one year.
- Cash Reserve Ratio (CRR): payments banks in India are required to maintain a Cash Reserve Ratio (CRR) with the Reserve Bank of India (RBI).
- FDI Limit: The Foreign Direct Investment (FDI) limit for these banks is 74% (consistent with other private sector banks).
4. Recent Developments and Policy Directions
- Deposit limit raised from ₹1 lakh to ₹2 lakh (2023): The RBI doubled the per-customer deposit ceiling to improve viability and encourage greater usage
- Interoperability mandate: All payment banks must be fully interoperable with UPI, IMPS, and ATM networks
- CBDC (Central Bank Digital Currency) integration: Payment banks are being considered as key distributors of the Digital Rupee (e-R) for retail use
- Account Aggregator Framework: Payment banks are being integrated into the Account Aggregator ecosystem to enable data-based credit access for their customers through partner lenders
Consider the following statements regarding Payments Banks:
1. Payments Banks can accept demand deposits with a maximum balance limit of ₹2 lakh per individual customer.
2. Payments Banks are allowed to provide loans and issue credit cards to enhance financial inclusion.
3. Payments Banks are required to invest a minimum of 75% of their demand deposits in government securities with maturity up to one year.
Which of the statements given above are correct?
(a) 1 and 3 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer: A
Explanation:
• Statement 1 is correct: Initially, the limit for demand deposits was ₹1 lakh. However, the RBI increased this limit to ₹2 lakh per individual customer in April 2021 to encourage more deposits and give these banks more flexibility in serving their customers.
• Statement 2 is incorrect: This is a critical distinction for UPSC Prelims. Payments Banks are strictly prohibited from undertaking lending activities. They cannot provide loans of any kind, nor can they issue credit cards. They can, however, issue ATM/Debit cards.
• Statement 3 is correct: Since Payments Banks cannot lend money to the public, they must maintain high liquidity. They are required to invest a minimum of 75% of their demand deposit balances in Statutory Liquidity Ratio (SLR) eligible Government securities/Treasury Bills with a maturity of up to one year. The remaining 25% can be held in current and time/fixed deposits with other scheduled commercial banks for operational purposes.
