SYLLABUS

GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Inclusive growth and issues arising from it. 

Context: The Reserve Bank of India cancelled the banking licence of Paytm Payments Bank Limited, under the Banking Regulation Act, 1949, citing serious regulatory and governance failures.

More on the News 

• The RBI cancelled the licence under Section 22(4), prohibiting the bank from carrying out any banking activity under Sections 5(b) and 6 of the Act with immediate effect. 

• The central bank will approach the High Court for winding up of the bank; however, it has clarified that the bank has sufficient liquidity to repay all depositors. 

• The action was based on multiple violations, including: 

• Operations conducted in a manner detrimental to depositors’ interests (Section 22(3)(b)) 
• Poor management character affecting public interest (Section 22(3)(c)) 
• No public interest in allowing continuation (Section 22(3)(e)) 
• Non-compliance with licence conditions (Section 22(3)(g)) 

• RBI had been tightening restrictions since March 2022 (ban on new customers), followed by 2024 restrictions prohibiting deposits, credits, and wallet top-ups due to persistent compliance failures. 

• The move is largely procedural culmination, with minimal impact on parent company One 97 Communications Ltd, as it had already transitioned operations to partner banks.

About Payments Banks

• A Payment Bank is a financial institution set up to operate on a smaller scale with minimal credit risk.

• It was introduced based on the recommendations of the Nachiket Mor Committee (2014) to promote financial inclusion by providing banking services to the unbanked and underbanked populations.

• Key Objectives:

• Serve migrant workers, low-income households, and small entrepreneurs 
• Offer essential banking services such as deposits, payments, and remittances 
• Facilitate the digital banking ecosystem in India 

• Regulatory Framework:

• Registered under: Companies Act, 2013 
• Governed by: Banking Regulation Act, 1949, RBI Act, 1934, Foreign Exchange Management Act, 1999 and Payment and Settlement Systems Act, 2007. 

• Key Features of Payment Banks:

• Differentiated Banks – Unlike universal banks, they have specific operational limitations 
• Smaller Scale Operations – Focus on low-value, high-volume transactions 

• Capital Requirements:

• Minimum paid-up capital – ₹100 crore 
• Promoter’s minimum initial contribution – 40% of paid-up equity capital for the first five years 

• Functions:

• Accept Deposits – Up to ₹2,00,000 per customer 
• Offer Savings & Current Accounts – No time deposits allowed 
• Issue Debit Cards – But no credit cards 
• Invest Deposits: 75% in Statutory Liquidity Ratio (SLR) securities and 25% as time deposits with scheduled commercial banks.
• Enable personal payments and cross-border remittances

Payments Banks vs Commercial Banks

Sources:
Newsonair
The Hindu
ACR
Clear Tax