Context: Recently Paytm Payments Bank Limited (PPBL), an associate entity of Paytm, has received Scheduled Bank status from Reserve Bank of India.
Will bring more financial services

• The bank has been included in the Second Schedule to the Reserve Bank of India Act, 1934 and the approval will help it to bring more financial services and products
• It can now explore new business opportunities, including participation in government and other large corporations issued request for proposals, primary auctions, fixed-rate and variable rate repos, and reverse repos.
• Besides, it can participate in Marginal Standing Facility and will be eligible to partner in government-run financial inclusion schemes.
• The inclusion of Paytm Payments Bank in the Second Schedule to the Reserve Bank of India Act, 1934, will help us innovate further and bring more financial services and products to the underserved and unserved population in India.
• The bank supports 33.3 crore Paytm Wallets and enables consumers to make payments at over 87,000 online merchants and 2.11 crore in-store merchants.

Payments Bank

• Based on the recommendations of the Nachiket Mor Committee, Payments Bank was set up to operate on a smaller scale with minimal credit risk.
• Aim: To advance financial inclusion by offering banking and financial services to the unbanked and underbanked areas
• They are registered under the Companies Act 2013.
• Governed by:  Banking Regulation Act, 1949, RBI Act, 1934, Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007.

Features

• They are differentiated and not universal banks.
• These operate on a smaller scale.
• It needs to have a minimum paid-up capital of Rs. 100,00,00,000.
• Minimum initial contribution of the promoter to the Payment Bank to the paid-up equity capital shall at least be 40% for the first five years from the commencement of its business.

Activities that can be performed by Payment banks

• Payment banks can take deposits up to Rs. 2,00,000.
• It can accept demand deposits in the form of savings and current accounts.
• The money received as deposits can be invested in secure government securities only in the form of Statutory Liquidity Ratio (SLR).
• Payments banks will be permitted to make personal payments and receive cross border remittances on the current accounts.
• It can issue debit cards.

Activities that cannot be undertaken by Payment banks

• Payment banks cannot issue credit cards.
• It cannot accept time deposits or NRI deposits.
• It cannot issue loans.
• It cannot set up subsidiaries to undertake non-banking financial activities

Advantages

• Expansion of rural banking and financial inclusion.
• Expansion of the formal financial system.
• Effective alternative to commercial banks.
• Efficiently deals with low value, high volume transactions.
• Access to diversified services.

Challenges

• Lack of awareness among the masses to access these services.
• Lack of incentives for the agents to involve themselves in these activities.
• Lack of infrastructure and access to operational resources.
• Technological hurdles.