In a renewed push for regulatory easing, payments banks are lobbying the government to significantly expand their operational scope. The finance ministry has been urged to raise the deposit limit per account to Rs 5 lakh, up from the current ceiling of Rs 2 lakh. The last revision occurred in April 2021, when the Reserve Bank of India (RBI) increased the end-of-day balance limit from Rs 1 lakh to Rs 2 lakh.
Industry stakeholders argue that the limited operational scope has constrained the profitability and growth potential of these banks. The recent calls to raise deposit limits and allow lending to the microfinance sector reveal the industry’s desire to scale up and play a more meaningful role in driving economic growth.
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Why payments banks
Payments banks were conceived as a tool for financial inclusion—designed to provide basic banking services to low-income households, small businesses, and the unorganised sector. These institutions aim to serve the unbanked and underbanked population, primarily through digital platforms.
Unlike traditional banks, these platforms operate with a narrow mandate. They accept small deposits and can issue ATM cards, but cannot offer credit cards or loans. Their role is largely restricted to enabling transactions and managing savings.
The concept originated from the recommendations of the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households. In July 2014, the RBI issued draft guidelines specific to such banks. By 2015, the central bank had granted “in-principle” approval to 11 entities, including Fino Payments Bank. The India Post also announced plans to leverage its vast postal network to offer payments bank services.
These banks offer a suite of services such as fund transfers, bill payments, virtual debit cards, insurance, and distribution of mutual funds. However, they are only permitted to invest customer deposits in government securities and are barred from accepting NRI deposits. In contrast, Non-Banking Financial Companies (NBFCs) have greater operational flexibility, including the ability to lend.
Prominent payments banks in India today include Jio Payments Bank, Airtel Payments Bank, Fino Payments Bank, NSDL Payments Bank, India Post Payments Bank, and Paytm Payments Bank.
Among these, India Post Payments Bank (IPPB) stands out for its widespread reach and emphasis on financial inclusion. With 650 branches and more than 163,000 access points, IPPB has emerged as a model for doorstep banking. It provides a wide range of services including savings accounts, virtual debit cards, money transfers, insurance, and even child enrolment for social schemes. Recognising its impact, the Financial Services Secretary recently urged other banks to emulate IPPB’s approach.
What lies ahead
The journey of payments banks has been a mix of promise and persistent challenges. Now, as the sector marks a decade since inception, there is a growing demand to re-evaluate its regulatory framework. In addition to a higher deposit ceiling, the industry is also seeking permission to lend to the microfinance sector—a significant shift from their current business model that restricts them to government securities.
Meanwhile, the RBI is considering new licences for small finance banks (SFBs), which banks can apply for after five years of operation, provided they meet regulatory requirements. This includes maintaining a minimum paid-up voting equity capital or net worth of ₹200 crore. Fino Payments Bank has already applied for an SFB licence.
Calls for reforms
Beyond the requests from the industry, many experts believe that a comprehensive overhaul of the regulatory architecture is long overdue. Despite some early setbacks, a few payments banks have demonstrated profitability and reach, validating the core model. Yet, the business remains constrained by outdated rules—last significantly updated in 2021.
Some analysts argue that payments banks have the potential to replace banking correspondents by becoming full-fledged payment service providers. However, there is significant debate over the industry’s demand to enter the lending space. Critics contend that lending should remain the domain of traditional banks and NBFCs, which have robust risk management systems.
Instead of granting lending rights, many suggest that the RBI should help payments banks explore new revenue models—particularly in the fast-growing realm of end-to-end payment services, where these banks already have a competitive edge.
A future built on core strengths
Rather than pivoting toward lending, payments banks should be empowered to evolve as comprehensive digital payment platforms. This would align with their founding purpose, improve financial access, and offer a scalable and sustainable growth model. Strengthening their role could reduce reliance on less dependable banking correspondents and enhance service delivery in rural and underserved regions.
The potential of payments banks to boost economic growth is significant. By integrating millions into the formal financial system, they can stimulate consumption, enable secure remittances, and facilitate small savings. Their tech-driven platforms also lower transaction costs and enhance efficiency—key ingredients for a more inclusive and dynamic economy.
The government and the RBI must weigh these proposals carefully, balancing the goals of financial inclusion with systemic stability. Permitting payments banks to lend, even with restrictions, could introduce new risks that demand stringent oversight. Likewise, raising deposit limits calls for a nuanced understanding of its implications on liquidity and financial health.
The success of payments banks in bridging India’s financial inclusion gap will depend on a pragmatic regulatory approach—one that supports innovation while safeguarding stability. The ongoing dialogue between the industry and regulators is crucial in shaping a future where these institutions can flourish without deviating from their core mission.