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RBI increases deposit limit for Payments Banks, new measures for PPIs

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The Reserve Bank of India (RBI) has decided to increase the deposit limit for payments banks to Rs 2 lakh per individual customer from Rs 1 lakh at present with immediate effect. Further, the central bank has also increased the limit of pre-paid instruments (PPI) to Rs 2 lakh per individual customer from Rs 1 lakh at present and has directed players to ensure their services are interoperable.

As part of its Monetary Policy Committee announcement for April 2021, the RBI said that the deposit limit for payments banks would be increased which means that customers can deposit more funds and companies can expand their product offerings.

“Based on a review of performance of payments banks and with a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants, it has been decided to enhance the limit of maximum balance at end of the day from ₹1 lakh to ₹2 lakh per individual customer” —RBI Statement on Developmental and Regulatory Policies

Since payments banks are restricted from lending and can only provide deposit services, restricted up to ₹1 lakh per customer till now, they rely on investing the funds in government debt securities or certificate of deposits and cross-selling other financial services like payments, insurance and investments for revenue.

Despite several years of operations and a multiple partnerships between financial services companies, like insurers, credit card companies and mutual fund houses, PBs were loss making entities due to the high cost of operations, the RBI said in its Report on Trend and Progress of Banking in India 2018-19. PBs made a net-loss of ₹626.8 crore in FY2019 compared to a net-loss of ₹515.6 crore in FY2018.

Recently, the RBI appointed an external advisory committee which would  evaluate applications for universal bank and small finance bank (SFB) licenses for a period of three years. As a result of this window for licenses, several of India’s payments banks may choose to convert into a SFBs and begin lending on their own balance sheets.

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Pre-Paid Instrument players

Back in 2017, the RBI directed PPI players (cards or wallets) to ensure that their users completed their full Know-Your-Customer (KYC) requirement. Once they completed the full-KYC process, they could load up to Rs 1 lakh in their card or wallet. On Wednesday, the RBI increased the limit to Rs 2 lakh for every individual customer that had fulfilled the full-KYC requirements.

At the same time, the RBI said that full-KYC compliant PPIs could move towards an interoperable model. Due to the voluntary nature of this rule, interoperability between PPIs has not taken 0ff. Therefore, the RBI has now mandated interoperability for all full-KYC PPIs.

“Despite a passage of two years, migration towards full-KYC PPIs, and therefore interoperability, is not significant. It is, therefore, proposed to make interoperability mandatory for full-KYC PPIs and for all acceptance infrastructure. To incentivise the migration of PPIs to full-KYC, it is proposed to increase the limit of outstanding balance in such PPIs from the current level of ₹1 lakh to ₹2 lakh”—RBI Statement on Developmental and Regulatory Policies

The RBI has also decided to permit non-bank PPIs, that fulfill the full-KYC criteria, to offer cash withdrawal services. At present, only PPIs issued by banks can be used to withdraw cash from ATMs or Point-of-Sale terminals.

“As a confidence-boosting measure, it is proposed to allow the facility of cash withdrawal, subject to a limit, for full-KYC PPIs of non-bank PPI issuers as well. The measure, in conjunction with the mandate for interoperability, will give boost to migration to full-KYC PPIs and would also complement the acceptance infrastructure in Tier III to VI centres”—RBI Statement on Developmental and Regulatory Policies

Large payments system access

The Real-Time Gross Settlement and the National Electronic Fund Transfer systems, which are operated by the RBI, are mainly used for high-value transactions and so far access t0 both has been restricted to banks, clearing corporations and a few development financial institutions. The RBI on Wednesday announced that non-bank payment entities like PPIs, card networks, White-Label ATM operators, Trade Receivables Discounting System (TReDS) platforms and other regulated payment entities would be given access to both RTGS and NEFT hereon out.

These players will be on-boarded to the RBI’s Centralised Payment Systems, which houses RTGS and NEFT, in a phased manner.

“This facility is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments. These entities will, however, not be eligible for any liquidity facility from the Reserve Bank to facilitate settlement of their transactions in these CPSs”—RBI Statement on Developmental and Regulatory Policies

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