After Paytm, is India’s payments bank experiment running out of road?

Subscribe to enjoy similar stories.Reserve Bank of India (RBI) has cancelled the licence of Paytm Payments Bank, culminating a series of supervisory actions that began with a halt on new customer onboarding in March 2022 and subsequent stringent business restrictions.While the action may appear rooted in regulatory non-compliance, it has reignited a broader debate over the viability of payments banks. Conceived to serve the unbanked, their relevance is now being questioned amid near-universal account ownership driven by Jan Dhan Yojana and intensifying competition from fintech platforms, most notably UPI.With a key player exiting, concerns are mounting over the sustainability of India’s differentiated banking model.Payments banks were set up to advance financial inclusion by offering small savings accounts and digital payment services to migrant workers, small businesses and low-income households in the unorganized sector.

They were initially permitted to accept deposits of up to ₹1 lakh per customer in 2014; this limit was later raised to ₹2 lakh in 2021.However, they are barred from lending, issuing credit cards or accepting deposits from non-resident Indians, sharply constraining their operating scope.Though initially hailed as the poster child of India’s differentiated banking experiment, enthusiasm faded early. The RBI granted in-principle approvals to 11 entities in 2015, but several withdrew, citing high compliance costs, lending restrictions and thin margins.

Eventually, seven licences were issued, with Airtel Payments Bank the first to begin operations.The constrained business model and high upfront costs meant a long road to profitability. Payments banks turned profitable only in 2022-23, aided by rising