Penalties on Payments Banks: What Went Wrong?

By BillCut
Last updated: September 2026

A payments bank is a restricted licence bank that can hold deposits and move money but cannot lend. Since 2018 the Reserve Bank of India has fined and restricted several of them, almost always for customer onboarding and governance failures rather than bad loans. Your money stays insured, but the account can stop working.

A supervisory action against a payments bank does not take your balance away. It stops the account receiving anything new, a different problem and often a more expensive one.

What Is a Payments Bank, and What Can It Not Do?

A payments bank is a bank licensed by the Reserve Bank of India to accept small deposits and run payments, with lending removed from the licence. It can hold your salary, run your Unified Payments Interface transactions and issue a debit card. It cannot give you a loan, an overdraft or a credit card.

The framework comes from the Guidelines for Licensing of Payments Banks released by the Reserve Bank of India on 27 November 2014. Those guidelines state that a payments bank cannot undertake lending activities and cannot issue credit cards, while it may issue ATM and debit cards, act as a business correspondent for another bank and distribute non risk products such as mutual fund units and insurance.

The deposit cap started at Rs 1 lakh per individual customer. The Reserve Bank of India raised it to Rs 2 lakh with immediate effect on 8 April 2021. As of September 2026 that is the maximum balance an individual customer may hold at the end of the day.

If your balance would cross the cap, there is a route rather than a rejected credit. Under the Operating Guidelines for Payments Banks issued on 6 October 2016, amounts above the limit may be swept into an account opened for you at another scheduled commercial bank or small finance bank, with your prior written consent. The same guidelines confine payments banks to savings and current deposits, so there is no fixed deposit or recurring deposit inside one.

Where the money goes is prescribed just as tightly. A payments bank must invest at least 75 per cent of its demand deposit balances in government securities and treasury bills eligible for the Statutory Liquidity Ratio with maturity up to one year, and hold at most 25 per cent in deposits with other scheduled commercial banks. Your balance sits in short dated government paper and bank deposits. It is not lent to anyone.

That design removes credit risk almost entirely. It also removes the main way a bank earns, the spread between what it pays depositors and what it charges borrowers. Nearly every problem below grows out of that constraint, which also shapes how digital only banks in India are structured.

How Does a Payments Bank Compare With a Regular Savings Account?

What you care about	Payments bank	Savings account at a scheduled commercial bank
Can it lend to you	No. Lending is excluded from the licence	Yes, including overdrafts and credit cards
Maximum end of day balance	Rs 2 lakh per individual customer, as of September 2026	Not subject to this cap
Deposit types available	Savings and current only	Savings, current, fixed and recurring
Where your balance is deployed	At least 75 per cent in short dated government securities	Largely lent out to borrowers
Deposit insurance cover	Up to Rs 5 lakh per depositor per bank	Up to Rs 5 lakh per depositor per bank
Practical risk to watch	The account can be barred from receiving credits	Ordinary credit and operational risk

A payments bank is a good place for money that moves and a poor place for money that sits, which is close to the opposite of how most people use a savings account. If you are weighing it against an app based account, the difference between digital wallets and neobanks matters too, because only one of those three is a licensed bank.

Which Payments Banks Operate in India?

The Reserve Bank of India list of banks in India names six payments banks as of September 2026:

• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• NSDL Payments Bank
• Paytm Payments Bank

Being listed is not the same as operating normally. Paytm Payments Bank remains named while operating under directions that stopped it accepting fresh deposits in 2024.

Why Did the Reserve Bank of India Penalise Payments Banks?

The enforcement record is about who was let in the door and how the systems were run, not about money lost on loans. The two clearest cases on the public record are Airtel Payments Bank in 2018 and Paytm Payments Bank between 2022 and 2024. Both turned on customer onboarding, know your customer checks and system audit findings.

In the first case, the Reserve Bank of India imposed a penalty of Rs 5 crore on Airtel Payments Bank on 7 March 2018 for contravening the operating guidelines for payments banks and the know your customer requirements. The sequence is instructive. Complaints about accounts being opened without proper authorisation came first, a supervisory visit followed from 20 to 22 November 2017, a show cause notice was issued on 15 January 2018, and the penalty came after the bank’s reply and personal hearing. The regulator added that the action rested on deficiencies in regulatory compliance and did not affect the validity of transactions between the bank and its customers.

The second case ran longer. The Reserve Bank of India had already directed Paytm Payments Bank to stop onboarding new customers on 11 March 2022. Nearly two years later, on 31 January 2024, it said that a comprehensive system audit report and a subsequent compliance validation report by external auditors had revealed persistent non compliances and continued material supervisory concerns, and that further supervisory action was warranted.

Two things stand out. The restriction on new customers ran for close to two years before the wider action, so nothing about it was sudden. And the trigger was an audit of systems, not a run on deposits. That is the shape most enforcement in this sector takes, and the same pattern sits behind the wider regulatory challenges facing neobanks in India.

What Does the Enforcement Timeline Look Like?

Date	Bank	What the Reserve Bank of India did	Stated reason
7 March 2018	Airtel Payments Bank	Monetary penalty of Rs 5 crore	Contravention of the payments bank operating guidelines and know your customer requirements
11 March 2022	Paytm Payments Bank	Directed to stop onboarding new customers	Supervisory concerns, with wider action following in 2024
31 January 2024	Paytm Payments Bank	Barred from accepting fresh deposits, credit transactions and top ups after 29 February 2024	Persistent non compliances and continued material supervisory concerns found in a comprehensive system audit
16 February 2024	Paytm Payments Bank	Cut off moved to 15 March 2024, withdrawals left unrestricted	Extension granted in the interest of customers and merchants

A Rs 5 crore penalty is small against a telecom backed bank’s balance sheet. The operational direction is what changes a customer’s day.

What Happened to Customer Money When Paytm Payments Bank Was Restricted?

No balance was confiscated and no deposit was written down. The Reserve Bank of India directed that withdrawal or use of balances by customers from savings accounts, current accounts, prepaid instruments, FASTags and National Common Mobility Cards be permitted without any restriction, up to the available balance. What stopped was money coming in.

The direction issued on 31 January 2024 under Section 35A of the Banking Regulation Act, 1949 barred further deposits, credit transactions and top ups in any customer account, prepaid instrument, wallet, FASTag or National Common Mobility Card. It also required the bank to stop providing other banking services, including fund transfers, Aadhaar Enabled Payment System transactions, Immediate Payment Service transfers, bill payment operations and Unified Payments Interface facilities.

That deadline moved once. On 16 February 2024 the Reserve Bank of India extended the cut off to 15 March 2024, kept withdrawals unrestricted, allowed interest, cashbacks and refunds to continue crediting, and required the bank to support automatic sweep in and sweep out arrangements so that customers were not left stranded.

Translate that into a household. Your balance was safe and you could take it out. Your salary could not land there after the cut off, your FASTag could not be topped up, and any auto debit mandate set from that account had nothing to pull from once the balance ran down. That is where the real cost sat, and it fell on people who had done nothing wrong.

What Does a Frozen Payments Bank Account Actually Cost You?

The direct cost is rarely the lost account. It is the missed payment the account was quietly handling in the background, and on a credit card that compounds monthly.

The figures below are illustrative. Assume a credit card balance of Rs 45,000 with an auto debit mandate set from a payments bank account, and assume an illustrative revolving rate of 3.5 per cent a month, which is 42 per cent a year on a simple basis. The account is barred from receiving credits, salary lands elsewhere, and the mandate bounces.

Cycles missed	Balance carried forward	Interest added so far
Starting balance	Rs 45,000	Rs 0
One cycle	Rs 46,575	Rs 1,575
Two cycles	Rs 48,205	Rs 3,205
Three cycles	Rs 49,892	Rs 4,892

Three missed cycles on Rs 45,000 add Rs 4,892 in interest alone at that illustrative rate, before any late payment fee and before any effect on the credit report. Compounded monthly, 3.5 per cent a month works out to about 51 per cent a year rather than 42 per cent, because the interest itself starts earning interest.

The arithmetic is unremarkable. The point is that a regulatory action aimed at a bank’s onboarding controls reached a household through a mandate nobody had thought about.

If a disrupted mandate has already left you carrying a revolving card balance, the interest does not pause while you sort the account out. BillCut is a debt refinancing platform, so it has a commercial interest here, and it works by converting high interest credit card balances into a structured loan with a fixed EMI. You can see how BillCut approaches credit card balances before deciding whether that route fits.

Is Your Money in a Payments Bank Insured?

Yes. Deposits in a payments bank are covered by the Deposit Insurance and Credit Guarantee Corporation, a wholly owned subsidiary of the Reserve Bank of India. Each depositor is insured up to a maximum of Rs 5 lakh per bank for both principal and interest.

Put that next to the Rs 2 lakh end of day cap and one useful conclusion falls out. A payments bank balance held within the rules cannot exceed the insured limit, so unlike a large savings balance at a commercial bank, there is no uninsured slice to worry about.

The limit that matters is per depositor per bank, not per account, so two accounts at the same payments bank share one Rs 5 lakh cover rather than getting Rs 5 lakh each.

The honest caveat is that deposit insurance answers a different question from the one most people are asking. It covers what happens if a bank fails. It does nothing about what happened to Paytm Payments Bank customers, where the bank did not fail and the balances were always available. Insurance protects the money. It does not protect the function.

Who Should Use a Payments Bank, and Who Should Not?

A payments bank suits you if your account is mainly a pipe rather than a store. If you receive a daily or weekly income, pay bills, top up a FASTag and rarely hold more than a few tens of thousands of rupees, the licence restrictions cost you little and the reach is often better than a branch network.

It also suits people who have struggled to open an account elsewhere. Business correspondent networks and doorstep onboarding were the point of the design, and that still holds for a first formal account.

It suits you less well in three situations. If you want your main balance to sit and earn, the Rs 2 lakh cap and the absence of fixed deposits get in the way. If you expect to borrow from the institution that holds your salary, a payments bank cannot do it, which is why questions about whether the Reserve Bank of India will license the next wave of neobanks keep coming back. And if a credit card auto debit or a loan EMI runs from a single account, the 2024 episode showed what that concentration costs.

A reasonable middle path is to use the payments bank for what it does well and keep critical mandates elsewhere.

How Do You Complain About a Payments Bank?

Start with the bank itself and keep the complaint in writing, with a reference number. Payments banks are regulated entities with the same kind of grievance redress obligations as any other bank.

If the bank does not resolve it, the escalation route is the Reserve Bank Integrated Ombudsman Scheme, introduced on 12 November 2021. Complaints are filed through the Complaints Management System portal at cms.rbi.org.in, processed centrally through the Centralised Receipt and Processing Centre at Chandigarh, and the Reserve Bank of India runs a contact centre on 14448 for guidance on the process. The portal shows the status of a complaint as it moves.

If your problem is a bounced mandate rather than the account itself, you have two complaints, not one. The card issuer whose mandate failed is a separate regulated entity with its own grievance process.

Frequently Asked Questions

What is a payments bank in simple terms?

A payments bank is a bank licensed by the Reserve Bank of India to hold deposits and run payments but not to lend. It can offer a savings account, a debit card and Unified Payments Interface transactions, but not a loan, an overdraft or a credit card.

How much money can I keep in a payments bank account?

Up to Rs 2 lakh per individual customer at the end of the day, a limit the Reserve Bank of India set on 8 April 2021 when it raised the earlier Rs 1 lakh cap. With your written consent, amounts above that may be swept into another bank account.

Can a payments bank give me a loan or a credit card?

No. The 2014 licensing guidelines exclude lending from the payments bank licence and bar credit card issuance. A payments bank may distribute other providers’ products, such as mutual fund units and insurance, but the credit itself comes from a different institution.

Why did the Reserve Bank of India act against Paytm Payments Bank?

The Reserve Bank of India said on 31 January 2024 that a comprehensive system audit and a compliance validation report by external auditors had revealed persistent non compliances and continued material supervisory concerns. The bank had already been barred from onboarding new customers since 11 March 2022.

Did customers lose their money when Paytm Payments Bank was restricted?

No. Withdrawals and use of existing balances were permitted without restriction up to the available balance, including from prepaid instruments and FASTags. What stopped after 15 March 2024 was fresh deposits, top ups and most payment services.

Is money in a payments bank covered by deposit insurance?

Yes. The Deposit Insurance and Credit Guarantee Corporation insures each depositor up to Rs 5 lakh per bank for principal and interest together. Because the end of day balance is capped at Rs 2 lakh, a compliant balance sits inside the insured limit.

Can I get my salary credited to a payments bank account?

Ordinarily yes, since a payments bank can hold a savings or current account. The caution is the Rs 2 lakh end of day cap and the risk that a supervisory direction can bar incoming credits.

Does a payments bank offer fixed deposits or recurring deposits?

No. The Operating Guidelines for Payments Banks issued on 6 October 2016 restrict these banks to savings and current deposits, so there is no fixed deposit or recurring deposit product inside a payments bank.

Which payments banks are currently listed by the Reserve Bank of India?

As of September 2026 the list names Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, NSDL Payments Bank and Paytm Payments Bank. Being listed does not mean each one operates without restriction.

How do I complain if my payments bank does not resolve an issue?

Raise it with the bank in writing first and keep the reference number. If it is not resolved, escalate under the Reserve Bank Integrated Ombudsman Scheme through the portal at cms.rbi.org.in, with guidance on the Reserve Bank of India contact centre number 14448.

This article is for information only. It is not financial, investment or tax advice, and it does not recommend any particular bank, card or borrowing decision. Rules, limits and charges change, so confirm current details with your bank or the Reserve Bank of India, and consult a qualified professional before acting on anything here.