In the Indian banking context, which activity does not fall within the permitted functions of Payments Banks as defined by regulation?

Introduction / Context:
Payments Banks are a special category of banks introduced in India to promote financial inclusion. They are designed to provide small savings accounts and payments or remittance services to underserved sections of the population. A frequently tested concept in exams is the limitation on what Payments Banks can and cannot do. Understanding that they are deliberately restricted from certain activities, especially lending, is essential for questions about Indian banking reforms and regulatory design.

Given Data / Assumptions:

• The institution in question is a licensed Payments Bank in India.
• The question asks which of the listed activities is not allowed for such banks.
• The options include deposit taking, Internet banking, remittance services and lending services.
• We assume current standard regulatory guidelines where Payments Banks face restrictions on lending.

Concept / Approach:
Payments Banks can accept demand deposits up to a regulator specified limit per customer, offer debit cards, and provide payments services such as remittances and bill payments. However, they are intentionally not allowed to undertake lending activities such as issuing loans or credit cards. The rationale is to keep their balance sheets simple and reduce credit risk, so that they can focus on safe small deposits and low cost transactional services. So we look for the option that involves lending rather than payments or deposit functions.

Step-by-Step Solution:
Step 1: Identify that "acceptance of demand deposits" is a core function of Payments Banks. They can open savings accounts subject to prescribed limits.Step 2: Internet banking is a channel of providing services, not a separate balance sheet activity. Payments Banks can certainly use digital channels to deliver basic services.Step 3: Remittance services, such as domestic money transfer and bill payments, are central to the financial inclusion objective of Payments Banks. They are encouraged to provide these.Step 4: Lending services involve extending credit to individuals or firms and bearing credit risk on the asset side of the balance sheet.Step 5: Regulations explicitly prohibit Payments Banks from lending directly to customers. Therefore lending services are not part of their permitted functions.

Verification / Alternative check:
A quick way to verify is to recall that Payments Banks primarily invest their funds in safe government securities and bank deposits rather than loans. If they were allowed to lend, their risk profile would resemble that of a small commercial bank, which contradicts the design objective. Also, exam syllabi and prudential guidelines typically summarise permitted activities as deposits, payments and remittances, but explicitly mention that credit creation is not allowed. This confirms that lending services are the excluded function.

Why Other Options Are Wrong:
Option a, "acceptance of demand deposits", is a basic function of a Payments Bank and is clearly permitted, subject to balance limits per customer. Option b, "Internet banking", refers to the method of providing services and is often encouraged to reduce branch costs. Option c, "remittance services", is one of the main reasons Payments Banks were created in order to serve migrant workers and small businesses. Therefore none of these are prohibited, so they cannot be the correct answer.

Common Pitfalls:
Candidates sometimes confuse Payments Banks with Small Finance Banks and assume both have similar powers. Small Finance Banks can lend, but Payments Banks cannot. Another common mistake is to treat any modern channel, such as Internet banking, as a specialised function that might be restricted. In reality, the restriction is on the type of assets they can hold, not on the digital channels used. It is important to remember that Payments Banks are deposit and payments centric, not loan centric. Keeping in mind the phrase "no lending, only deposits and payments" can help avoid errors in similar questions.

Final Answer:
The activity that does not fall into the permitted functions of Payments Banks is lending services.