Airtel said it will apply to RBI for the licence, final norms for which were issued by the central bank in November 2014 and applications have been invited till February 2.
Airtel's proposed tie-up with Kotak is the first formal partnership announced by an existing lender and a non-bank entity aspiring to get into the space.
Earlier, Axis Bank had said it intends to tie-up with a new applicant and was talking to a few interested entities.
The payments banks are aimed to encourage savings and help with the remittances, although RBI has put a cap on the stake which can be held by commercial banks in such entities.
Existing non-bank lenders, prepaid payment instrument issuers, corporate business correspondents, mobile telephone companies and super market chains have been allowed by the RBI to set up payments banks, which would not be have the entire range of banking services offered by full-fledged banks.
Airtel said its wholly owned subsidiary Airtel M Commerce Services Limited (AMSL) is seeking to convert its existing prepaid payment instrument license into a payments bank license to be issued by the Reserve Bank of India.
Subject to grant of a license to AMSL and all regulatory approvals, Kotak Mahindra Bank Limited (Kotak) will acquire 19.90 percent stake in AMSL as an investor, it added.
AMSL currently offers mobile money services under the brand name 'Airtel Money'.
"The RBI guidelines provide an exciting and challenging opportunity for an entity like us to contribute in a meaningful manner to drive financial inclusion," Bharti Airtel MD and CEO (India and South Asia) Gopal Vittal said.
On the tie-up with Kotak, Vittal added, "Kotak's banking expertise coupled with Airtel's strength in telecom will help deliver financial services to millions of unbanked citizens across the country."
Kotak Mahindra Bank's Joint MD Dipak Gupta said, "Payments banks have the potential to leapfrog India's financial inclusion agenda. Basic but critical services such as small savings accounts, remittances, etc., will bring a large number of low income households and small businesses under the formal banking network."
He further said that Bharti Airtel's technology, physical infrastructure and distribution network, when combined with Kotak's banking expertise will be a "win-win" for both.
As per RBI norms, those seeking to set up payments banks would need minimum Rs. 100 crores of capital and fulfil the necessary 'fit and proper' criteria, among other conditions.
The payments banks will initially be restricted to holding a maximum balance of Rs. 1,00,000 per individual customer.
They will be allowed to issue ATM/debit cards as also other prepaid payment instruments, but not the credit cards.
They can also distribute non-risk sharing simple financial products like mutual funds and insurance products, but non-resident Indians will not be allowed to open accounts.
Airtel said it is the largest mobile services provider in India with over 215 million subscribers and with 31 percent revenue market share.
The company added it has deep and wide distribution reach especially in rural and remote parts of the country with a network of over 1.4 million retail points.
Airtel Money, launched in 2011 was the first mobile based prepaid payment instrument service in the country.
For details of the latest launches and news from Samsung, Xiaomi, Realme, OnePlus, Oppo and other companies at the Mobile World Congress in Barcelona, visit our MWC 2025 hub.