The Reserve Bank of India (RBI) on Friday went public with its resistance to the Centre’s proposal to set up an independent Payment Regulatory Board (PRB) which will oversee all payment systems in the country stating that the proposed body “must remain with the Reserve Bank” and headed by the RBI Governor. Coming out strongly against the Inter-Ministerial Committee’s proposal to take PRB out of the RBI’s purview, the RBI said there has been no evidence of any inefficiency in payment systems of India.
“The digital payments have made good and steady progress. India is gaining international recognition as a leader in
payment systems. Given this, there need not be any change in a well-functioning system,” the RBI said in its dissent note.
The proposal for an independent PRB was outlined in the draft Payment and Settlement System Bill, 2018.
The RBI referred to the Watal Committee on digital payments which had recommended the establishment of the PRB within the overall structure of the RBI.
“There is no need for any deviation and the PRB can be with the RBI,” the central bank said.
Earlier, the RBI had also opposed the government’s proposal to set up a separate public debt management body and the proposal was kept on hold. The latest RBI move follows the central bank’s directive to payment companies to store data within the country.
Slamming the government’s move to make PRB an independent regulator, the RBI said, “The composition of the PRB is also not in conformity with the announcements made in the Finance Bill by the Finance Minister.” It (PRB) may comprise 3 members nominated by the Government and the RBI respectively, with a casting vote for the Governor to ensure smooth operations of the Board, the central bank said. “Since banks are regulated by the RBI, a holistic regulation by the RBI would be more effective and not result in increased compliance costs if multiple regulators exist for related systems,” the RBI said. “Almost all countries in the world have recognized this change which has gained significance in the recent past.”
While the committee proposed the need to have non-banks to have access to payment systems, the RBI said, “Currently, non-banks do have access to payment systems operated by banks. In fact there are payment systems operated by non-banks (for example NPCI and card companies as well as prepaid payment instrument issuers) as well.”
The RBI also opposed the panel’s proposal on designating the Securities Appellate Tribunal (SAT) for grievance redressal, sating “it is not clear why the SAT is being brought in for resolving payment system related cases and more so when exchanges and securities markets are not under the purview of the Payment Systems Bill.”
The committee, under the chairmanship of Subhash Chandra Garg, Secretary, Department of Economic Affairs, had recommended that PRB be an independent regulator outside the purview of the RBI. It said that that it’s important to distinguish the role of the central bank (RBI) as an infrastructure institution providing settlement function from its role as a regulator of the payment sector.
“It is this role of the regulator which needs to evolve from being largely bank centric,” the committee had said.
Defending its stand, the RBI said payment systems are actually technology-based substitutes for currency. “The distribution of currency is done by the RBI through the banks. The logical extension of this to payment systems has being yielding good results. Fintech companies and other non-banks have been bridging this function very well. It is not clear how non-banks can be ascribed the job of creating money via payment systems. It needs to be recalled that even banks distribute currency on behalf of the RBI and cannot create their own currency,” the central bank said.
Payment systems are a sub-set of currency which is regulated by the RBI. “The overarching impact of Monetary policy on payment and settlement systems and vice versa provides support for regulation of payment systems to be with the monetary authority. There is an underlying bank account for payment systems which is under the purview of banking system regulation which is vested with the RBI,” it said.
Further, settlement systems are finally posted in the books of account of banks with the RBI to attain settlement finality. Regulating these entities goes hand in hand with the settlement function, it said. “There are certain payment systems like cards which are issued by banks globally. Dual regulation over such instruments will not be desirable,” it said.
The RBI has argued that the payment system is bank-dominated in India. “Regulation of the banking systems and payment system by the same regulator provides synergy and inspires public confidence in the payment instruments. Regulation of the payment system by the central bank is the dominant international model for stability consideration. Thus, having the regulation and supervision over Payment and Settlement systems with the central bank will ensure holistic benefits,” it said.
According to a recent report by Credit Suisse, cash share in India is still estimated at 70 per cent in value terms and digital payments currently aggregate only $200 billion, compared with $5-trillion mobile payments in China. “Payment integration into popular apps in India will drive the digital payment market in India to around $1 trillion over the next five years,” Credit Suisse said.