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Watal Committee recommendations: Reserve Bank differs on some proposals of payment panel

The Watal Committee has said that the primary objectives of the PRB must include promotion of competition and innovation in the payments market.

By: ENS Economic Bureau | Mumbai |
February 21, 2017 1:59:02 am
Watal Committee recommendations, Reserve Bank of India, payment panel, RBI, business news Reserve Bank of India

A senior Reserve Bank of India official has said the RBI has differed with some of the proposals of the Watal Committee on the payment system and stated that granting licences to payment service providers cannot be a ‘tick box exercise’ as entities will be entrusted with money, and so fit and proper criterion is important.

RBI Deputy Governor R Gandhi on Monday said the central bank is against amending the law to explicitly cast responsibility on the proposed Payment Regulatory Board (PRB) to promote competition and innovation in the payment industry.

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The Watal Committee has said that the primary objectives of the PRB must include promotion of competition and innovation in the payments market. “Though we do understand the spirit behind this recommendation, we differ the way in which it is sought to be achieved. For competition, there is a separate statue and authority associated. Enshrining it within PSS Act can lead to overlapping jurisdictions which can best be avoided. Likewise, if promoting innovation is to be hard coded in the Act, defining what would constitute “an innovation” would be difficult,” Gandhi said at the launch of BharatQR, an inter-operable payment solution developed by National Payments Corporation of India (NPCI), Mastercard, and Visa.

Gandhi also differed with the committee observation that “banking as an activity is separate from payments, which is more of a technology business”. “I beg to differ. Payments can be effected only in either of two ways — one you use cash to make payments and the other you transfer money in your bank account. There is no third method,” Gandhi said.

“Thus for the non-cash payments, the origination and ending places are banks only. Therefore, minus the banks, there is no non-cash payment instrument or system. Perhaps, what the Committee refers ‘remittances’ as ‘payments’. This view is further strengthened when they say it is “more of a technology business”. Yes, “remittances” are today a technology business,” he said.

Ruling out free entry of payment service providers, Gandhi said there is an implied suggestion that this sector needs to be freed of licensing mechanism and once a set of criteria are fixed, any number of entities meeting those criteria should be allowed to function. “We differ from this idea. Such a free entry may not be appropriate for ‘payment industry’. We must remember that the payment service provider is ‘entrusted’ with money, and therefore “fit and proper” criterion is of utmost importance and consequently, “free entry” based on tick-box exercise will be a risky phenomenon,” Gandhi said.

Further, the committee said the payments function should be independent of the central banking function of the RBI. This can be achieved by making the Board for Payment and Settlement Systems (BPSS) more independent by introducing members from outside RBI. The government has accepted this recommendation and has followed it up with promoting an amendment to the PSS Act 2007 by including it as a part of the Finance Bill 2017. “For records, I may mention that the BPSS as it stands today does have eminent independent members with knowledge, experience and expertise in payment systems and information technology and operations. Hence, it is welcome to make this arrangement de jure in PRB,” Gandhi said.

Gandhi said there is a misconception that non-bank entities are being discriminated as compared to the banking entities in the payment system arena. He clarified that RBI, as a payment system regulator, has opened up the space of non-bank entities and given them access to various payment systems.

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