RBI, central govt at loggerheads over proposed payments regulator

The central bank wrote two letters to the committee on May 22 and June 14 to argue that the banking regulator is best suited to regulate the payments space

India needs an independent payments regulator, said a government panel set up under the Department of Economic Affairs in a committee report examine the formation of a separate payments regulatory board. Reserve Bank of India, however, seems to be at odds with the structure of the proposed panel as it claimed that it is a natural function of a central bank to monitor and regulate payment systems in the country. 

In the committee report, all members unanimously voted for a complete overhaul of the payments and settlements act and put forward a draft Payment and Settlement System Bill, 2018 which has 100 sections as against 38 sections in the existing act. There were, however, disagreements between the RBI and the committee on the structure of the regulatory board.

A payments regulatory board is considered to be important from the perspective of rising depth and breadth of payments systems in the country as well as the rapidly rising digital transactions. The regulatory space for payments is currently with the RBI, even though National Payments Corporation of India also runs a couple of newer payments systems and acts as a quasi-regulator for UPI, specifically. A separate entity was thought to be key to focussed regulation of payments in India. 

To this end, the government amended the Finance Act, 2017 and suggested a PRB structure with six members with the RBI Governor as the committee’s chairperson. The committee would have 2 more members from the RBI and 3 members were proposed to be appointed by the government. 

Meanwhile, the new draft proposes sweeping changes to the earlier structure. The committee proposes the PRB to be a seven member board. The chairperson will be appointed by the government in consultation with the RBI and there will be one deputy chairman nominated by the Central Board of RBI. Moreover, there will be two persons nominated by the RBI and three by the central government. 

This structure hasn’t made the RBI too happy. The central bank wrote two letters to the committee on May 22 and June 14 this year to argue that the banking regulator is best suited to regulate the payments space. In one of the letters, the RBI gave examples of other countries such as China and Japan.  

“In view of the international experience, you may please consider retaining the regulation and supervision over the payments system with the Reserve Bank of India in the new Payment & Settlement Systems Bill,” wrote BP Kanungo, Deputy Governor, RBI in a letter to Subhash C Garg, Secretary, Department of Economic affairs. 

Kanungo added that the board should be chaired by the RBI Governor and he should have a casting vote.

The committee, in its deliberations, came to two major conclusions. Firstly, it said that the currency management function of the central bank doesn’t automatically require it to manage and regulate payment systems as well. 

Secondly, it stated that the RBI’s claim that there will be a problem in regulation and possible regulatory arbitrage if the payments space moves out of the ambit of the RBI appeared to be “without evidence”. 

Another point of disagreement came from the Department of Financial Services which suggested that the government should take at least 51 percent of equity in the National Payments Corporation of India which is currently largely owned by a cluster of banks. 

The DFS argued that this will ensure that there’s no conflict of interest as NPCI actually competes in the space as a systems provider for UPI and Aadhaar based payments, among others. 

The committee stated that it is not advisable for the government to get into the ownership of payments infrastructure if the issues can be resolved without mandatory ownership and rejected the suggestion. 

Meanwhile, questions about the actual appointment of the regulatory board members remain. There’s no clarity how the government will nominate its share of three members, said Amol Kulkarni, fellow at CUTS international. 

“There is still no discussion on the appointment of whole time members and who they will be. There should be an independent selection committee,” he said.