RBI opposes creation of an independent regulator for payments system

The Reserve Bank of India (RBI) has opposed the creation of an independent payments regulator, which was recommended by a committee set up by the government. The central bank has sought to retain control of payment companies with itself, through a dissent note placed on the RBI website.

“The Payments Regulatory Board (PRB) must remain with the Reserve Bank and headed by the Governor of the RBI. It may comprise three members nominated by the Government and RBI respectively, with a casting vote for the Governor to ensure smooth operations of the Board,” said RBI’s note. The RBI added that the proposed composition of the PRB was not in conformity with the announcements made in the Finance Bill by the Finance Minister.

An Inter-Ministerial Committee had been formed by the government for finalising the amendments to the Payments Act, under the chairmanship of the Secretary, Department of Economic Affairs, wherein the RBI was also represented.

The draft report of the committee pushed for a number of recommendations, which caused a rift between the finance ministry and the central bank. The panel report called for an independent payments regulator, with the chairperson to be appointed by the government in consultation with RBI.

The RBI maintained that it welcomes changes and is not totally against a new Payments System and Settlement (PSS) Bill, if required. However, it highlighted that “the changes should not result in existing foundations being shaken and the potential creation of disturbances, in an otherwise well-functioning and internationally acclaimed structure as far as India is concerned”.

While the draft report states it has taken the RBI’s view into account, the RBI dissent note stated that the essence of arguments made by the RBI representative has not been factored in.

The central bank argued that payments systems are a subset of currency and predominantly controlled by banks in India. Since both currency and banks fall under the purview of the RBI, it argued that control of payments systems should lie with the central bank itself. “The overarching impact of the Monetary Policy on payment and settlement systems, and vice versa, provides support for regulation of payment systems to be with the monetary authority," it added.

“The proposed constitution has been recommended to provide a slightly broad-based composition and provision for a whole-time chairperson and four whole-time members. In the composition provided in the Finance Act, there were three positions with the RBI and three with the Central Government. All the members were nominated or independent. In that design, there were no whole-time members on the PRB. The revised design proposed by this Committee seeks to addresses this gap,” said the panel’s draft report. The RBI argued that the composition of the PRB was not in conformity with the announcements made in the Finance Bill by the Finance Minister.

The RBI also opposed the panel’s recommendation to resolve payments cases through the Securities Appellate Tribunal.

The central bank said that objectives for the PRB should not be mandated by law, as it will lack flexibility. The views of the Ministry of Law could also be taken into account on jurisdictional conflict. Further, it added that innovation is generally not mandated – it evolves based on requirements.