Some payments banks face dual oversight

Those already running payment systems may be regulated by RBI, Financial Authority

Of the payments bank applicants, the companies already operating payment systems in India - such as Airtel, Vodafone and One Mobikwik - could be regulated by both the Reserve Bank of India (RBI) and the proposed Financial Authority, should they get payments bank licences. That is, if the Indian Financial Code (IFC) is implemented.

The revised draft IFC says that the proposed regulatory body, the Financial Authority, will be responsible for oversight on all financial services, except banking and 'systemically important' payment systems and authorised dealerships. It will also regulate all financial products. Regulation of the banking sector, systemically important payment systems and authorised dealerships will remain with RBI.

On what constitutes a 'systemically important payment system', the IFC says it will be decided by the Financial Stability and Development Council, led by the finance minister and comprising heads of financial regulatory bodies.

Senior government officials say there are two likely parameters on the basis of which a payment system could be deemed 'systemically important'. First could be the size of the payment system, in terms of the number of people or companies using it, and the value of money passing through it. And second, if a payment system fails, will it create a ripple too strong to be contained and lead to a larger crash in the financial system?

On the basis of these parameters, the National Electronics Funds Transfer (NEFT), Real-Time Gross Settlement (RTGS), and bank-related payment systems like ATM networks, might also come under RBI's jurisdiction. Other services, mostly private payment systems like Paytm, Vodafone MPesa, Airtel Money, online and mobile payment systems, credit and debit cards, cash cards, money and wire transfer services, etc, will be under the proposed Financial Authority.

Some other parameters that might be considered include timely settlement of transfers, practicality of use, well-laid rules and procedures, and a high degree of security and operational reliability.

"The final decision on what is systemically important will be taken by FSDC. The size of the payment system, how many people use it, the amount of money passing through the system, and implication on the larger financial sector, should the payment system fail, might all be parameters," confirmed a senior government official.

TWIN REGULATION

• As proposed in draft Indian Financial Code, RBI to have oversight of banks and systemically important payment systems
• Other financial services, financial products and other payment systems to be monitored by the proposed Financial Authority
• Most private payment systems to be regulated by the financial authority
• But companies with payment  systems, as well as payment banks, to be regulated by both the Financial Authority and RBI
• 41 companies have applied for payments bank licences
• A number of the payments bank applicants already operate various payment systems. Examples: Vodafone, Airtel, One Mobikwik, Itz Cash Card, Weizmann, FINO Paytech

However, there are several companies that are operating payment systems and have also applied for payments bank licences. Among those are Airtel, Vodafone MPesa, One Mobikwik, My Mobile Payments, Citrus Payment Solutions, Oxigen Services, Itz Cash Card, and Weizmann Forex. Such companies' payments bank operations will be regulated by RBI, sources say.

"We follow activity-based regulation, and not entity-based oversight. So, a company's payment system might be monitored by the Financial Authority, while its payment bank operations could be regulated by RBI," said a second official.

Payments banks, once given the licence to operate, will be able to accept demand deposits, issue ATM-cum-debit cards, offer payment & remittance services through various channels, and distribute non-risk sharing of simple financial products like mutual fund units and insurance products. Such banks will initially be restricted to holding a maximum balance of Rs 1 lakh per individual customer, and they will not be able to issue credit cards.

According to an RBI press release, issued on February 4, some 41 companies have applied for payments bank licences.

The revised draft IFC was put on the finance ministry website on July 23 for further comments and suggestions from stakeholders and the public. There is no set deadline on when the IFC Bill will be taken up for legislative consideration in Parliament.

According to IFC, the proposed Financial Authority will be headed by a chairperson, and a board with a minimum of six and maximum of 12 members, including two government nominees.

The selection of members of the board and the chairperson of the Financial Authority will be conducted by the selection committee, as laid down by IFC. The selection panel, which will also have independent experts in the field of law, finance, and economics, will have to ensure a fair and transparent process.