A bad idea

A separate payments regulator could be counter-productive

The country’s central bank, Reserve Bank of India, and the Union government seem to be moving towards an unseemly spat over the issue of regulating payments systems in India. The trouble started last month when an inter-ministerial committee formed by the government for finalising the amendments to the existing Payment & Settlement Systems Act, 2007, proposed a new law altogether. This committee was under the chairmanship of the secretary, Department of Economic Affairs, Ministry of Finance, but also had the RBI’s representation. According to the committee’s recommendation, the government should bring in a law instead of amending the existing one, and create a separate regulator for the payments systems instead of the RBI being in charge, as is the case now. The committee’s view was that the government should appoint the new regulator, albeit in consultation with the RBI. However, the RBI sharply disagreed with the final recommendations of the committee and on October 19, it released a dissent note on the matter.

To be sure, there were several reasons why many felt that the need for a separate payments regulator was justified. For one, it is a new sector where technology is bringing about rapid changes. As such, it could be argued that it needed a team of subject experts working independently because working under the established RBI framework could inhibit innovation and competition. Moreover, the RBI is burdened with a wide array of regulatory work and there were concerns if it would be able to provide the light as well as quick regulatory touch that a new and evolving sector such as the payments services sector perhaps deserves. However, in the dissent note, the RBI has capably answered the doubts that were raised not just about its own ability to regulate but also about the requirements of the payments regime needed.
 

The main contentious issue between the government and the RBI pertains to the leadership of the payments regulator. To answer this, the RBI has gone back to the first principles and shown that no matter which way one looks at the functioning of the payments ecosystem, the regulation must stay with the RBI. For instance, payments are a sub-set of the currency, which, in turn, is regulated by the RBI. Similarly, all payment systems have an underlying bank account, which again is regulated by the banking regulator, i.e. the RBI. The fact is that most of the payments systems in India are dominated by banks and as such the RBI’s regulation will perhaps provide the maximum synergy. In fact, taking regulation away from the RBI could create confusion. For instance, settlement systems are posted in the books of accounts of banks with the RBI to attain settlement finality. It would be odd to have two different entities regulating what is essentially one continuous function. A similar problem will arise for card-based payments, which are issued by banks but can come under dual regulation.

Given how the functioning of payments systems is inextricably fused with that of the rest of the banking and the broader monetary system, it would be counter-productive to have a separate regulator. Entrusting the responsibility of regulating the payments services to a new regulator can also be risky, ignoring the commendable track record of the RBI. The key to resolving this debate lies in understanding that payments systems need integrated regulation, not coordinated regulation. Keeping the RBI out of the loop would also defy established international practice. If instead the government still wants to have its nominees on the Payments Regulatory Board (PRB), the RBI has shown willingness to accommodate them provided the overall leadership stays with it. It would be best for the government to give up its insistence on a separate regulator and reconcile its differences with the RBI.