Last week, R Gandhi, deputy governor of the Reserve Bank of India (RBI) responded to the recommendations of the Ratan Watal Committee report, which had been critical of the RBI regulating payments, had recommended the separation of payments and banking. Gandhi was speaking was at the launch of the BharatQR and used the platform to defend the RBI.
Here are some of the takeaways and context around his statements:
1. Setting up a payments regulator: The Watal Committee had recommended the formation of a Payments Regulatory Board (PRB) which would regulate payments in the country. The PRB would look at regulation of payments independent from the function of central banking. The PRB can be formed by making the Board for Payment and Settlement Systems more independent by introducing members from outside the RBI. The Governor of RBI will be the chairman of the proposed PRB. But its composition will have a majority of non-RBI members nominated by the Central Government.
What the deputy governor said: Gandhi defended the BPSS as being independent by saying “For the 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.”
MediaNama’s take: Currently, the BPSS only has members from the RBI and a few permanent invitees. However, representation from the non-bank entities which engaged in payments would always help in growing the eco-system. As the Watal Committee noted, that the National Payments Corporation of India (NPCI) which runs the IMPS, UPI and other payment systems, is bank-owned which gives them monopolistic advantage. For example, wallets are excluded from the UPI and the BharatQR.
2. What the committee said on competition in payments: The Committee says that the primary objectives of the PRB must include promotion of competition and innovation in the payments market.
What the deputy governor said: The deputy governor said that they did understand the spirit the behind recommendation but differ in the way it could 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.”
MediaNama’s take: It is understandable that the RBI would have a difficult time in defining what “an innovation” would mean, but the fact remains that wallets are not treated equally and right now banks have an advantage in accessing new forms of payments.
The CEO of the National Payments Corporation of India admitted that wallets have been excluded from the UPI as banks wanted a competitive advantage. While when the BharatQR was launched, the press release explicitly said, “non-bank PPI Operators (read wallets) are not covered under the RBI directive.” Perhaps it is time to hard code anti-competitve measures while creating the new payments regulator.
3. On data and consumer protection: The Watal committee recommended that the payments regulator be responsible for data protection and consumer protection.
What the deputy governor said: Gandhi agreed that the data and consumer protection is essential. He pointed that data protection should encompass all digital data and that the Information Technology Act would be more appropriate. “However, the concept of data protection is relevant much beyond the payment system; it should in fact, encompass any digital data. Appropriately, this should be enshrined in Information Technology Act; otherwise, again there will be overlapping jurisdictions, which is best avoided,” he added.
MediaNama’s take: Last year, more than 3.2 million debit cards details were stolen by hackers from ATMs and POS machines which undermined the data security of the banking system. There have also been many instances of payments failing on the UPI as there is no refund API to handle them. Last week, the UIDAI itself has filed a complaint against Axis Bank, Suvidhaa Infoserve and eMudhra alleging that they stored Aadhaar biometric details.
With more digital payments coming and the government pushing for the less-cash society, the RBI cannot wash off its hands over data and consumer protection due merely “overlapping jurisdictions”. In fact, the RBI must push for an inter-ministry and department co-operation to make sure that data is not misused and protect consumers. Right now, Section 43 A of the Information Technology Act which deals with data protection, allows corporations to determie what security practices and procedures are adequate. But there is no proper standard to say if these data protections are enough, as indicated by this FirstPost story. The RBI needs to ensure that its regulated entities, such as wallets, adhere to a certain standard of data security.
4. Separating banking and payments: The Committee observed that “banking as an activity is separate from payments, which is more of a technology business”.
What the deputy governor said: “I beg to differ. As I had said in my address at Benares Hindu University, 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. 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.” This signals that the RBI wants to keep banks as the keeper of all accounts. Gandhi also spoke about the success of mPesa in Kenya. However, Gandhi maintained that only banks are allowed to open accounts.
“Our answer is simple. If you maintain ‘an account’, then you are a bank and you need a banking license. When you keep the money of the public in “account”, you are a financial entity taking deposits and you must be public trustworthy and so be regulated as a deposit taking financial entity.”
MediaNama’s take: By saying payments are an exclusive function of a bank, the RBI will be limiting the competition and innovation in the space. If the RBI is afraid that non-banks will develop products which will exceed their mandate, it can always intervene and regulate them.
For example, the RBI intervened and said that peer-to-peer lending platforms should be treated as non-banking financial companies (NBFCs) which come under its ambit. Generally, interventions such as this would give clarity on whether companies can undertake certain activities and would only help grow the system.