India’s central bank, Reserve Bank of India (RBI), has made no progress on proposals received under its new umbrella entity (NUE) scheme, according to comments shared by RBI Deputy Governor T Rabi Sankar during a press conference.
Sankar said, “..we have had a look at the applications. The objective was to introduce some innovative infrastructural value add facility into the system because our digital ecosystem is already quite active, quite innovative. We just wanted to bring in new ideas. We did not want something which is either incremental or a substitute for existing ideas or technologies. Now, of the proposals that we have received, we did not quite see any innovative or infrastructural solution that had come up. So that’s where it lies at this point.”
Several news publications have taken Sankar’s comments as an indication that the RBI has pulled the plug on NUE but he has not made a conclusive statement on the same. It is more likely that the project is in limbo at the RBI presently.
What is NUE: The solution was proposed by the RBI in 2019 to offer solutions for retail payment systems. These entities would have been competing with the National Payments Corporation of India (NPCI). The central bank had also clarified that the proposed entity could either be a for-profit or a non-profit organisation.
- The entities would have been responsible for setting up, managing and operating new payment systems in the retail space, including ATMs, White Label PoS, Aadhaar-based payments and remittance services.
- The new entities were expected to develop new payment methods, standards and technologies, and monitor payment issues in India and internationally.
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Why it matters: It is a significant announcement as the RBI has essentially affirmed NPCI’s dominance over payments with the scrapping of NUE. The organisation will continue to have unfettered access to the Indian retail space which it already dominates with over 50 per cent of all electronic payments. The central bank had pointed out that the lack of competition resulted in concentration risks owing to which there was a need to permit multiple entities. The plan may be in limbo* but there is still a need to address concentration risks stemming from NPCI, on which the RBI is conspicuously silent.
Who had applied for a licence: The central bank began inviting bids for licences in 2020. It must be noted that the finance ministry expressed concerns about the participation of state-run banks in the process, given their stake in NPCI, so they were absent from the process. Moreover, SBI requested the ministry to rethink its reservations and allow the bank to participate in the process. Here are some of the applications received by the RBI—
- Reliance Industries (RIL) teamed up with Facebook, Google, YES Bank, and Infibeam’s So Hum Bharat Digital Payments to form a consortium.
- Financial Software and Systems (FSS) joined hands with Razorpay, Airpay Payment Services, Zoho, India Post, and Zerodha.
- Axis Bank and ICICI Bank floated MoPay and included players like BillDesk, Pine Labs, Amazon, and Visa in their consortium.
- Tata Group’s Ferbine got together with Flipkart, Mastercard, PayU, National Bank for Agriculture and Rural Development (NABARD), Airtel Digital, HDFC Bank, and Kotak Mahindra Bank to form a consortium.
- PayTM partnered with Ola Financial, PolicyBazaar, Electronic Payment and Services, IndusIND Bank, Centrum finance, Suryoday small finance bank, Zeta Pay, and Think360.ai. They set up an entity called Foster Payment Network.
- iserveU is an Odisha-based financial services startup. Fintech and neobanking startup Niyogin Fintech acquired a majority stake in iserveU last year, Inc42 reported.
Overview of RBI’s handling of NUE: It was only in 2022 that the central bank acknowledged the delay in granting licences and said that it was evaluating proposals by various companies. But, there had been no announcement since then.
- RBI put the plan on hold in the past citing data security concerns for which it set up a committee to examine proposals and provide recommendations.
- The issue of data security vis-á-vis foreign entities forced RBI to not provide new licenses. It was also put off by Mastercard’s non-compliance with local data storage norms which resulted in a ban on the company.
- Moreover, data breaches at MobiKwik and BigBasket forced RBI to account for the threats posed by the involvement of the private sector in handling payment transactions.
- The project also attracted controversy when it was opposed by the All India State Bank of India (SBI) Staff Federation and the UNI Global Union.
- They requested the RBI to scrap the “whole process of NUE licensing” and focus on strengthening the domestic payments group, NPCI, which operates as a non-profit.
- The groups, in a letter, said that the participation of multinational companies can lead to the abuse of user data. They had also predicted then that privatisation would compromise data safety.
*Disclaimer: The post was edited on April 10, 2023, at 17:47 for purposes of clarity.
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