The Payment and Settlement Systems Act, 2007 ("PSS Act")1 for the first time recognized payments as a different function from a bank's core functions, such as lending, accepting deposits or managing monetary policy2. The Watal Committee Report3 further explained this difference when it suggested in 2016 that payments must be regulated by a separate, independent payment board. In 2018, the 'Report of the Inter-Ministerial Committee for Finalisation of Amendments of the PSS Act, 2007' ("Inter-Ministerial Committee Report")4 took this proposal further and recommended the creation of a Payments Regulatory Board ("PRB") which would be independent from the Reserve Bank of India ("RBI"). This proposal was met with considerable resistance from the RBI and with a few proponents specifically from the start-up ecosystem. This blog post examines the proposal to set up a PRB and the critique this proposal has met.
Key proposals for a new, independent Payments Regulatory Board
The PRB was first introduced via an amendment to the PSS Act in the Finance Act of 20175, within the framework of the RBI and subject to the same PSS Act. The Inter-Ministerial Report suggested more radical changes, proposing that the PRB be made independent of the RBI altogether.
The RBI had a bigger role to play in PRB established under the Finance Act of 2017. For instance, the Governor of the RBI would serve as its Chairman. Other members included the Deputy Governor and one other RBI-nominated member, and three members appointed by the central government6. The role of the RBI in PRB proposed under the Inter-Ministerial Committee Report, however, is reduced to a consultative one. The Chairman of the PRB, for instance, is now a person appointed by the central government in consultation with the RBI. The Deputy Chairman and two whole-time members would be nominated by the RBI, while one officer and two other whole-time members would be appointed by the central government7.
The Inter-Ministerial Committee backed this proposal with a complete reform of the PSS Act, proposing a new Payment and Settlement Systems Bill, 2018 ("PSS Bill"), which incorporates a number of new goals for the PRB, including an increased focus on consumer protection, innovation and competition. The PSS Bill8 also sets out how the PRB must coordinate with the RBI, which further indicates a reduced role of the RBI. For instance, the PSS Bill allows the PRB to make references to the RBI in relation to its proposed actions for a 'designated payment system'9. This term refers to a payment system, whose disruption could lead to systemic disruption to India's financial system, or could affect the public confidence in payment systems in India, and must be designated as such under the PSS Bill10. Similarly, the RBI has been allowed, under a separate provision, to make a reference to the PRB on any matter which it feels is essential to monetary policy11.
Although there is a slight difference in the procedure, for both these references, the RBI has not been given any decisive authority. It may only make recommendations, and if the PRB and the RBI are unable to reach an agreement, then the matter would be referred to the central government for resolution.
For other matters under the PSS Bill, such as authorizing payment systems12, designating a payment system, taking enforcement actions13, and others, there is no obligation to make a reference to the RBI. For all other matters, therefore, the RBI's only role will be via the members present on the PRB.
Reactions to the proposed PRB
The Inter-Ministerial Committee Report thus proposed a significant overhaul of the regulatory system for payments. This proposal met with considerable support from parts of the fintech industry14, in view of the promise of a more flexible payments regulator. The support comes partly from the stated objectives of encouraging innovation and competition in this field with the PSS Bill itself, and partly from the hope that an independent PRB may be more open to experimentation and be transparent in policy making.
The proposal did lead to concerns from the industry as well, particularly from the possibility of the overlapping jurisdiction of the RBI and the PRB, which can lead to dual regulatory oversight and compliance requirements for the same financial products and services. Another concern that arises is whether adequate steps have been taken to ensure transparency in the functioning of the PRB. As much as there may be a need for a PRB to foster competition, consumer protection and create systemic stability in the payments sector, proper checks and balances need to be in place to ensure proper synchronization between the RBI and the PRB in the decision-making process.
A significant disagreement with the proposed PRB came from the RBI itself which, in a rare move, published a dissent note15 against the inter-ministerial committee's report. In particular, the RBI pointed to major progress that has been seen in the fintech sector in terms of payment, arguing that there was no need to fix a system that was not broken. The fintech industry, however, is not in complete agreement with the RBI's argument. To illustrate, two policy issues created major disruption in the industry. First, the RBI's 2018 data localization circular, which mandated the storage of all payment systems data within India16. The second was the Circular issued at the exact same time on virtual currencies, which prohibited RBI regulated entities like banks from dealing with them17. Both of these decisions came without warning or explanation, and, moreover, without any prior consultation with industry stakeholders.
The innovation mandate under the PSS Bill
While there is no saying whether a new PRB will be more supportive in its functioning, there is a hope that its independence will make it more open to innovation and experimentation. Various provisions in the PSS Bill (which lays out a far more detailed structure for the functioning of the PRB than the PSS Act) also give support to this.
The PSS Bill, for instance, expressly mandates promoting competition and innovation as the objectives of the PRB, along with a focus on consumer protection and ensuring systemic stability and resilience. This factor, for instance, leads to the hope that the PRB may at least offer the industry an opportunity to present its views before taking decisions such as those on the prohibition on cryptocurrencies or imposition of data localization. The PSS Bill, further, requires records of meetings conducted and decisions made to be published on a website18, which may allow greater transparency in the functioning and decision making of the Board.
Next, the PSS Bill includes express provisions for a regulatory sandbox19, which may also allow experimentation, and thus lead to more innovation. It is noteworthy that the RBI released a draft enabling framework for a regulatory sandbox in April 2018.
The competition mandate under the PSS Bill
Another interesting point for fintech companies in the new Bill is the focus on promoting competition, and, in particular, ensuring a level playing ground for bank and non-bank payment system providers ("PSPs"). The Watal Committee Report pointed out some of these differences, such as that only bank PSPs had access to payment systems, while non-bank PSPs were allowed access as sub-members of banks20. Similarly, only banks are allowed to issue open system PPIs, while non-banks can only issue semi-closed PPIs 21.
To deal with this disparity, the Watal Committee Report had recommended that the PRB have a positive obligation to be ownership neutral, technology neutral and infrastructure neutral. The PSS Bill specifically adopts one of these - ownership neutrality, thus imposing a mandate on the PRB to issue ownership neutral regulations under various provisions, for instance, the criteria for grant of authorization must be ownership-neutral22. These norms can thus ensure a level playing field between bank and non-bank PSPs.
Should the PRB be independent?
The proposed new PRB and the PSS Bill thus take several positive steps towards progress in the digital payments sector. There have been many arguments for23 and against24 the independence of the PRB vis-à-vis the RBI. The independence of the PRB may certainly serve as a factor that allows atypical decisions, supported by the guidance of the RBI. The key factor, however, appears to be the forward-looking goals and mandates as outlined under the PSS Bill, whether it is the focus on innovation and competition, the requirement of ownership neutrality, or the allowing of a regulatory sandbox, to name a few. A new PRB subject to these goals will definitely be an experiment in payments regulation, and will hopefully herald a new era for digital payments in India.
1 Available at https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/86706.pdf
2 Sunil Kulkarni: PSSA 2018: A step towards separating banking, payments, LiveMint, dated September 25th, 2018, available at https://www.livemint.com/Opinion/2D0X3DIvyCi3EszZLjIv9N/PSSA-2018-A-step-towards-separating-banking-payments.html
3 Page 22 of the The Report of the Committee of Digital Payments, titled 'Medium Term Recommendations to Strengthen the Digital Payments Ecosystem', popularly known as the Watal Committee Report, Ministry of Finance, Government of India, dated December 2016, available at http://finance.du.ac.in/du-finance/uploads/pdf/Reports/watal_report271216.pdf
4 Report titled 'Recommendations to Consolidate and Amend the Law relating to Digital Payments', Ministry of Finance, Government of India, dated August 2018, available at https://dea.gov.in/sites/default/files/Payment%20and%20settlement.pdf
5 The Finance Act, 2017, replaced the former Board for Regulation and Supervision of Payment and Settlement Systems, established under the PSS Act, 2017, with a new Payments Regulatory Board. Available at http://www.civilaviation.gov.in/sites/default/files/MoL%26amp%3BJ%20%28Legislative%20Deptt%29%20The%20Finance%20Act%20.pdf
6 Section 3(2), PSS Act, 2007, as amended by the Finance Act, 2017: Designated Authority
7 Section 3, Payment and Settlement Systems Bill, 2018: Composition of Payments Regulatory Board
8 Part III, PSS Bill, 2018: Coordination with the Reserve Bank
9 Section 9, Ibid.: Reference to the Reserve Bank
10 Section 63, Ibid.: Designation
11 Section 10, Ibid.: References to the Payments Regulatory Board
12 Chapter 5, Ibid.: Authorisation of Payment System
13 Chapter 7, Ibid.: Enforcement Actions
14 Media Report by Suprita Anupam: PSS Amendment: The Rights And Wrongs Of Making The Payments Board Independent, Inc42, dated September 21st, 2018, available at https://inc42.com/features/pss-amendment-why-does-govt-want-payments-board-to-be-made-independent-of-rbi/
15 RBI Press Release: Reserve Bank of India releases Dissent Note on Inter-Ministerial Committee for finalization of Amendments to PSS Act, dated October 19th, 2018, Press Release: 2018-2019/929, available at https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=45287
16 RBI Notification: Storage of Payment System Data, RBI/2017-18/153, dated April 6th, 2018, available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11244&Mode=0
17 RBI Circular: Prohibition on dealing in virtual currencies (VCs), RBI/2017-18/154, dated April 6th, 2018, available at https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF
18 Section 7, PSS Bill, 2018: Decision Making and Meetings of the Board
19 Section 22, Ibid.: Regulatory Sandbox
20 Page 45, Footnote 5, Watal Committee Report, Supra at 3: See, Department of Payment and Settlement Systems, Reserve Bank of India, RTGS System Regulations, The procedural guidelines for the RTGS, NEFT and NECS, restrict membership to banks having settlement accounts with the RBI. The procedural guidelines for IMPS allow non-banks to become sub-members of member banks; Reserve Bank of India, National Electronic Funds Transfer System Procedural Guidelines, National Electronic Clearing Service Procedural Guidelines; National Payments Corporation of India, IMPS Procedural Guidelines.
21 Clause 3, RBI Master Directions on PPIs, Supra at 25: Eligibility to issue semi-closed and open system PPIs
22 Section 17, PSS Bill, 2018: Criteria for grant of authorization. See also Section 8: Objectives of the PRB, and Section 27: Open access and interoperability.
23 Mandar Kagade: Opinion | The case for an independent payments regulator, MoneyControl, dated September 25th, 2018, available at https://www.moneycontrol.com/news/economy/policy/opinion-the-case-for-an-independent-payments-regulator-for-india-2982171.html
24 R.B. Barman: Opinion | No reason for a payments board, LiveMint, dated October 15th, 2018, available at https://www.livemint.com/Opinion/iAFjWEkfRrFXt56YwRfUaJ/Opinion-No-reason-for-a-payments-board.html
Originally published 26 July, 2019.
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