Government Committee Pushes For An Independent Payments Regulator
An inter-departmental committee set up to suggest reforms to India’s payment laws has recommended setting up an independent payments regulator, outside the Reserve Bank of India (RBI). The payments regulator would be known as the Payments Regulatory Board (PRB).
The suggestion, while not the first of its kind, is a contentious one. The RBI has always maintained that regulating payment systems is part of its core mandate. As such, it has argued that a body regulating payments has to fall under the RBI’s umbrella. The committee, which consisted of members from the government, the RBI, the Unique Identification Authority of India (UIDAI) and others, has taken a slightly different view.
The committee suggests that the Payments and Settlements Act 2007 be amended to separate the regulation of payments from RBI’s central banking and monetary policy management functions. While the RBI would continue to have significant representation on the board of the payments regulator, it would still be an independent body.
The report also recommended a “formal mechanism for co-ordination so that the regulation of payments, in so far as it may be relevant in the context of financial stability, monetary policy and credit policy is achieved harmoniously.”
Opposing The RBI’s View
In suggesting a separate payments regulator, the committee did not accept recommendations from the RBI.
These recommendations included keeping the payments regulator under the RBI and ensuring that the chairman of the payments regulator must be from within the central bank. The RBI had also suggested that the chairman should have a casting vote in any decisions taken by the payments regulator. This, too, was not accepted by the inter-departmental committee in its final recommendations.
As part of the committee’s deliberations, the RBI had said that in certain countries, the regulation of payments systems falls within the ambit of the banking regulator. However, the committee noted that countries like United Kingdom and Australia have payments regulators separate from the banking regulator. It added that supervision of the payment system is not a natural corollary of a central bank's currency management system.
The committee suggested that the payment regulator make a reference to RBI when it proposes any regulation impacting the payment system. The RBI can give its opinion in this regard, the committee said. If a difference in opinion persists, then the banking regulator would have the powers to make a reference to the central government.
Greater Role For Government?
In its suggestions to the committee, the Department of Financial Services (DFS) had asked that the amended law should provide for a 51 percent government stake in the National Payments Council of India (NPCI). At present, the shareholding of NPCI is diversified with most large banks holding equity. Public sector banks hold 58.6 percent while private banks hold 25 percent.
The DFS also sought powers for the government to appoint two nominee directors on the boards of payments system providers where public sector banks are the majority owners, or where the company is implementing a payments service of national importance.
The committee did not accept the suggestions by the DFS stating that it would not be advisable for the government to get into the ownership and management of payment systems and infrastructure systems, if the concerns can be addressed without that.
With respect to the suggestions on NPCI’s ownership, the committee suggested that the issue be taken up separately at an appropriate forum.