RBI Proposes Alternative Retail Payments System
Electronic payment terminals sit on a stool at a gas station in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Proposes Alternative Retail Payments System

The Reserve Bank of India is proposing to set up an alternative digital retail payments organisation as it aims to prevent a monopoly in a system that’s currently dominated by National Payments Corporation of India Ltd.

The new umbrella entity will set up, manage and operate new payment systems, especially in the retail space, the RBI said in a set of draft guidelines released on Monday. This organisation will operate clearing and settlement systems. It will also identify and manage relevant risks such as settlement, credit and liquidity, the draft guidelines added.

Prior to 2008, the RBI managed, developed and operated various payment systems. In the early 2000s, it set up the National Electronic Funds Transfer System and Electronic Clearing Service, which it operates to date. As retail electronic transactions gained traction, the RBI set up NPCI to develop and operate various retail payment systems.

However, in a policy paper in 2019, the RBI suggested that NPCI has become ‘too big to fail’ and threw up the idea of an alternative umbrella organisation for retail payments. The draft guidelines released this week follow-through on that idea.

Who Can Set Up The ‘New Umbrella Entity’

The RBI, in its draft rules, has suggested that the umbrella entity could be a for-profit or not-for-profit entity, owned and controlled by Indian residents.

  • Proposed umbrella entity can be ‘for profit’ and registered as a company under PSS Act 2007.
  • Entities eligible to apply as promoter / promoter group shall be ‘owned and controlled by residents’.
  • Minimum paid up capital should be Rs 500 crore and a minimum net-worth of Rs 300 crore shall be maintained at all times.
  • Promoters shall upfront demonstrate capital contribution of not less than 10 percent, that is, Rs 50 crore.
  • No single promoter can hold more than 40 percent.
  • Promoter shareholding to be diluted to a minimum of 25 percent after five years.

The new umbrella entity, according to the draft guidelines, will have a board to ensure compliance with corporate governance principles. The RBI will retain the right to appoint directors on the board and may nominate a member, it said.

The promoter or promoter group must possess financial integrity, honesty, and good reputation and character, under the RBI’s fit and proper guidelines. They must also not be convicted by any court of moral turpitude, economic offences. The promoter or promoter group should not have been barred from accessing the financial system by any regulator, must be financially and mentally sound and should not have been declared financially insolvent, the guidelines said.

Breaking A Monopoly

According to the RBI’s January 2019 policy paper, while there are 89 payments system operators in India, a few had grown to a level where “concentration risk” had increased.

The issue, it said, is that the NPCI has become pivotal to the operations of many retail payment systems of the country. There is a “concentration” of many complicated systems and tasks under its ambit, which creates conditions for monopolistic behaviour in terms of quality of service or access to and charges on services, it had said.

Like the NPCI, the new umbrella entity shall set-up, manage and operate new payment systems, especially in the retail space comprising but not limited to automated teller machines, white-label point of sale terminals, Aadhaar-based payments and remittance services.

The entity shall also develop new payment methods, standards and technologies, monitor-related issues in the country and internationally, take care of developmental objectives like enhancement of awareness about the payment systems, the RBI proposed.

The banking regulator is seeking comments on the draft guidelines by Feb. 25 after which it will issue the final guidelines and accept applications from those wanting to set up such an organisation.

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