RBI has differed with some of the proposals of the Watal Committee on the payment system and stated that granting licences to payment service providers cannot be a ‘tick box exercise’ as entities will be entrusted with money, and so fit and proper criterion is important.
About Ratan Watal Committee
The Committee on Digital Payments was constituted by the Ministry of Finance under the Chairmanship of Shri. Ratan P. Watal, Principal Advisor, NITI Aayog and former Finance Secretary to the Government of India.
RBI opposes proposal to set up separate payments regulator
The Reserve Bank of India (RBI) has opposed a move to establish a separate entity to regulate payments and settlements as recommended by Ratan Watal Committee for Digital Payments.
The 11-member committee was notified in September 2016 by the Union Finance Ministry to review existing payment systems in country and recommend appropriate measures for encouraging Digital Payments.
What Watal Committee says?
One of the committee’s terms of reference was to study and recommend changes in the regulatory mechanism under various acts such as the RBI Act, Payments and Settlement Act, and the Information Technology Act among others.
Based on it, the committee had recommended making regulation of retail payments independent from the function of RBI to give digital payments boost.
It had called for establishing separate Payments Regulatory Board (PRB) as an independent body for retail payments and suggested that RBI’s regulation must be kept only for SIPS (systemically important payment system).
Rationale by Watal Committee
The Watal Committee had said that the primary objectives of the PRB must be to include promotion of competition and innovation in the payments market.
“Likewise, if promoting innovation is to be hard coded in the Act, defining what would constitute “an innovation” would be difficult,”
What RBI says?
According to the global practice both the SIPS and retail payment systems are under the central bank for a variety of reasons including issues of inter-connectivity between the systems and the role of the central bank as the lender of last resort (LOLR). RBI has mooted a monetary-policy-committee-style structure for the PRB, where outcomes are decided independently, but implementation remains with the banking regulator.
Rationale by RBI Deputy Governor R Gandhi
1. Gandhi differed with the committee observation that “banking as an activity is separate from payments, which is more of a technology business”. 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,” Gandhi said. For the non-cash payments, the origination and ending places are banks only.
2. Ruling out free entry of payment service providers, Gandhi said there is an implied suggestion that this sector needs to be freed of licensing mechanism and once a set of criteria are fixed, any number of entities meeting those criteria should be allowed to function.
What is SIPS?
Systemically important payment systems (SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In the event of a bank failure, adherence to the rules for the operation of SIPS should prevent a domino effect whereby payment obligations of the failing bank are effected against the solvent banks. Clearly, this does not prevent the effects of a bank failure from spreading; however, it closes off one route.