RBI against separate regulator for payments system; issues dissent note

The Reserve Bank Friday made public its strongly-worded dissent note on certain recommendations of a government panel on changes to payment and settlement laws and said the regulation of payments system should remain with the central bank.

The inter-ministerial committee set up by the government under the chairmanship of economic affairs secretary to finalise amendments to the Payment and Settlement Systems (PSS) Act, 2007 in its draft report suggested creation of an independent regulator Payments Regulatory Board (RRB) to deal with payments related issues.

"There is no case of having a regulator for payment systems outside the RBI," said the dissent note submitted by an RBI representative to the committee.

Observing that the RBI was not totally against a new PSS Bill, the note stressed, "Changes should not result in existing foundations being shaken and the potential creation of disturbances in an otherwise well functioning and internationally acclaimed structure as far as India is concerned".

The RBI said it is reproducing a copy of the dissent note for public information on certain recommendations of the committee, in which it had a representation, adding that the payment systems are a sub-set of currency, which is regulated by the Reserve Bank.

"The overarching impact of monetary policy on payment and settlement systems and vice versa provides support for regulation of payment systems to be with the monetary authority," the dissent note said.

The regulator said that it is vested within its purview to regulate the bank account for payment systems and the settlement systems are finally posted in the books of account of banks with the RBI to attain settlement finality.

Regulating these entities goes hand in hand with the settlement function, the RBI added.

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On payments systems like cards which are issued by banks globally, dual regulation systems is not desirable, it said, adding that the payment system is bank dominated in India and the regulation of the banking systems and payment system by the same regulator provides synergy and inspires public confidence in the payment instruments.

Regulation of the payment system by the central bank is the dominant international model for stability consideration.

"Thus, having the regulation and supervision over Payment and Settlement systems with the central bank will ensure holistic benefits. There has been no evidence of any inefficiency in payment systems of India. The digital payments have made good and steady progress. India is gaining international recognition as a leader in payment systems. Given this, there need not be any change in a well-functioning system," as per the note.

The Payments Regulatory Board (PRB) must remain with the Reserve Bank and headed by the RBI governor, it said further.

The apex bank said that PRB may comprise three members nominated by the government and RBI, respectively, with a casting vote for the RBI Governor to ensure smooth operations of the board.

The compensation of the PRB is also not in conformity with the announcements made in the Finance Bill by the Finance Minister, it said.

Among others, RBI said that competition, innovation and customer protection have been hall marks of the initiatives under the PSS Act and if there are specific concerns which need to be provided for, then making amendments to a relatively new law (PSS Act of 2007) is much more easier than framing a new Act.

If further said that the Watal Committee on PRB to be an independent regulator has recommended the establishment of PRB within the overall structure of the RBI, which would deliver the outcomes which is now changed and "there is no need for any deviation and the PRB can be with the RBI".

On September 19, the inter-ministerial panel headed by Economic Affairs Secretary S C Garg had suggested setting up an independent Payments Regulatory Board (PRB) to foster competition, consumer protection, systemic stability and resilience in payment sector after submitting its report to Finance Minister Arun Jaitley.

In the Finance Act of 2017, the government amended the Payment and Settlement System Act, 2007 (PSSA) and provide for a PRB to be headed by the RBI Governor as ex-offico chairperson.

The committee had suggested that the chairperson of the Board should be appointed by the government in consultation with the RBI and also put forwarded a draft of the Payment and Settlement System Bill 2018 for consideration by the Cabinet.

The draft bill seeks to promote consumer protection; systemic stability and resilience; and competition and innovation, with regards to the payment system. 

In the report, RBI had suggested that the regulation and supervision over the payment systems be retained with the RBI in the proposed bill, and also the chairperson of the PRB should be from the central bank with a casting vote.