Insights into Editorial: Turf battle: on independent payments regulator
Context:
The Reserve Bank of India (RBI) and the Union government are once again at loggerheads over the legitimate extent of their powers.
The central bank made public its reservations against the government’s plans to set up an independent payment’s regulator, potentially setting the stage for a regulatory turf war.
The Reserve Bank of India (RBI) has opposed a proposal to set up a separate and independent regulator for the payments industry in the country.
Payment and Settlement Systems (PSS) Act, 2007:
The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters.
The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), to exercise its powers and perform its functions and discharge its duties under this statute.
Proposed Amendments to PSS Act,2007: Issue of Concern:
The fact that the RBI has made public its dissent against the Union government’s idea, suggests that the central bank has serious problems with the dilution of its current powers over the financial sector.
In a strongly worded dissent note against the inter-ministerial committee for the finalisation of amendments to the Payment and Settlement Systems Act, 2007, published, the central bank observed that it would prefer the Payments Regulatory Board to function under the purview of the RBI Governor.
RBI viewed that “There is no case of having a regulator for payment systems outside the RBI”.
RBI’s Supporting Views:
- In support of its stance, the RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator.
- So, according to this logic, it might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry.
- RBI pinpointed that “Regulation of the banking systems and payment system by the same regulator provides synergy”.
- The RBI, in essence, is pointing to the interconnection between the payments industry and the banking system to back the extension of its regulatory powers.
- The RBI’s case makes good sense when seen from the perspective of the cost of regulatory compliance.
As stated above, there is definite overlapping between the current regulatory powers of the RBI and the proposed regulations for the payments industry.
Government Proposal Arguments:
- It will foster competition and consumer protection.
- It will lead to systemic stability and resilience in the payments sector.
- It is the era of digital payments and it is not possible to foster competition, when it is under the purview of RBI.
- Dynamic decisions are required for the growth of sunrise sector.
Conclusion:
The RBI has argued that the payment system is bank-dominated in India. 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.
Way Forward:
According to a recent report by Credit Suisse, cash share in India is still estimated at 70 per cent in value terms and digital payments currently aggregate only $200 billion, compared with $5-trillion mobile payments in China.
“Payment integration into popular apps in India will drive the digital payment market in India to around $1 trillion over the next five years.
A unified regulator can thus help in lowering the compliance costs and enabling the seamless implementation of rules.
Further, there is the real risk that a brand-new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties.
So, it makes better sense to have the RBI take charge of the rapidly growing payments industry which can ill-afford regulatory errors at this point.
However, the RBI’s demand for the centralisation of regulatory powers also brings with it the need for exercising a greater degree of responsibility.
At a time when there are increasing risks to the stability of the domestic financial system, both the government and the RBI must look to work together to tackle these risks instead of battling over regulatory powers.