Central to the prescriptions on facilitating payments for financial inclusion is the new concept of payments banks, introduced by the Committee. While this recommendation has come positively-influenced by Brazils recent regulations for payments institutions, it differs in some crucial aspects. Brazil has created a new legal entity that allows non-banks such as digital wallet providers, card issuers, and mobile network operators to get a license and be regulated by the Central Bank. Payment institutions cannot issue credit but must follow stringent requirements, e.g., minimum capital, risk management processes, etc. Unlike the Mor Committee recommendations, these institutions do not provide deposit products.
In India, digital payments, particularly mobile payments (m-banking) have floundered mainly due to the challenges of regulating a business system that straddles two domains, telecom and banking, each having its own independent regulator. There is no doubt that telcos can provide access to the last mile and the unbanked population. Yet, endless debate has stymied the definitional aspects in payments and banking; the struggle between telcos and banks has been a result of fuzziness over roles, liabilities and accountability, pricing of services, and ownership of customers.
RBI, which has gone about a cautious yet steady liberalisation in payment systems, has had two key concerns with non-banks: poor KYC (customer fraud) and systemic risk (money laundering). First, the consumer fraud risk in mobile banking remains inadequately addressed, as non-banks do not come under RBI deposits liability regulations. Second, banks have been concerned about KYC standards of non-banks and remain sceptical of even Aadhaar-based e-KYC in the absence of UIDAI accepting specific liabilities of false acceptance. Meanwhile, even though the RBI Governor has announced pilots to test the operational and technical aspects of Aadhaar-enabled cash-out from non-bank prepaid payments instrument providers, the pilot was postponed from last October to March this year, clearly taking a hit due to non-clarity of the legality of non-banks accepting money from customers.
The Mor Committee report seeks to settle these issues rather unambiguously through the following recommendations:
n Accepting deposits and providing payments may be done by payments banks, a new entity under the Banking Regulation Act. However, payments banks will not offer credit, and can hold a maximum of R50,000 balance per customer.
n Payments banks can be subsidiaries of scheduled commercial banks or telcos, besides independent entities. They must hold a minimum capital of R50 crore and must hold their deposits in SLRs for a maximum of three months. All existing pre-paid instruments providers must convert to payment banks or BCs.
n Telcos are to be mandated to provide USSD connectivity to enable payments, with a price cap of R1.50 per five interactive sessions.
With these provisions, the issues of turf and regulatory jurisdiction have been clarified. The headline is clear: payment functions must necessarily be made by a new profile of banks which will be under RBIs jurisdiction.
However, the new formulation leaves several issues hanging in the air, issues that need debate. Is a payments bank license cost-effective in leveraging the large national footprint of telcos to deliver financial inclusion Why should telcos and smaller payment solution companies be expected to invest the huge capital requirements for payments banks and subject themselves to additional regulations and banking supervision If non-banks do not show sufficient interest due to the high entry barriers and capital adequacy requirements, how can banks be mandated to create the last mile access where they have failed for decades
While there is a considerable long-term benefit in the recommendations, one cannot help worrying that the room for innovative experimentation within the existing ecosystem has been scuppered. Like for any other business, the drivers of payments banks will eventually be commercial viability and scale. Looking at it from a practical standpoint, we already have the licensed banks and the large retail ecosystem in the last mile. If Indian banks must bear the torch and the onus of payments as is now proposed, should we not focus on the business models to incentivise all the existing players and mandate banks to sign feasible contractual agreements with last mile operators, instead of proposing yet another hybrid entity, which can never have the scale and scope of a bank, nor the low cost and flexibility of a non-bank Further, the recommendations do not stipulate tariffs for payment institutions, or a definitive time line for setting up payments banks. All in all, the Mor Committee recommendations have thrown up more questions than solutions in the quest for financial inclusion.
S V Divvaakar
The author is fellow, Indicus Centre for Financial Inclusion