Big Question: RBI regulates currency but not clear why it shouldn’t control payments

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Published: October 25, 2018 4:27:14 AM

RBI regulates currency anyway and, since all payments have to connect with banks eventually, a common regulator makes sense

RBI,  separate payments regulator, HLCC, KYC norms for banks, PCA, WhatsApp payments, google payThere are several problems with the arguments being made for a separate payments regulator, apart from the obvious fact that non-banks are participating in the payments system without a problem even today.

It is difficult to understand why the government wanted a separate payments regulator instead of the central bank, but that is precisely what a committee headed by the economic affairs secretary has recommended; and RBI has submitted a dissent note on the matter. While coming out with its recommendations, one of the reasons advanced by the committee is that non-banks—like, say, Google Pay or WhatsApp—must also have access to, and must be able to participate in the country’s payment system. As such, the committee felt the role of the regulator needed to “evolve from being largely bank centric”.

There are several problems with the arguments being made for a separate payments regulator, apart from the obvious fact that non-banks are participating in the payments system without a problem even today. Also, to the extent the payments system in the country is going to be dominated by banks for a long time to come, the natural choice for a regulator has to be the central bank. Having a separate regulator creates artificial distinctions since, to the extent banks have payments systems—credit cards or wallets—these will have to be regulated by a different entity while the bank itself will be regulated by RBI. This creates regulatory grey areas and, while a coordination mechanism between the payments regulator and RBI has been suggested, India’s sad history with the High Level Coordination Committee (HLCC) makes it clear that the system simply doesn’t work.

More importantly, to the extent RBI is in charge of regulating the currency, and payments are a sub-set of this, it is not clear how RBI is to function if a fast-growing segment is outside its purview. In any case, to the extent that, at some point, all payments systems, even those run by non-banks, have to connect with the banking system, surely the regulatory environment for all of them has to be prescribed by the same authority? You cannot have one set of, say, KYC norms for banks while a more relaxed set of norms applies to mobile wallets.

It is possible that one reason why the committee under the economic affairs secretary would have wanted a separate payments regulator could have to do with RBI’s insistence that all payment companies store their data in India; it can be sent overseas for, say, fraud management but once this exercise is done, the data sent overseas has to be destroyed. This is a provision that several MNC payments firms have objected to and the finance ministry, amongst others, seems more comfortable with the idea of ‘data mirroring’ instead; that is, payments firms can take Indian data overseas but need to keep one copy in India. The problem with this argument, however, is that, if not allowing the data to be stored overseas helps make India’s payments systems more secure, even an independent payments regulator should adopt the same position as RBI. In the same vein, RBI and the finance ministry should be on the same page when it comes to the central bank’s Prompt and Corrective Action (PCA) since that helps keep the country’s banking system more secure as weak banks will not be allowed to expand till they are financially sound; but yet, as we’ve seen, the finance ministry feels the PCA norms are stifling credit growth. It is to be hoped that, as in the case of the PCA, the government reconsiders its views on a separate payments regulator.

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