Tuesday, November 6, 2018

SEP 18 ECO 3 Payments Regulator

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Payments Regulator
Why in News?

Recently, Inter-Ministerial Committee headed by Subhash Chandra Garg submitted draft Payment and Settlement
System Bill, 2018, which seeks to setup independent Payments Regulatory Board (PRB).

Background

•   Growing Digital Payment:  According to Google and Boston Consulting Group (BCG) titled Digital Payments
2020 study, digital payments in India will exceed $500 billion by 2020, up from $50 billion in 2016, which
required a comprehensive review of payments sector with an objective to promote access and competition in the payments industry.
Nachiket Mor Committee Report (2013)  observed that despite significant progress in bank-led payment systems, there remained a vast gap in the availability of basic payment services for small business, and low - income households.
Watal committee (2016) recommended constituting a Payment Regulatory Board (independent of RBI) to promote competition and innovation in the payment ecosystem in India.
Budget 2017, proposed to create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems, which overlooks the payment ecosystem in India.



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Provision of Payment and Settlement System Bill, 2018

Aim:     Draft     bill     seeks     to consolidate laws relating to payments.
Setting        up        Independent Payments Regulatory Board (PRB): Bill seeks changes to the composition of the PRB and recommended that the chairperson appointed by the government in consultation with RBI.
o Objectives for the PRB:
✓   Consumer    protection:
(i)  Protect  the  interest of  consumers,  (ii) ensure safety and soundness of the payment systems, and (iii) create trust and confidence in the payment systems.
✓ Systemic stability and resilience:   Control    of
systemic risk and systemic efficiency, stability and resilience.
✓ Competition           and innovation:  To  enable, in the interest of consumers, (i) system participants to access payment systems based on objective, ownership
neutral and proportionate  standards,  (ii) interoperability  among  system  participants  and among payment systems, (iii) payments systems and payment services to be developed and operated in a manner that promotes their ease of use, and (iv) improvements in the quality, efficiency and economy of payment systems and payment services.
Defining Role of RBI: Bill provides role of RBI as an infrastructure institution in relation to its function of providing        settlement

system     and    payment system.
Parity   Between   Banks and Non-Banks: It provides that the authorization criteria should be risk based and ownership neutral for different classes of payment systems.

Payment and Settlement Systems Act, 2007.
•    It was enacted to regulate and supervise payment systems in India.
Empower RBI: Act provide necessary statutory backing to the Reserve Bank of India for undertaking the Oversight function over the payment and settlement systems in the country. These systems include inter-bank transfers such as the National  Electronics   Funds  Transfer   (NEFT)  system,   the   Real  Time   Gross Settlement (RTGS) System, ATMs, credit cards, etc.
Board for Regulation and Supervision of Payment and Settlement Systems
•    It's a statutory body as per Payment and Settlement Systems Act 2007.
•    It is the highest policy making body on payment systems.
It is empowered to authorize, prescribe policies and set standards to regulate and supervise all the payment and settlement systems in the country.
•    The Department of Payment and Settlement Systems of the RBI serves as the
Secretariat to the Board and executes its directions.



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Significance

Shifting of Power from RBI to PRB: Bill proposes a major change in the payment industry which seems necessary because it was observed that central banks deal with matters of systematic importance only and their main aim is to promote financial stability.
Improving Efficiency as PRB will only issue two types of instruments, regulations and orders, thereby, reducing multiplicity of instruments.
Restoring Requisite RBI Power: Bill provides the RBI with the powers to make a reference to the PRB to consider any matter, which in the opinion of the RBI, was important in the context of monetary policy.
•   Improving Confidence: An independent regulator will instill confidence among users and investors.
Improving Financial Inclusion: A robust Payment regulator will boost digital transactions in India, which is currently close to 90 million.

Challenges

Another Bureaucratic Level: Board could be made a scapegoat for policy failures in payments and settlement, by interfering in monitoring and regulatory function.
•   Crypto currency transactions still function under grey area and haven’t been brought under the legal purview.
Against the Majority Views: Independent PRB is in contrast with the view of RBI, which wants the chairperson of the new regulator to be from the central bank with a casting vote. It also sidelined Watal Panel recommendation which had pitched for establishing PRB within the structure of RBI with a majority of non- RBI members nominated by the centre.
Cyber Breach Cost: Cyber attacks cost India an estimated $4 billion annually, and could rise to USD 20 billion by 2025, with the digitisation of payments presenting new challenges for cybersecurity.

Way Forward

The Financial Sector Legislative Reforms Commission (FSLRC) recommended draft Indian Financial Code which seeks to move away from the current sector-wise regulation to a system where the RBI regulates the banking and payments system and a Unified Financial Agency subsumes existing regulators like SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets.
•   FSLRC also envisages a unified Financial Sector Appellate Tribunal (FSAT), subsuming the existing Securities
Appellate Tribunal (SAT), to hear all appeals in finance.

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