Last year, the Finance Ministry constituted a committee under the chairmanship of the former Finance Secretary, Mr Ratan P Watal, to review the framework related to Digital Payments. The committee submitted its report last month ahead of schedule probably in view of the accelerated implementation of the digital payment framework after the demonetization.
The committee’s recommendations are of wide significance and could make substantial difference to the system of regulation of digital payments as we know today. In view of the criticality of some of the recommendations, it is necessary that the recommendations are widely discussed and debated before adoption.
We shall attempt to discuss the provisions bit by bit through a series of articles here to commence a healthy debate. This is the first of such articles in the series.
The Watal Committee has submitted its report to the Finance Ministry on different aspect of the Digital payment infrastructure in the country. The Committee identified four factors which have led to the phenomenal growith of digital payments namely,
(i) digital and technology revolution,
(ii) entry of several non banking PSPs into payments space,
(iii) customers becoming more demanding and expecting instantaneous and one-touch payment solutions and
(iv) progressive changes in the regulatory framework.
The Committee has expressed its vision to set a roadmap for digital payments to grow substantially over the next three years. It is desired that India’s cash to Gross Domestic Product (GDP) ratio should be reduced from about twelve percent to six percent.
The Committee has taken note that at present about 65% of population have access to mobiles and around 95% have Aadhaar identity. It is also noted that about 35% use Internet and Social media and these should be helpful in achieving the said goal.
The committee recognizes that Banks have been currently managing the payment systems and regulated by RBI. But the role of FinTech companies as Payment Service Providers (PSPs) has gathered momentum in the recent days and there is overlap of the activities of FinTech PSPs with the Banks.
In this context the committee has found it necessary to recommend that the regulatory framework needs to be changed to provide for increased participation of FinTech PSPs in the traditional Banking system. (It may be recalled that Naavi had several years back advocated that RBI should introduce a new licensing category for E Banking companies and not allow the current system to be diluted. A move in this direction appears happening now in the PSP industry).
The Committee suggests that the recommendations may be put into implementation over the next thirty to ninety days.
The measures indicated to be inroduced include
(i) placing the proposed legislative changes before the Parliament,
(ii) regulatory changes by RBI within the current legislative framework and
(iii) implementing the policy and executive steps by Ministry of Finance (MoF) and other nodal ministries.
The Committee has made a total of 13 recommendations as follows, which will be discussed in detail subsequently.
- Make regulation of payments independent from the function of central banking.
- Update the current Payments and Settlement Systems Act, 2007
- Promote digital payments and receipts within Government
- Create a fund proposed as DIPAYAN from savings generated from cash-less transactions
- Create a ranking and reward framework
- Implement other measures to promote digital payments including promoting Aadaar based eKYC etc
- Consider outsourcing the function of operation of payment systems
- Upgrade payment systems like RTGS and NEFT to operate on 24×7 basis in due course of time.
- Allow non-bank PSPs to directly access payment systems
- Require NPCI, to be payments centric in its ownership and objectives.
- Enable payments to be inter-operable between bank and non-banks as well as within non-banks.
- Create a formal mechanism to enable innovations and new business models
- Implement other measures to promote digital payments including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs) etc.
As one can observe, the recommendations are far reaching and could in the terms commonly used in the industry, “Disruptive” of the financial regulatory systems. Recognizing the impact of these suggestions and the problems of its improper implementation, there is need for all stake holders to deliberate in depth the action plan under this report.
Let’s start the debate here and now.