The RBI, Reserve Bank of India has made a proposal to set up an alternative digital retail payment organization. RBI aims to prevent the occurrence of monopoly in the system that is currently being dominated by the National Payments Corporation of India Ltd.
The new entity will be first set up, managed and will operate a new payment system especially in the retail arena, as per RBI's set of draft guidelines that had been released on Monday, 10th February 2020.
This new organization will be operating the clearing as well as the settlement systems. It will identify and manage the risks as well including settlement, credit, and liquidity, as per the draft guidelines given by RBI.
Before the year 2008, the RBI had managed, developed and operated all the different payment systems. At the start of the 2000s, it had set up the National Electronic Funds Transfer System and the Electronic Clearing Service that are still in operation to date. As the retail electronic transactions had been gaining traction, the Reserve Bank of India has set up the NPCI with the aim to develop and operate the different retail payment systems.
Although, the RBI had made the suggestion that NPCI had become ‘too big to fail’ and gave up the proposal of an alternative umbrella organization for retail payments, as per a policy paper released in the year 2019. The draft guidelines that have been released on Monday give a follow-through on that proposal.
- The RBI has suggested in its draft guidelines that the umbrella entity could either be a for-profit or a not-for-profit entity, that should be owned and controlled by the Indian residents.
- The umbrella entity that has been proposed can be ‘for profit’ and can be registered as a company under the PSS Act of 2007.
- The Entities that are eligible to apply as a promoter/promoter group must be ‘owned and controlled by the residents’.
- The Minimum paid-up capital must be Rs 500 crore and the minimum net-worth should be of Rs 300 crore that should be maintained at all times.
- The Promoters shall be upfront and demonstrate the capital contribution of a minimum of 10 percent or Rs 50 crore.
- A single promoter cannot hold more than 40 percent.
- Promoter shareholding is to be diluted to not less than 25 percent after a duration of five years.
- As per the draft guidelines, the new umbrella entity will get a board with the aim to ensure compliance with the principles of corporate governance. The RBI will be retaining the right to appoint the directors on the board and may nominate a member.
- The promoter or the promoter group must possess qualities such as financial integrity, honesty, and good reputation and character, according to the RBI’s guidelines. They must not be convicted by any court of moral turpitude and economic offenses. The promoter or promoter group shouldn't have been banned from getting access to the financial system by any regulator. They should also be financially and mentally sound and must not be declared as financially insolvent. These are the guidelines.
According to the RBI’s policy paper that was released in January 2019, although there are 89 payments system operators in India, a few of them have experienced growth to a level where the “concentration risk” had also increased.
It said that the issue is the NPCI becoming important to the operations of the several retail payment systems of India. There has been a “concentration” of various complicated systems and tasks under it that ends up creating conditions for monopolistic behavior either in the terms of service quality or access to and charges on the services.
Just like NPCI, the new umbrella entity will set-up, manage and operate the new payment systems, especially in the retail area that will comprising of the Automated teller machines but will not be limited to it, the white-label point of sale terminals, Aadhaar-based payments as well as the remittance services.
This new entity should also aim to develop the new payment methods, standards, and technologies, monitor-related issues in India as well as internationally, complete the developmental objectives such as the enhancement of awareness about the payment systems, as proposed by the RBI.
The banking regulator has been seeking ideas and comments on the draft guidelines by 25th February 2020. After this, they will be issuing the final guidelines as well as accept the applications from those who want to set up such an organization.
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