By Simran Jalan (firstname.lastname@example.org)
An Inter-Ministerial Committee was formed to finalise Payment and Settlement System Bill, 2018 to amend the Payment and Settlement System Act, 2007 (“PSS Act”). The Bill seeks to foster competition, consumer protection, systemic stability and resilience in payment sector and establish an independent Payments Regulator Board (“PRB”) to regulate the same. The proposals of the Government to amend the PSS Act at length is covered in our previous Article- Major recommendations of the Committee on Payment Systems.
Reserve Bank of India (“RBI”) had raised various objections in the Bill and has, further, issued dissent note to bring out into public domain the fact that RBI is not happy with the government’s attempt to take control of payment and settlement systems.
Dissent of RBI
The RBI has given the dissent on the following recommendations of the committee:
• On composition of PRB
RBI has contended that there has been a major departure with respect to composition of the PRB from what was proposed under the Finance Bill, 2017. Initially, the Finance Bill proposed that the PRB shall be constituted with the Governor of RBI as the Chairman, however, the PSS Bill states that the Chairman of the PRB shall be appointed by the Government in consultation with the RBI.
Further, the Finance Bill, 2017 suggested that the PRB must be built into the overall framework and the RBI, however, the PSS Bill states that the PRB shall be an independent body. Payment and settlement system being a sub-set of the currency management system, keeping the PRB independent of RBI would not be appropriate. The Monetary Policy has a huge impact on the payment systems and therefore, the power to regulate the payment systems should be with the monetary authority.
The Bill also provides for a formal mechanism for co-ordination between PRB and RBI. The RBI is of a view that the operations of PRB should be integrated and not co-ordinated with RBI.
Further, banks are the most important parties of the payment systems, RBI being the banking regulator makes it logical to keep integrate PRB within the operations of the RBI.
It will additionally provide holistic benefits since a single regulator will decrease the compliance costs as compared to the costs incurred if there are multiple regulators and will be more effective.
Further, the Bill stated that it was necessary to distinguish the role of the Central Bank as an infrastructure institution providing settlement function from its role as a regulator of the payment sector. In respect to this statement, RBI commented that the payment systems are nothing but digital substitutes of currency. RBI creates currency and distributes them through banks. Major concern of RBI was that the non-banks were ascribed the job of creating money via payment systems.
The Bill has designated the Securities Appellate Tribunal (“SAT”) for grievance redressal. Since securities market transactions and payment systems have little correlation, RBI is of the view that the designating SAT as grievance redressal authority is meaningless.
RBI, in its dissent note, stated that instead of framing a new law, it would be easier to amend the existing Act, if required. It has to be, however, recognized that changes should not result in existing foundations being shaken and the potential creation of disturbances in an otherwise well-functioning and internationally acclaimed structure as far as India is concerned.
Essentially, the point that the RBI makes is that the payment systems are part of the overall monetary system of the country, and therefore, the RBI being the primary financial sector regulator should remain in control of the monetary system. Ability to create and proliferate instruments which interfere and the payment and settlement systems, if kept outside the RBIs domain, may:
a) undermine the independence of the RBI as the authority in control of the monetary system;
b) weaken the macro controls of the RBI over the credit and money supply in the economy.
It is quite clear that in coming times, monetary supply will find increasing inroads being made by technology-enabled payment systems, and it is difficult to envisage how the RBI may still remain in control of the monetary system if the payment/settlement systems go out of the RBI’s domain.
The foundation of the country’s democratic traditions lies in the systems of balances. The RBI is not the government and in the past there have been innumerable occasions where the RBI has trodden its own independent path and not gone as per the wishes of the government. The Government is more inclined towards short-termism and populism than institutions such as the RBI, SEBI or the judiciary. Any attempt that weakens these institutions must be deplored.