Payment and Settlement Systems: A Primer

– Siddarth Goel (finserv@vinodkothari.com)

Introduction

A payment denotes the performance or discharge of an obligation to pay, which may or may not involve money transfer. Payment is therefore a financial obligation in whatever parties have agreed constituting a payment. A payment and settlement system could be understood as a payments market infrastructure that facilitates the flow of funds in satisfaction of a financial obligation. The need for a payment system is an integral part of commerce. From the use of a payment system in an e-commerce purchase, a debit or credit card fund transfer, stock or share purchase. The payment obligation can also be settled without the presence of any financial intermediary (peer-to-peer). The payment transaction need not always be settled in money, it could be settled in security, commodity, or any other obligation as may be decided by payment system participants.

One of the earlier known payment mechanisms was the barter system. With the evolution of civilisation, the world moved to a system supported by tokens and coins that are still prevalent and are widely used as the mode of payment. The payment mechanism supported by physical currency notes or coins is simple, as it offers peer-to-peer, real-time settlement of obligation between the parties, by way of physical transfer of note or coin from one party to another.

In contemporary electronic payment systems, the manner of flow of funds from one payment system participant to another is central to the security, transparency, and stability of the payment system and financial system as a whole. The RBI’s main objective is to maintain public confidence in payment and settlement systems, while the other function being to upgrade and introduce safe and efficient modes of payment systems. The RBI is also the banker to all scheduled banks and maintains bank accounts on their behalf.  All the scheduled commercial banks have access to a central payment system operated by RBI. Thereby banks have access to liquidity funding line with RBI which have been discussed later in this chapter.

Electronic payments usually involve the transfer of funds via money in bank deposits. While securities settlement system involves trade in financial instruments namely; bonds, equities, and derivatives. The implementation of sound and efficient payment and securities settlement systems is essential for financial markets and the economy. The payment system provides money as a means of exchange, as central banks are in control of supplying money to the economy which cannot be achieved without public confidence in the systems used to transfer money. It is essential to maintain stability of the financial systems, as default under very large value transfers create the possibilities of failure that could cause broader systemic risk to other financial market participants. There is a presence of negative externality that can emanate from a failure of a key participant in the payment system.[1]

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Understanding regulatory intricacies of Payment Aggregator business

-Siddarth Goel (finserv@vinodkothari.com)

Abstract

The penetration of electronic retail payments has witnessed a steep surge in the overall payment volumes during the latter half of the last decade. One of the reasons accorded to this sharp rise in electronic payments is the exponential growth in online merchant acquisition space. An online merchant is involved in marketing and selling its goods and/or services through a web-based platform. The front-end transaction might seem like a simple buying-selling transaction of goods or services between a buyer (customer) and a seller (merchant). However, the essence of this buying-selling transaction lies in the payment mode or methodology of making/accepting payments adopted between the customer and the merchant. One of the most common ways of payment acceptance is that the merchant establishes its own payment integration mechanism with a bank such that customers are enabled to make payments through different payment instruments. In such cases, the banks are providing payment aggregator services, but the market is limited usually to the large merchants only. Alternatively, merchants can rely upon third-party service providers (intermediary) that facilitate payment collection from customers on behalf of the merchant and thereafter remittance services to the merchant at the subsequent stage – this is regarded as a payment aggregation business.

The first guidelines issued by the RBI governing the merchant and payment intermediary relationship was in the year 2009[1]. Over the years, the retail payment ecosystem has transformed and these intermediaries, participating in collection and remittance of payments have acquired the market-used terminology ‘Payment Aggregators’. In order to regulate the operations of such payment intermediaries, the RBI had issued detailed Guidelines on Regulation of Payment Aggregators and Payment Gateways, on March 17, 2020. (‘PA Guidelines’)

The payment aggregator business has become a forthcoming model in the online retail payments ecosystem. During an online retail payment by a customer, at the time of checkout vis-à-vis a payment aggregator, there are multiple parties involved. The contractual parties in one single payment transaction are buyer, payment aggregator, payment gateway, merchant’s bank, customer’s bank, and such other parties, depending on the payment mechanism in place. The rights and obligations amongst these parties are determined ex-ante, owing to the sensitivity of the payment transaction. Further, the participants forming part of the payment system chain are regulated owing to their systemic interconnectedness along with an element of consumer protection.

This write-up aims to discuss the intricacies of the regulatory framework under PA Guidelines adopted by the RBI to govern payment aggregators and payment gateways operating in India. The first part herein attempts to depict growth in electronic payments in India along with the turnover data by volumes of the basis of payment instruments used. The second part establishes a contrast between payment aggregator and payment gateway and gives a broad overview of a payment transaction flow vis-à-vis payment aggregator. The third part highlights the provisions of the PA Guidelines and establishes the underlying internationally accepted best principles forming the basis of the regulation. The principles are imperative to understand the scope of regulation under PA Guidelines and the contractual relationship between parties forming part of the payment chain.

Market Dynamics

The RBI in its report stated that the leverage of technology through the use of mobile/internet electronic retail payment space constituted around 61% share in terms of volume and around 75% in share in terms of value during FY 19-20.[2] The innovative payment instruments in the retail payment space, have led to this surge in electronic payments. Out of all the payment instruments, the UPI is the most innovative payment instrument and is the spine for growth in electronic payments systems in India. Chart 1 below compares some of the prominent payment instruments in terms of their volumes and overall compounded annual growth rate (CAGR) over the period of three years.

The payment system data alone does not show the complete picture. In conformity with the rise in electronic payment volumes, as per the Government estimates the overall online retail market is set to cross the $ 200 bn figure by 2026 from $ 30 bn in 2019, at an expected CAGR of 30 %.[4] India ranks No. 2 in the Global Retail Development Index (GRDI) in 2019. It would not be wrong to say, the penetration of electronic payments could be due to the presence of more innovative products, or the growth of online retail has led to this surge in electronic payments.

What are Payment Aggregators and Payment Gateways?

The terms Payment Aggregator (‘PA’) and Payment Gateways (‘PG’) are at times used interchangeably, but there are differences on the basis of the function being performed. Payment Aggregator performs merchant on-boarding process and receives/collects funds from the customers on behalf of the merchant in an escrow account. While the payment gateways are the entities that provide technology infrastructure to route and/or facilitate the processing of online payment transactions. There is no actual handling of funds by the payment gateway, unlike payment aggregators. The payment aggregator is a front-end service, while the payment gateway is the back-end technology support. These front-end and back-end services are not mutually exclusive, as some payment aggregators offer both. But in cases where the payment aggregator engages a third-party service provider, the payment gateways are the ‘outsourcing partners’ of payment aggregators. Thereby such payments are subject to RBI’s outsourcing guidelines.

PA Transaction Flow

One of the most sought-after electronic payments in the online buying-selling marketplace is the payment systems supported by PAs. The PAs are payment intermediaries that facilitate e-commerce sites and merchants in accepting various payment instruments from their customers. A payment instrument is nothing but a means through which a payment order or an instruction is sent by a payer, instructing to pay the payee (payee’s bank). The familiar payment instruments through which a payment aggregator accepts payment orders could be credit cards, debit cards/PPIs, UPI, wallets, etc.

Payment aggregators are intermediaries that act as a bridge between the payer (customer) and the payee (merchant). The PAs enable a customer to pay directly to the merchant’s bank through various payment instruments. The process flow of each payment transaction between a customer and the merchant is dependent on the instrument used for making such payment order. Figure 1 below depicts the payment transaction flow of an end-to-end non-bank PA model, by way of Unified Payment Interface (UPI) as a payment instrument.

In an end-to-end model, the PA uses the clearing and settlement network of its partner bank. The clearing and settlement of the transaction are dependent on the payment instrument being used. The UPI is the product of the National Payments Corporation of India (NPCI), therefore the payment system established by NPCI is also quintessential in the transaction. The NPCI provides a clearing and settlement facility to the partner bank and payer’s bank through the deferred settlement process. Clearing of a payment order is transaction authorisation i.e., fund verification in the customer’s bank account with the payer’s bank. The customer/payer bank debits the customer’s account instantaneously, and PA’s bank transfers the funds to the PA’s account after receiving authorisation from NPCI. The PA intimates the merchant on receipt of payment and the merchant ships the goods to the customer. The inter-bank settlement (payer’s bank and PA’s partner bank) happens at a later stage via deferred net-settlement basis facility provided by the NPCI.

The first leg of the payment transaction is settled between the customer and PA once the PA receives the confirmation as to the availability of funds in the customer’s bank account. The partner bank of PA transfers the funds by debiting the account of PA maintained with it. The PA holds the exposure from its partner bank, and the merchant holds the exposure from the PA. This explains the logic of PA Guidelines, stressing on PAs to put in place an escrow mechanism and maintenance of ‘Core Portion’ with escrow bank. It is to safeguard the interest of the merchants onboarded by the PA. Nevertheless, in the second leg of the transaction, the merchant has its right to receive funds against the PA as per the pre-defined settlement cycle.

Regulatory approach towards PAs and PGs

The international standards and best practices on regulating Financial Market Infrastructure (FMI) are set out in CPSS-IOSCO principles of FMI (PFMI).[5] A Financial Market Infrastructure (FMI) is a multilateral system among participating institutions, including the operator of the system. The consumer protection aspects emerging from the payment aggregation business model, are regulated by these principles. Based on CPSS-IOSCO principles of (PFMI), the RBI has described designated FMIs, and released a policy document on regulation and supervision of FMIs in India under its regulation on FMIs in 2013.[6] The PFMI stipulates public policy objectives, scope, and key risks in financial market infrastructures such as systemic risk, legal risk, credit risk, general business risks, and operational risk. The Important Retail Payment Systems (IRPS) are identified on the basis of the respective share of the participants in the payment landscape.  The RBI has further sub-categorised retail payments FMIs into Other Retail Payment Systems (ORPS). The IRPS are subjected to 12 PFMI while the ORPS have to comply with 7 PFMIs. The PAs and PGs fall into the category of ORPS, regulatory principles governing them are classified as follows:

These principles of regulation are neither exclusive nor can said to be having a clear distinction amongst them, rather they are integrated and interconnected with one another. The next part discusses the broad intention of the principles above and the supporting regulatory clauses in PA Guidelines covering the same.

Legal Basis and Governance framework

The legal basis principle lays the foundation for relevant parties, to define the rights and obligations of the financial market institutions, their participants, and other relevant parties such as customers, custodians, settlement banks, and service providers. Clause 3 of PA Guidelines provides that authorisation criteria are based primarily on the role of the intermediary in the handling of funds. PA shall be a company incorporated in India under the Companies Act, 1956 / 2013, and the Memorandum of Association (MoA) of the applicant entity must cover the proposed activity of operating as a PA forms the legal basis. Henceforth, it is quintessential that agreements between PA, merchants, acquiring banks (PA’s Partners Bank), and all other stakeholders to the payment chain, clearly delineate the roles and responsibilities of the parties involved. The agreement should define the rights and obligations of the parties involved, (especially the nodal/escrow agreement between partner bank and payment aggregator). Additionally, the agreements between the merchant and payment aggregator as discussed later herein are fundamental to payment aggregator business. The PA’s business rests on clear articulation of the legal basis of the activities being performed by the payment aggregator with respect to other participants in the payment system, such as a merchant, escrow banks, in a clear and understandable way.

Comprehensive Management of Risk

The framework for the comprehensive management of risks provides for integrated and comprehensive view of risks. Therefore, this principle broadly entails comprehensive risk policies, procedures/controls, and participants to have robust information and control systems. Another connecting aspect of this principle is operational risk, arising from internal processes, information systems and disruption caused due to IT systems failure. Thus there is a need for payment aggregator to have robust systems, policies to identify, monitor and manage operational risks. Further to ensure efficiency and effectiveness, the principle entails to maintain appropriate standards of safety and security while meeting the requirements of participants involved in the payment chain. Efficiency is resources required by such payment system participants (PAs/PGs herein) to perform its functions. The efficiency includes designs to meet needs of participants with respect to choice of clearing and settlement transactions and establishing mechanisms to review efficiency and effectiveness. The operational risk are comprehensively covered under Annex 2 (Baseline Technology-related Recommendation) of the PA Guidelines. The Annex 2, inter alia includes, security standards, cyber security audit reports security controls during merchant on-boarding. These recommendations and compliances under the PA Guidelines stipulates standard norms and compliances for managing operational risk, that an entity is exposed to while performing functions linked to financial markets.

KYC and Merchant On-boarding Process

An important aspect of payment aggregator business covers merchant on-boarding policies and anti-money laundering (AML) and counter-terrorist financing (CFT) compliance. The BIS-CPSS principles do not govern within its ambits certain aspects like AML/CFT, customer data privacy. However, this has a direct impact on the businesses of the merchants, and customer protection. Additionally, other areas of regulation being data privacy, promotion of competition policy, and specific types of investor and consumer protections, can also play important roles while designing the payment aggregator business model. Nevertheless, the PA Guidelines provide for PAs to undertake KYC / AML / CFT compliance issued by RBI, as per the “Master Direction – Know Your Customer (KYC) Directions” and compliance with provisions of PML Act and Rules. The archetypal procedure of document verification while customer on-boarding process could include:

  • PA’s to have Board approved policy for merchant on-boarding process that shall, inter-alia, provide for collection of incorporation certificates, constitutional document (MoA/AoA), PAN and financial statements, tax returns and other KYC documents from the merchant.
  • PA’s should take background and antecedent checks of the merchants, to ensure that such merchants do not have any malafide intention of duping customers, do not sell fake/counterfeit/prohibited products, etc.

PAs shall ensure that the merchant’s site shall not save customer’s sensitive personal data, like card data and such related data. Agreement with merchant shall have provision for security/privacy of customer data.

Settlement and Escrow

The other critical facet of PA business is the settlement cycle of the PA with the merchants and the escrow mechanism of the PA with its partner bank. Para 8 of PA Guidelines provide for non-bank PAs to have an escrow mechanism with a scheduled bank and also to have settlement finality. Before understanding the settlement finality, it is important to understand the relevance of such escrow mechanisms in the payment aggregator business.

Escrow Account

Surely there is a bankruptcy risk faced by the merchants owing to the default by the PA service provider. This default risk arises post completion of the first leg of the payment transaction. That is, after the receipt of funds by the PA from the customer into its bank account. There is an ultimate risk of default by PA till the time there is final settlement of amount with the merchant. Hence, there is a requirement to maintain the amount collected by PA in an escrow account with any scheduled commercial bank. All the amounts received from customers in partner bank’s account, are to be remitted to escrow account on the same day or within one day, from the date amount is debited from the customer’s account (Tp+0/Tp+1). Here Tp is the date on which funds are debited from the customer’s bank account.  At end of the day, the amount in escrow of the PA shall not be less than the amount already collected from customer as per date of debit/charge to the customer’s account and/ or the amount due to the merchant. The same rules shall apply to the non-bank entities where wallets are used as a payment instrument.[7] This essentially means that PA entities should remit the funds from the PPIs and wallets service provider within same day or within one day in their respective escrow accounts. The escrow banks have obligation to ensure that payments are made only to eligible merchants / purposes and not to allow loans on such escrow amounts. This ensures ring fencing of funds collected by the PAs, and act as a deterrent for PAs from syphoning/diverting the funds collected on behalf of merchants. The escrow agreement function is essentially to provide bankruptcy remoteness to the funds collected by PA’s on behalf of merchants.

Settlement Finality

Settlement finality is the end-goal of every payment transaction. Settlement in general terms, is a discharge of an obligation with reference of the underlying obligation (whatever parties agrees to pay, in PA business it is usually INR). The first leg of the transaction involves collection of funds by the PA from the customer’s bank (originating bank) to the PA escrow account. Settlement of the payment transaction between the PA and merchant, is the second leg of the same payment transaction and commences once funds are received in escrow account set up by the PA (second leg of the transaction).

Settlement finality is the final settlement of payment instruction, i.e. from the customer via PA to the merchant. Final settlement is where a transfer is irrevocable and unconditional. It is a legally defined moment, hence there shall be clear rules and procedures defining the point of settlement between the merchant and PA.

For the second leg of the transaction, the PA Guidelines provide for different settlement cycles:

  1. Payment Aggregator is responsible for the delivery of goods/service– The settlement cycle with the merchant shall not be later than one day from the date of intimation to PA of shipment of goods by the merchant.
  2. Merchant is responsible for delivery– The settlement cycle shall not be later than 1 day from the date of confirmation by the merchant to PA about delivery of goods to the customer.
  3. Keeping the amount by the PA till the expiry of refund period– The settlement cycle shall not be later than 1 day from the date of expiry of the refund period.

These settlement cycles are mutually exclusive and the PA business models and settlement structure cycle with the merchants could be developed by PAs on the basis of market dynamics in online selling space. Since the end-transaction between merchant and PA is settled on a contractually determined date, there is a deferred settlement, between PA and the merchant.  Owing to the rules and nature of the relationship (deferred settlement) is the primary differentiator from the merchants proving the Delivery vs. Payment (DvP) settlement process for goods and services.

Market Concerns

Banks operating as PAs do not need any authorisation, as they are already part of the the payment eco-system, and are also heavily regulated by RBI. However, owing to the sensitivity of payment business and consumer protection aspect non-bank PA’s have to seek RBI’s authorisation. This explains the logic of minimum net-worth requirement, and separation of payment aggregator business from e-commerce business, i.e. ring-fencing of assets, in cases where e-commerce players are also performing PA function. Non-bank entities are the ones that are involved in retail payment services and whose main business is not related to taking deposits from the public and using these deposits to make loans (See. Fn. 7 above).

However, one could always question the prudence of the short timelines given by the regulator to existing as well as new payment intermediaries in achieving the required capital limits for PA business. There might be a trade-off between innovations that fintech could bring to the table in PA space over the stringent absolute capital requirements. While for the completely new non-bank entity the higher capital requirement (irrespective of the size of business operations of PA entity) might itself pose a challenge. Whereas, for the other non-bank entities with existing business activities such as NBFCs, e-commerce platforms, and others, achieving ring-fencing of assets in itself would be cumbersome and could be in confrontation with the regulatory intention. It is unclear whether financial institutions carrying financial activities as defined under section 45 of the RBI Act, would be permitted by the regulator to carry out payment aggregator activities. However, in doing so, certain additional measures could be applicable to such financial entities.

Conclusion

The payment aggregator business models in India are typically based on front-end services, i.e. the non-bank entitles are aggressively entering into retail payment businesses by way of providing direct services to merchants. The ability of non-bank entitles to penetrate into merchant onboarding processes, has far overreaching growth potential than merchant on-boarding processes of traditional banks. While the market is at the developmental stage, nevertheless there has to be a clear definitive ex-ante system in place that shall provide certainty to the payment transactions. The CPSS-IOSCO, governing principles for FMIs lays down a good principle-based governing framework for lawyers/regulators and system participants to understand the regulatory landscape and objective behind the regulation of payment systems. PA Guidelines establishes a clear, definitive framework of rights between the participants in the payment system, and relies strongly on board policies and contractual arrangements amongst payment aggregators and other participants. Therefore, adequate care is necessitated while drafting escrow agreements, merchant-on boarding policies, and customer grievance redressal policies to abide by the global best practices and meet the objective of underlying regulation. In hindsight, it will be discovered only in time to come whether the one-size-fits-all approach in terms of capital requirement would prove to be beneficial for the overall growth of PA business or will cause a detrimental effect to the business space itself.

 

[1] RBI, Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries, November 24, 2009. https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5379

[2] Payment Systems in India – Booklet (rbi.org.in)

[3] https://m.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1293

[4] https://www.investindia.gov.in/sector/retail-e-commerce

[5] The Bank for International Settlements (BIS), Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO) published 24 principles for financial market infrastructures and  and responsibilities of central banks, market regulators and other authorities. April 2012 <https://www.bis.org/cpmi/publ/d101a.pdf>

[6]Regulation and Supervision of Financial Market Infrastructures, June 26, 2013 https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2705

[7] CPMI defines non-banks as “any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans”  See, CPMI, ‘Non-banks in retail Payments’, September 2014, available at <https://www.bis.org/cpmi/publ/d118.pdf>

 

Our other related articles:

Overview of Regulatory Framework of Payment and Settlement Systems in India by Anita Baid – Vinod Kothari Consultants

RBI to regulate operation of payment intermediaries – Vinod Kothari Consultants

Major recommendations of the Committee on Payment Systems on Payment and Settlement System Bill, 2018 – Vinod Kothari Consultants

Factoring Law Amendments backed by Standing Committee

-Megha Mittal 

[finserv@vinodkothari.com]

In the backdrop of the expanding transaction volumes, and with a view to address the still prevalent delays in payments to sellers, especially MSMEs, the Factoring Regulation (Amendment) Bill, 2020 (‘Amendment Bill’) was introduced in September, 2020, so as to create a broader and deeper liquid market for trade receivables.

The proposed amendments have been reviewed and endorsed by the Standing Committee of Finance chaired by Shri. Jayant Sinha, along with some key recommendations and suggestions to meet the objectives as stated above.  In this article, we discuss the observations and recommendations of the Standing Committee Report  in light of the Amendment Bill.

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Banking exposure to open the current account by the banks

-Siddarth Goel (finserv@vinodkothari.com)

Background

Declaration from current account customers

The RBI issued a circular dated August 06, 2020, whereby the regulator instructed all scheduled commercial banks and payments banks shall not open a current account for customers who have availed credit facilities in form of cash credit (CC)/overdraft (OD) from the banking system. The motive behind the circular being that all the transactions of borrowers should be routed through the CC/OD account.

The genesis of this circular was in RBI circular dated May 15, 2004, where banks were advised that at the time of opening of current accounts for their customers, they have to insist on a declaration form by the account-holder to the effect that he is not enjoying any credit facility with any other bank or obtain a declaration giving particulars of credit facilities enjoyed by such customer. The move was in essence to secure the overall credit discipline in banking so that there is no diversion of funds by the borrowers to the detriment of the banking system. Post-May 15, 2004, a clarification notification was issued by the regulator dated August 04, 2004, stipulating that in case there is no response obtained concerning NOC after waiting a minimum period of a fortnight, the banks may open current accounts of the customers.

Thus there was an obligation on banks to scrupulously ensure that their branches do not open current accounts of entities that enjoy credit facilities (fund based or non-fund based) from the banking system without specifically obtaining a No-Objection Certificate (NOC) from the lending bank(s). Further, the non-adherence by banks as per the circular is to be perceived as abetting the siphoning of funds and such violations which are either reported to RBI or noticed during the regulator inspection would make the concerned banks liable for penalty under Banking Regulation Act.

Establishment of CRILC

The RBI established a Central Repository of Information on Large Credits (CRILC). The CRILC was established in connection to the RBI framework “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy“. As under the framework banks were required to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs. 5 Crores and above with them. Besides banks were required to furnish current accounts of their customers with outstanding balance (debit or credit) of Rs 1 Crore and above to the CRILC. The reporting under the extant framework was to determine SMA-0 classification, where the principal or interest payment is not overdue for more than 30 days but account showing signs of stress. An increase in the frequency of overdrafts in current accounts is one of the illustrative methods for determining stress.

Reposting of large credits

Post establishment of CRILC, a subsequent guideline on the opening of current accounts by banks was issued by the RBI via circular dated July 02, 2015, dealing with the same subject. To enhance credit discipline, especially for the reduction in NPA level in banks, banks were asked to use the information available in CRILC and not limit their due diligence to seeking NOC. Banks were to verify from the data available in the CRILC database whether the customer is availing of credit facility from another bank.

The chart below highlights the series and events and relevant circulars.

Credit Discipline- August 06, 2020 Circular

As per the circular dated August 06, 2020, issued by the regulator on Opening of Current Accounts by Banks – Need for Discipline (‘Revised Guidelines’), there are two aspects that need to be considered before opening a CC/OD facility or opening the current account of the customer. The Revised Guidelines provides a clear guiding flowchart for banks to follow when the customer approaches a bank for opening of the current account, the same has been categorised into two scenarios which could be considered by the banks to comply with the revised guideline.

Case 1: Customer wants to avail or is already having a credit facility in form of CC/OD

Case 2: Customer wants to open a current account or have an existing current account with the bank

 

Further, there is a requirement on banks to monitor all CC/OD accounts regularly at least quarterly, especially concerning the exposure of the banking system to the borrower. There has been an ambiguity surrounding what would amount to ‘exposure’ under the Revised Guidelines.

‘Exposure to the banking system’ under Revised Guidelines

The Revised Guidelines provides that exposure shall mean the sum of sanctioned ‘fund based and non-fund based credit facilities’. However, there is a regulatory ambiguity, since neither the term used by the RBI has been specifically defined in the Revised Guideline nor elsewhere under any other regulations. There is no straight jacket exclusive definition for determining as to what exposure banks should include determining funded and non-funded credit facilities. Therefore, based on back-tracing of regulatory regime an inclusive list can be of guidance for banks and borrowers especially large borrowers (like NBFCs and HFCs) and other financial institutions and corporates who rely on banking facilities (current account and CC/OD) extensively for their business.

The CRILC may not be the only source for banks while the collection of borrower’s credit information. Other modes could be information by Credit Information Companies (CICs), National E-Governance Services Ltd. (NeSL), etc., and even by obtaining customers’ declaration, if required. However, since the revised guideline stresses on borrowers having exposure more than 5 crores, therefore, information disseminated by the banks to CRILC is a good point to start with and to comply with under the revised guidelines. The circular dated July 02, 2015, draws reference to the Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate data on all borrowers’ credit exposures. The guideline further provided banks to verify the data available in the CRILC database whether the customer is availing credit facility from another bank. Further even under the Guidelines on “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders” dated January 30, 2014, provided that credit information shall include all types of exposures as defined under RBI Circular on Exposure Norms.

The RBI Exposure Norms dated July 01, 2015, defines exposure as;

“Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments). The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding as the exposure.”

The banking exposure norms provide for two exposures; namely credit and investment exposures. Further RBI Exposure Norms defines ‘credit exposure’ and ‘Investment Exposure’ as follows;

“2.1.3.3. Credit Exposure

Credit exposure comprises the following elements:

(a) all types of funded and non-funded credit limits.

(b) facilities extended by way of equipment leasing, hire purchase finance and factoring services.

2.1.3.4 Investment Exposure

  1. a) Investment exposure comprises the following elements:

(i) investments in shares and debentures of companies.

(ii) investment in PSU bonds

(iii) investments in Commercial Papers (CPs).

  1. b) Banks’ / FIs’ investments in debentures/ bonds / security receipts / pass-through certificates (PTCs) issued by an SC / RC as compensation consequent upon sale of financial assets will constitute exposure on the SC / RC. In view of the extraordinary nature of the event, banks / FIs will be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis.
  2. c) The investment made by the banks in bonds and debentures of corporates which are guaranteed by a PFI1(as per list given in Annex 1) will be treated as an exposure by the bank on the PFI and not on the corporate.
  3. d) Guarantees issued by the PFI to the bonds of corporates will be treated as an exposure by the PFI to the corporates to the extent of 50 per cent, being a non-fund facility, whereas the exposure of the bank on the PFI guaranteeing the corporate bond will be 100 per cent. The PFI before guaranteeing the bonds/debentures should, however, take into account the overall exposure of the guaranteed unit to the financial system.”

The Revised Guidelines, specifically define exposure in a footnote to the revised guideline stipulating that to arrive at aggregate exposures in the footnote as follows;

“‘Exposure’ for the purpose of these instructions shall mean sum of sanctioned fund based and non-fund based credit facilities”.

Further the RBI in its subsequent FAQs on revised guidelines dated December 14, 2020, guided on what could be included in aggregate exposure.

4. Whether aggregate exposure shall include Day Light Over Draft (DLOD)/ intra-day facilities and irrevocable payment commitments, limits set up for transacting in FX and interest rate derivatives, CPs, etc.

All fund based and non-fund based credit facilities sanctioned by the banks and carried in their Indian books shall be included for the purpose of aggregate exposure.”

Further in FAQ No. 3 in the circular dated December 14, 2020, the RBI clarified that

3. For the purpose of this circular, whether exposure of non-banking financial companies (NBFCs) and other financial institutions like National Housing Bank (NHB) shall be included in computing aggregate exposure of the banking system.

The instructions are applicable to Scheduled Commercial Banks and Payments Banks. Accordingly, the aggregate exposure for the purpose shall include exposures of these banks only”

While the regulator evaded assigning express meaning as to what could be included while determining banking exposure and took an inclusive view. However, from the foregoing, it is amply clear that the credit facilities should include credit exposures (funded and not funded) that have been sanctioned by banks. Therefore, only exposures to banks and payments banks are to be included while calculating exposures, any or all the exposure of a borrower to the other financial institutions like NHB, LIC Housing, SIDBI, NABARD, Mutual funds & other development Banks are neither commercial banks nor payments banks hence are to be excluded. [The list of licensed payments banks by the RBI can be viewed here. ]

CIRLC captures credit information of borrowers having aggregate fund-based and non-fund based exposures of Rs. 5 Crores and above including investment exposures. The banks are required to submit a quarterly return to CIRLC. It is pertinent to note that total investment exposure is to be indicated separately under the head total investment exposure. While there is a need for a detailed breakup on fund-based and non-fund based credit facilities in the CIRLC return. The table below is an indicative list of (funded and non-funded) loans to be submitted from the CIRLC return.

 

Non-Funded credit exposure  Funded credit exposure
Letter of Credit Cash Credit/ Overdraft
Guarantees Working Capital Demand Loan (including CPs)*
Acceptances Inland Bills
Foreign Exchange Contracts Packing Credit
Interest Rate Derivatives (incl FX Interest Rate Derivatives) Export Bills
Term Loan
Credit equivalent of OBS/derivative exposure

*CP to be included in WCDL only if part of working capital sanctioned limit. All other CPs are to be considered as investment exposure.

Therefore, all the investment exposures of banks to the borrower such as investments in corporate bonds, shares, PTCs issued by asset reconstruction companies and securitisation companies, and others are to be excluded while arriving at aggregate fund-based and non-fund based credit facilities as under the Revised Guidelines. Nevertheless, the PTCs issued by NBFCs or HFCs are investment exposure of banks on the underlying loan pools and not on the originator entity. Similarly, exposure of a bank in a co-lending transaction is exposure on the ultimate obligor and not the co-originating partner NBFC.

 

 

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-Kanakprabha Jethani (kanak@vinodkothari.com)

The Rise of Stablecoins amidst Instability

-Megha Mittal

(mittal@vinodkothari.com

The past few years have witnessed an array of technological developments and innovations, especially in Fintech; and while the world focused on Bitcoins and other cryptos, a new entrant ‘Stablecoin’ slowly crept its way into the limelight. With the primary motive of shielding its users from the high volatility associated with cryptos, and promises of boosting cross-border payments and remittance, ‘Stablecoins’ emerged in 2018, and now have become the focal point of discussion of several international bodies including the Financial Standards Board (FSB), G20, Financial Action Task Force (FATF) and International Organization of Securities Commission (IOSCO).

Additionally, the widespread notion that the desperate need of cross-border payments and remittances during the ongoing COVID-crisis may prove to be a defining moment for stablecoins, has drawn all the more attention towards the need of establishing regulations and legal framework pertaining to Stablecoins.

In this article, we shall have an insight as to what Stablecoins, (Global Stable Coinss) are, its modality, its current status of acceptance by the international bodies, and how the ongoing COVID crisis, may act as a catalyst for its rise.

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RBI to regulate operation of payment intermediaries

Guidelines on regulation of Payment Aggregators and Payment Gateways issued

-Mridula Tripathi (finserv@vinodkothari.com)

Background

In this era of digitalisation, the role of intermediaries who facilitate the payments in an online transaction has become pivotal. These intermediaries are a connector between the merchants and customers, ensuring the collection and settlement of payment. In the absence of any direct guidelines and adequate governance practices regulating the operations of these intermediaries, there was a need to review the existing instructions issued in this regard by the RBI. Thus, the need of regulating these intermediaries has been considered cardinal by the regulator.

RBI had on September 17, 2019 issued a Discussion Paper on Guidelines for Payment Gateways and Payment Aggregators[1] covering the various facets of activities undertaken by Payment Gateways (PGs) and Payment Aggregators (PAs) (‘Discussion Paper’). The Discussion Paper further explored the avenues of regulating these intermediaries by proposing three options, that is, regulation with the extant instructions, limited regulation or full and direct regulation to supervise the intermediaries.

In this regard, the final guidelines have been issued by the RBI on March 17, 2020 which shall be effective from April 1, 2020[2], for regulating the activities of PAs and providing technology-related recommendations to PGs (‘Guidelines’).

In this article we shall discuss the concept of Payment Aggregator and Payment Gateway. Further, we intend to cover the applicability, eligibility norms, governance practices and reporting requirements provided in the aforesaid guidelines.

Concept of Payment Aggregators and Payment Gateways

In common parlance Payment Gateway can be understood as a software which enables online transactions. Whenever the e-interface is used to make online payments, the role of this software infrastructure comes into picture. Thinking of it as a gateway or channel that opens whenever an online transaction takes place, to traverse money from the payer’s credit cards/debit cards/ e-wallets etc to the intended receiver.

Further, the role of a Payment Aggregator can be understood as a service provider which includes all these Payment Gateways. The significance of the Payment Aggregators lies in the fact that Payment Gateway is a mere technological base which requires a back-end operator and this role is fulfilled by the Payment Aggregator.

A merchant (Seller) providing goods/services to its target customer would require a Merchant Account opened with the bank to accept e-payment. Payment Aggregator can provide the same services to several merchants through one escrow account without the need of opening multiple Merchant Accounts in the bank for each Merchant.

The concept of PA and PG as defined by the RBI is reproduced herein below:

PAYMENT AGGREGATORS (PAs) means the entities which enable e-commerce sites and merchants to meet their payment obligation by facilitating various payment options without creation of a separate payment integration system of their own. These PAs aggregate the funds received as payment from the customers and pass them to the merchants after a certain time period.

PAYMENT GATEWAYS (PGs) are entities that channelize and process an online payment transaction by providing the necessary infrastructure without actual handling of funds.

The Guidelines have also clearly distinguished Payment Gateways as providers of technological infrastructure and Payment Aggregators as the entities facilitating the payment. At present, the existing PAs and PGs have a variety of technological set-up and their infrastructure also keeps changing with time given the business objective for ensuring efficient processing and seamless customer experience. Some of the e-commerce market places have leveraged their market presence and started offering payment aggregation services as well. Though the primary business of an e-commerce marketplace does not come within the regulatory purview of RBI, however, with the introduction of regulatory provisions for PAs, the entities will end up being subjected to dual regulation. Hence, it is required to separate these two activities to enable regulatory supervision over the payment aggregation business.

The extant regulations[3] on opening and operation of accounts and settlement of payments for electronic payment transactions involving intermediarieswe were applicable to intermediaries who collect monies from customers for payment to merchants using any electronic / online payment mode. The Discussion Paper proposed a review of the said regulations and based on the feedback received from market participants, the Guidelines have been issued by RBI.

Coverage of Guidelines

RBI has made its intention clear to directly regulate PAs (Bank & Non-Bank) and it has only provided an indicative baseline technology related recommendation. The Guidelines explicitly exclude Cash on Delivery (CoD) e-commerce model from its purview. Surprisingly, the Discussion Paper issued by RBI in this context intended on regulating both the PAs & PGs, however, since PGs are merely technology providers or outsourcing partners they have been kept out of the regulatory requirements.

The Guidelines come into effect from April 1, 2020, except for requirements for which a specific deadline has been prescribed, such as registration and capital requirements.

Registration requirement

Payment Aggregators are required to fulfil the requirements as provided under the Guidelines within the prescribed timelines. The Guidelines require non-bank entities providing PA services to be incorporated as a company under the Companies Act, 1956/2013 being able of carrying out the activity of operating as a PA, as per its charter documents such as the MoA. Such entities are mandatorily required to register themselves with RBI under the Payment and Settlement Systems Act, 2007 (‘PSSA, 2007’) in Form-A. However, a deadline of June 30, 2021 has been provided for existing non-bank PAs.

Capital requirement

RBI has further benchmarked the capital requirements to be adhered by existing and new PAs. According to which the new PAs at the time of making the application and existing PAs by March 31, 2021 must have a net worth of Rs 15 crore and Rs 25 crore by the end of third financial year i.e. March 31, 2023 and thereafter. Any non-compliance with the capital requirements shall lead to winding up of the business of PA.

As a matter of fact, the Discussion Paper issued by RBI, proposed a capital requirement of Rs 100 crore which seems to have been reduced considering the suggestion received from the market participants.

To supervise the implementation of these Guidelines, there is a certification to be obtained from the statutory auditor, to the effect certifying the compliance of the prescribed capital requirements.

Fit and proper criteria

The promoters of PAs are expected to fulfil fit and proper criteria prescribed by RBI and a declaration is also required to be submitted by the directors of the PAs. However, RBI shall also assess the ‘fit and proper’ status of the applicant entity and the management by obtaining inputs from various regulators.

Policy formulation

The Guidelines further require formulation and adoption of a board approved policy for the following:

  1. merchant on-boarding
  2. disposal of complaints, dispute resolution mechanism, timelines for processing refunds, etc., considering the RBI instructions on Turn Around Time (TAT)
  3. information security policy for the safety and security of the payment systems operated to implement security measures in accordance with this policy to mitigate identified risks
  4. IT policy(as per the Baseline Technology-related Recommendations)

Grievance redressal

The Guidelines have put in place mandatory appointment of a Nodal Officer to handle customer and regulator grievance whose details shall be prominently displayed on the website thus implying good governance in its very spirit. This is similar to the requirement for NBFCs who are required to appoint a Nodal Officer. Also, it is required that the dispute resolution mechanism must contain details on types of disputes, process of dealing with them, Turn Around Time (TAT) for each stage etc.

However, in this context, the Discussion Paper provided for a time period of 7 working days to promptly handle / dispose of complaints received by the customer and the merchant.

Merchant on boarding and KYC compliance

To avoid malicious intent of the merchants, PAs should undertake background and antecedent check of the merchants and are responsible to check Payment Card Industry-Data Security Standard (PCI-DSS) and Payment Application-Data Security Standard (PA-DSS) compliance of the infrastructure of the merchants on-boarded and carry a KYC of the merchants on boarded. It also provides for some mandatory clauses to be incorporated in the agreements to be executed with the merchants.

Risk Management

For the purposes of risk management, apart from adoption of an IS policy, the PAs shall also have a mechanism to monitor, handle and report cyber security incidents and breaches. They are also prohibited to allow online transactions with ATM pin and store customer card credentials on the servers accessed by the merchants and are required to comply with data storage requirements as applicable to Payment System Operators (PSOs).

Reporting Requirements

The Guidelines provide for monthly, quarterly and annual reporting requirement. The annual requirement comprises of certification from a CA and IS audit report and Cyber Security Audit report. The quarterly reporting again provides for certification requirement and the monthly requirement demand a transaction statistic. Also, there shall be reporting requirement in case of any change in management requiring intimation to RBI within 15 days along with ‘Declaration & Undertaking’ by the new directors. Apart from these mainstream reporting requirements there are non-periodic requirements as well.

Additionally, PAs are required to submit the System Audit Report, including cyber security audit conducted by CERTIn empanelled auditors, within two months of the close of their financial year to the respective Regional Office of DPSS, RBI

Escrow Account Mechanism

The Guidelines clearly state that the funds collected from the customers shall be kept in an escrow account opened with any Schedule Commercial Bank by the PAs. And to protect the funds collected from customers the Guidelines state that PA shall be deemed as a ‘Designated Payment System’[4] under section 23A of PSSA, 2007.

Shift from Nodal to Escrow

The Discussion Paper proposed registration, capital requirement, governance, risk management and such other regulations along with the maintenance of a nodal account to manage the funds of the merchants. Further, it acknowledged that in case of nodal accounts, there is no beneficial interest created on the part of the PAs; the fact that they do not form part of the PA’s balance sheet and no interest can be earned on the amount held in these account. The Guidelines are more specific about escrow accounts and do not provide for maintenance of nodal accounts, which seems to indicate a shift from nodal to escrow accounts with the same benefits as nodal accounts and additionally having an interest bearing ‘core portion’. These escrow account arrangements can be with or without a tripartite agreement, giving an option to the merchant to monitor the transactions occurring through the escrow. However, in practice it may not be possible to make each merchant a party to the escrow agreement.

Timelines for settlement to avoid unnecessary delay in payments to Merchants, various timelines have been provided as below:

  1. Amounts deducted from the customer’s account shall be remitted to the escrow account maintaining bank on Tp+0 / Tp+1 basis. (Tp is the date of debit to the customer’s account against good/services purchased)
  2. Final settlement with the merchant
  3. In cases where PA is responsible for delivery of goods / services, the payment to the merchant shall be made on Ts + 1 basis. (Ts is the date of intimation by merchant about shipment of goods)
  4. In cases where merchant is responsible for delivery, the payment to the merchant shall be on Td + 1 basis. (Td is the date of confirmation by the merchant about delivery of goods)
  5. In cases where the agreement with the merchant provides for keeping the amount by the PA till expiry of refund period, the payment to the merchant shall be on Tr + 1 basis. (Tr is the date of expiry of refund period)

Also, refund and reversed transactions must be routed back through the escrow account unless as per contract the refund is directly managed by the merchant and the customer has been made aware of the same. A minimum balance requirement equivalent to the amount already collected from customer as per ‘Tp’ or the amount due to the merchant at the end of the day is required to be maintained in the escrow account at any time of the day.

Permissible debits and credits

Similar to the extant regulations, the Guidelines provide a specific list of debits and credits permissible from the escrow account:

  • Credits that are permitted
  1. Payment from various customers towards purchase of goods / services.
  2. Pre-funding by merchants / PAs.
  3. Transfer representing refunds for failed / disputed / returned / cancelled transactions.
  4. Payment received for onward transfer to merchants under promotional activities, incentives, cashbacks etc.
  • Debits that are permitted
  1. Payment to various merchants / service providers.
  2. Payment to any other account on specific directions from the merchant.
  3. Transfer representing refunds for failed / disputed transactions.
  4. Payment of commission to the intermediaries. This amount shall be at pre-determined rates / frequency.
  5. Payment of amount received under promotional activities, incentives, cash-backs, etc.

The aforesaid list of permitted deposits and withdrawals into an account operated by an intermediary is wider than those allowed under the extant regulations. The facility to pay the amount held in escrow to any other account on the direction of the merchant would now enable cashflow trapping by third party lenders or financier. The merchant will have an option to provide instructions to the PA to directly transfer the funds to its creditors.

The Guidelines expressly state that the settlement of funds with merchants will in no case be co-mingled with other business of the PA, if any and no loans shall be available against such amounts.

No interest shall be payable by the bank on balances maintained in the escrow account, except in cases when the PA enters into an agreement with the bank with whom the escrow account is maintained, to transfer “core portion”[5] of the amount, in the escrow account, to a separate account on which interest is payable. Another certification requirement to be obtained from auditor(s) is for certifying that the PA has been maintaining balance in the escrow account.

Technology-related Recommendations

Several technology related recommendations have been separately provided in the Guidelines and are mandatory for PAs but recommendatory for PGs. These instructions provide for adherence to data security standards and timely reporting of security incidents in the course of operation of a PA. It proposes involvement of Board in formulating policy and a competent pool of staff for better operation along with other governance and security parameters.

Conclusion

With these Guidelines being enforced the online payment facilitated by intermediaries will be regulated and monitored by the RBI henceforth. The prescribed timeline of April 2020 may cause practical difficulties and act as a hurdle for the operations of existing PAs. However, the timelines provided for registration and capital requirements are considerably convenient for achieving the prescribed benchmarks. Since PAs are handling the funds, these Guidelines, which necessitate good governance, security and risk management norms on PAs, are expected to be favourable for the merchants and its customers.

 

[1] https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=943

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11822&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5379&Mode=0

[4] The Reserve Bank may designate a payment system if it considers that designating the system is in the public interest. The designation is to be by notice in writing published in the Gazette, as per Payment System Regulation Act, 1998

[5] This facility shall be permissible to entities who have been in business for 26 fortnights and whose accounts have been duly audited for the full accounting year. For this purpose, the period of 26 fortnights shall be calculated from the actual business operation in the account. ‘Core Portion’ shall be average of the lowest daily outstanding balance (LB) in the escrow account on a fortnightly (FN) basis, for fortnights from the preceding month 26.

 

 

Our other write ups on NBFCs to be referred here http://vinodkothari.com/nbfcs/

Our other similar articles:

http://vinodkothari.com/2017/04/overview-of-regulatory-framework-of-payment-and-settlement-systems-in-india-by-anita-baid/

Cryptotrading’s tryst with destiny- Supreme Court revives cryptotrading, RBI’s circular struck down

-Megha Mittal

(mittal@vinodkothari.com

April 2018, the Reserve Bank of India (RBI) issued a “Statement on Developmental and Regulatory Policies” (‘Circular’) dated 06.04.2018, thereby prohibiting RBI regulated entities from dealing in/ providing any services w.r.t. virtual currencies, with a 3-month ultimatum to those already engaged in such services. Cut to 4th March, 2020- The Supreme Court of India strikes down RBI’s circular and upheld crypto-trading as valid under the Constitution of India.

Amidst apprehensions of crypto-trading being a highly-volatile and risk-concentric venture, the Apex Court, in its order dated 04.03.2020 observed that RBI, an otherwise staunch critic of cryptocurrencies, failed to present any empirical evidence substantiating cryptocurrency’s negative impact on the banking and credit sector in India; and on the basis of this singular fact, the Hon’ble SC stated RBI’s circular to have failed the test of proportionality.

In this article, the author has made a humble attempt to discuss this landmark judgment and its (dis)advantages to the Indian economy.

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RBI introduces another minimum details PPI

BACKGROUND

The Reserve Bank of India (RBI) has vide its notification[1] dated December 24, 2019, introduced a new kind of semi-closed Prepaid Instrument (PPI) which can only be loaded from a bank account and used for purchase of goods and services and not for funds transfer. This PPI has been introduced in furtherance of Statement on Developmental and Regulatory Policies[2] issued by the RBI. The following write-up intends to provide a brief understanding of the features of this instrument and carry out a comparative analysis of features of existing kinds of PPIs and the newly introduced PPI.

BASIC FEATURES

The features of the newly introduced PPIs has to be clearly communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the PPI / before the first loading of funds. Following shall be the features of the newly introduced PPI:

  • Issuer can be banks or non-banks.
  • The PPI shall be issued on obtaining minimum details, which shall include a mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘officially valid document’ (OVD) listed in the KYC Direction.
  • The new PPI shall not require the issuer to carry out the Customer Due Diligence (CDD) process, as provided in the Master Direction – Know Your Customer (KYC) Direction (‘KYC Directions)[3].
  • The amount loaded in such PPIs during any month shall not exceed ₹ 10,000 and the total amount loaded during the financial year shall not exceed ₹ 1,20,000.
  • The amount outstanding at any point of time in such PPIs shall not exceed ₹ 10,000.
  • Issued as a card or in electronic form.
  • The PPIs shall be reloadable in nature. Reloading shall be from a bank account only.
  • Shall be used only for purchase of goods and services and not for funds transfer.
  • Holder shall have an option to close the PPI at any time and the outstanding balance on the date of closure shall be allowed to be transferred ‘back to source.’

COMPARATIVE ANALYSIS

The Master Direction on Issuance and Operation of Prepaid Payment Instruments[4] contain provisions for two other kinds of semi-closed PPIs having transaction limit of ₹10,000. The features of these PPIs seem largely similar. However, there are certain differences as shown in the following table:

 

Basis PPIs upto ₹ 10,000/- by accepting minimum details of the PPI holder

(Type 1)

PPIs upto ₹ 1,00,000/- after completing KYC of the PPI holder 

(Type 2)

PPIs upto ₹ 10,000/- with loading only from bank account

(Type 3)

Issuer Banks and non-banks Banks and non-banks Banks and non-banks
PPI holder identification procedure Based on minimum details (mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the officially valid document (OVD) as per PML Rules 2005[5]) KYC procedure as provided in KYC Directions Based on minimum details (mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’[6] or OVD as per KYC Directions[7]
Reloading Allowed Allowed Allowed (only from a bank account)
Form Electronic Electronic Card or electronic
Limit on outstanding balance ₹ 10,000 ₹ 1,00,000 ₹ 10,000
Limit on reloading ₹ 10,000 per month and ₹ 1,00,000 in the entire financial year Within the overall PPI limit ₹ 10,000 per month and ₹ 1,20,000 during a financial year
Transaction limits ₹ 10,000 per month ₹ 1,00,000 per month in case of pre-registered beneficiaries and  ₹ 10,000 per month in all other cases ₹ 10,000 per month
Utilisation of amount Purchase of goods and services Purchase of goods and services and transfer to his bank account or ‘back to source’ Purchase of goods and services
Conversion Compulsorily be converted into Type 2 PPIs (KYC compliant) within 24 months from the date of issue No provisions for conversion Type 1 PPIs maybe converted to Type 3, if desired by the holder
Restriction on issuance to single person Cannot be issued to same person using the same mobile number and same minimum details more than once No such provision No such provision
Closure of PPI Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ or to other PPIs of the holder Holder to have option to close and transfer the outstanding balance ‘back to source’ (i.e. the bank account of the holder only)
Pre-registered Beneficiary Facility not available Facility available Facility not available

THE UPPER HAND

Based on the aforesaid comparative analysis, it is clear that for issuance of the newly introduced PPI or the Type 3 PPI, the issuer is not required to undertake the CDD process as provided in the KYC Directions. Only authentication through mobile number and OTP supplemented with a self-declaration regarding of details provided in the OVD shall suffice. This implies that the issuer shall not be required to “Originally See and Verify” the KYC documents submitted by the customer. This would result into digitisation of the entire transaction process and cost efficiency for the issuer.

Compared to the other 2 kinds of PPIs, one which requires carrying out of the KYC process prescribed in the KYC Directions and the other, which can be issued without carrying out the prescribed KYC process but has to be converted into Type 2 PPI within 24 months, this new PPI can be a good shot aiming at ease of business and digital payments upto a certain transaction limit.

CONCLUSION

The newly issued PPI will ensure seamless flow of the transaction. As compared to other PPIs, it will be easier to obtain such PPIs. Further, the limitations such as reloading only from the bank account, restriction of transfer of money from PPI etc. are some factors that shall regulate the usage of such PPIs. These may, however, pull back their acceptance in the digital payments space.

 

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11766&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803

[3] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566

[4] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

[5] “officially valid document” means the passport, the driving licence, the Permanent Account Number (PAN) Card, the Voter’s Identity Card issued by the Election Commission of India or any other document as may be required by the banking company, or financial institution or intermediary

[6] Permanent Account Number (PAN)

[7] “Officially Valid Document” (OVD) means the passport, the driving licence, proof of possession of Aadhaar number, the Voter’s Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government and letter issued by the National Population Register containing details of name and address.

 

Our other write-ups relating to PPIs can be viewed here:

 

Our other resources can be referred to here: