The RBI is butting heads with the central government over a proposal to establish an independent payments regulator

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The RBI is butting heads with the central government over a proposal to establish an independent payments regulator

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  • The Reserve Bank of India went public on 19 October with its disagreement regarding a proposal from the central government to establish an independent regulator to oversee all payments systems.
  • The proposal was put forth last month by an inter-ministerial committee as an amendment to the the Payment & Settlement Systems Act of 2007.
  • The RBI explained that since payments systems come under the umbrella of currency, it made sense for them to be overseen by the central bank since it was a currency regulator and monetary authority.

In a rare move, the Reserve Bank of India went public on 19 October about its disagreement with a proposal from the central government to establish an independent regulator to oversee all payments systems in the country. The move comes a few days after the central bank’s 15 October deadline for payment companies to demonstrate their compliance with local data storage norms expired.

The “dissent note”, as it was termed by the central bank, comprised a list of reasons why it was against the government’s decision to take the regulation of payments outside its current scope of responsibilities. The proposal was put forth last month by an inter-ministerial committee as an amendment to the the Payment & Settlement Systems Act of 2007.

The RBI explained that since payments systems came under the umbrella of currency and all issues related to currency, it made sense for their regulation to be overseen by the central bank since it was a currency regulator and monetary authority. Furthermore, as the settlement of payment transactions involves entries in the books of banking entities, it negates the need for dual regulators.

Payments systems are currently dominated by banks. The RBI has moved to make it easier for non-banking financial institutions and mobile wallet instruments from participating in the payments industry. Infact, last week it released guidelines for the transfer of funds between different “pre-paid instruments”.

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The central bank emphasised that since the banking system and payment system are two sides of the same coin it will be easier for the same regulator to oversee both, instead of creating another body - which would lead to greater costs and a potential overlap of responsibilities between different regulators.

The RBI has regulated payments for several years. After drawing attention to the international model under which most central banks are payments regulators, the RBI concluded by saying that the current system was “well-functioning” and there wasn’t any need to change it at the moment.

As a compromise, the RBI said that an payments regulator committee should be established which should be headed by the governor of the central bank and made up of three nominees each put forth by the RBI and central government.
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