India’s payments landscape is poised for a major directional change if the recommendations of the recently released RBI’s Nachiket Mor Committee report are accepted. There are many aspects to the report. However, this column confines its scope to the subject of payments, specifically, electronic or digital payments.
Central to the prescriptions on facilitating payments for financial inclusion is the new concept of ‘payments banks’, introduced by the Committee. While this recommendation has come positively-influenced by Brazil’s recent regulations for ‘payments institutions’, it differs in some crucial aspects. Brazil has created a new legal entity that allows non-banks such as digital wallet providers, card issuers, and mobile network operators to get a license and be regulated by the Central Bank. Payment institutions cannot issue credit but must follow stringent requirements, e.g., minimum capital, risk management processes, etc. Unlike the Mor Committee recommendations, these institutions do not provide deposit products.
In India, digital payments, particularly mobile payments (m-banking) have floundered mainly due to the challenges of regulating a business system that straddles two domains, ‘telecom’ and ‘banking’, each having its own independent regulator. There is no doubt that telcos can provide access to the last mile and the unbanked population. Yet, endless debate has stymied the definitional aspects in payments and banking; the struggle between telcos and banks has been a result of fuzziness over roles, liabilities and accountability, pricing of services, and ownership of customers.
RBI, which has gone about a cautious yet steady liberalisation in payment systems, has had two key concerns with non-banks: poor KYC (customer fraud) and systemic risk (money laundering). First, the consumer fraud risk in mobile banking remains inadequately addressed, as non-banks do not come under RBI deposits liability regulations. Second, banks have been concerned about KYC standards of non-banks and remain sceptical of even Aadhaar-based e-KYC in the absence of UIDAI accepting specific liabilities of false acceptance. Meanwhile, even though the RBI Governor has announced pilots to test the operational and technical aspects of Aadhaar-enabled cash-out from non-bank prepaid payments instrument providers, the pilot was postponed from last October to March this year, clearly taking a hit due to non-clarity of the legality of non-banks accepting money from customers.
The Mor Committee report seeks to settle these issues rather unambiguously through the following recommendations:
n Accepting deposits and providing payments may be done by payments banks, a new entity under the Banking Regulation Act. However, payments banks will