An inter-ministerial committee set up by the Union government to examine the working and regulation of payments systems in India has submitted its recommendations to the finance ministry. The aim is to replace the Payment and Settlement Act, 2007, with an updated law, currently called the Payment and Settlement Services Bill. The committee’s draft has significantly streamlined the existing law, reducing the number of sections from 100 to 38 and cutting the number of possible actions by a regulator to just two. Overall, the broad thrust of the committee’s recommendations seems to be positive in this respect; a growing and relatively new sector needs a light touch in terms of regulation, as well as clarity from the authorities. It is unfortunate, however, that an element of controversy is brewing over the location and leadership of the proposed regulator. The committee has suggested that the head of the regulator be appointed by the government in consultation with the Reserve Bank of India (RBI), which, however, has strongly suggested that the head come from within the central bank itself, and have a controlling vote. There are some indications that this might develop into another squabble over jurisdiction of the sort that RBI-government relations can ill afford.
It is quite clear that the committee’s report moves in the right direction. There is no logical reason why the payments infrastructure should be managed by the central bank. Indeed, it is far better to have an independent regulator who is responsible for this sector. The suggestion also that there be a backbone of full-time regulators in the new body is one that should be followed — the RBI’s preferred approach, to have bankers from Mint Street and bureaucrats from New Delhi sit down together, is a recipe for delay, inaction and over-regulation. If the RBI is concerned at any point that aspects of the payments infrastructure are affecting the conduct of monetary policy, then it should convey that to the payments regulator, which will consider the argument on its merit. There is also no pressing reason why the same body should regulate the banks and the payments systems. In the United States and the United Kingdom, for example, multiple bodies — including but not limited to the central bank — have some authority over the payments architecture. In India, if a single regulator is to be set up in order to avoid regulatory arbitrage, it should be independent.
It is relevant in this respect to consider the fact that the RBI’s track record in this sector does not inspire a great deal of confidence. It has on occasion imposed more stringent rules for payments — such as two-factor authorisation even for micro-payments — than is the global norm. This may be because consumer satisfaction is not among its priorities. This cannot be allowed to be the case for the new regulator, which must consider consumer requirements as well as competition, growth and stability. In this context, therefore, the government must stand firm and reject the RBI’s attempt to take control of this new regulatory mechanism. Independence for the payments regulator is a must.