Indicus Centre for Financial Inclusion


RBI Payment and Settlement Systems: Vision 2018

The Reserve Bank of India has released the Payment and Settlement Systems in India: Vision-2018 with four strategic initiatives: responsive regulation, robust infrastructure, effective supervision and customer centricity.

  1. Firstly, RBI, in consultation with all the stakeholders, will continue its efforts to create a regulatory framework to promote twin objectives of enhanced coverage with interoperability of the payments system and convenience with security for the end-users in sync with emerging developments and innovations.
  2. Secondly, building a robust payments infrastructure in the country to increase the accessibility, availability, interoperability and security of the payment systems will continue to remain a key objective.
  3. Thirdly, Vision-2018 will focus on effectiveness of supervisory mechanisms to strengthen the resilience of the Financial Market Infrastructures (FMIs) and System Wide Important Payment Systems (SWIPS) in the country besides setting up appropriate oversight framework for new systems, and augmenting the data reporting and fraud monitoring systems.
  4. Finally, Vision-2018 will adopt a customer centric approach to streamline the customer grievance redressal mechanism, focus on building customer awareness and education, and initiate customer protection measures.

The document lays out the specific tasks to achieve by 2018 under each initiative. Since the The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems Regulations, 2008, the RBI has worked towards a less-cash economy, with the objective of ensuring that any person in the country can transact seamlessly with any other person in any other part of the country. While a strong foundation of robust infrastructure and efficient oversight and supervision are key to the transformation, the RBI is also focusing now on customer centricity, to ensure that the banks and payment service providers have appropriate customer protection measures and grievance redressal system in place.

Whither Payments Banks!

In August 2015, the RBI gave in-principle licenses to 11 of the 41 applicants for Payments Banks, they were to begin operations within 18 months. Of these 11, three have recently dropped out of the space – Cholamandalam Distribution Services, Dilip Shanghvi and Tech Mahindra. The media is abuzz.

In this piece,  Payments banks aren’t looking that lucrative anymore, (Livemint, 25th May 2016), Ira Dugal puts down three reasons why the economics does not make sense to many applicants – a) the low-margin, high volume business model is not everyone’s cup of tea, b) restrictions on deploying deposits curtails income options and c) competition from existing banks even in rural areas has heated up considerably over the past year. She concludes that the telcos would be the most natural fit for the Payments Banks business model and most likely to last the long race.

The Indian Express notes RBI Deputy Governor Mr. S S Mundra‘s reaction :

We would certainly feel little aggrieved because lot of efforts from the part of RBI goes in processing these applications,” Mundra told reporters here. …When asked whether RBI may levy processing fee on the entities which have pulled out, Mundra said the current regulation does not give scope of charging a processing fee. “Unfortunately, that kind of enabling mechanism is not there today. But if we learn by experience, probably this is something which can help in augmenting our revenue to some extent,” the deputy governor said in a lighter note.” 

R Jagannathan brings out the strengths in the firms remaining in the field in SwarajyaMag (May 25, 2016):

“In short, each of the players now left in the arena has a long-term and sound reason to get into payment banking. While payments banking may be a tough business, there is a strong likelihood that the licensing conditions for them will be liberalised once they establish a track record. The RBI is being over-cautious right now. The exit of three players is thus good, for the last thing a bold experiment needs is players unwilling to stay the course.”

Even as three have dropped out, firm dates for operations have already come from India Post for March 2017 (Livemint, May 22, 2016); Paytm is still gung-ho for August 2016 (Moneycontrol, May 24, 2016); Airtel is pushing for opening services sometime between July and September 2016 (Business Standard, May 2, 2016).

While it is true that those dropping out find the economics of Payments Banks difficult to stomach, there are some new factors that may have queered the pitch recently. For one, the Unified Payments Interface from NPCI will make it much easier and cheaper to remit money – see Latha Venkatesh on this (CNBCTV 18, May 24, 2016).

Further, given that the RBI recently released draft guidelines for on-tap banking licenses, it is possible that some players exiting now will repitch for a full bank license when the time comes!

Looking back, the announcement of Payments Banks approvals spurred existing full service banks to pull up their socks, especially when it came to mobile banking and digital services. Now with the stronger licensees like India Post and telcos with wide networks remaining in the field, India’s financial inclusion mission will definitely get a firmer foundation.


Strengthening BC network – RBI’s timeline

RBI’s First Bi-monthly Monetary Policy Statement, 2016-17 has set out two main tasks for strengthening the BC network: 

The BC model offers significant scope for further strengthening. Accordingly, the following initiatives are proposed:

  1. In order to ensure the competence of BCs and to promote quality delivery of financial services, a graded certification/training programme for BCs is proposed to be introduced. This would enable BCs with a good track record and advanced training to be entrusted with more complex tasks such as handling/delivery of financial products that go beyond deposit and remittance. The Reserve Bank will issue the necessary framework for establishing a certification programme for BCs by end-June 2016. Based on the framework, the Indian Banks’ Association (IBA) will be requested to put in place a system of training and certification of BCs in coordination with external training institutes.
  2. In order to have a tracking system of BCs, it is proposed to create a registry covering all BCs, both existing and new. The registration will be online and will capture basic details including location of fixed point BCs, nature of operations and the like. This database will be updated on a quarterly basis. The necessary enabling framework would be issued by the Reserve Bank by end-June 2016 and the IBA will be requested to put in place a registry of BC agents in consultation with all stakeholders.

One of the key recommendations made by Indicus in “Service Quality Standards in Telecom Connectivity for Financial Inclusion Policy Brief November, 2015” was to

“Put in place a unified, harmonised database of the financial inclusion footprint, in terms of outlets, service points, devices, connectivity and agent networks, aggregated and monitored by a single source.”

It is gratifying to note that this recommendation has been picked up by the RBI Committee on Medium Term Path for Financial Inclusion (Recommendation 6.7) and is now being implemented.

Budget 2016-17 and Aadhaar

The Finance Minister Mr. Arun Jaitley has announced the government’s intention to introduce a bill in this Budget session of the Parliament to give statutory basis to Aadhaar

In his Budget 2016-17 Speech on February 29th 2016, he noted:

we will introduce a bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar framework. The bill will be introduced in the current Budget Session of the Parliament. The Aadhar number or authentication shall not, however, confer any right of citizenship or domicile. A social security platform will be developed using Aadhar to accurately target beneficiaries. This will be a transformative piece of legislation which will benefit the poor and the vulnerable

At Indicus, we await full details of this Bill as the pending legislation has been a consistently called out by us in our policy briefs and op-eds – See

In addition for DBT he also announced the following measures:

    • We propose to introduce DBT on pilot basis for fertilizer in a few districts across the country, with a view to improving the quality of service delivery to farmers.
    • Of the 5.35 lakh Fair Price Shops in the country, automation facilities will be provided in 3 lakh Fair Price Shops by March 2017
    • The Director General of Supplies and Disposal (DGS&D) will establish a technology driven platform to facilitate procurement of goods and services by various Ministries and agencies of the Government.

JAM or BAPU – which works best for DBT?

The Economic Survey 2015-16 has an excellent chapter analysing the progress of JAM and impediments to its further spread. The Chapter Spreading JAM across India’s Economy analyses the existing schemes to conclude that the Centre should prioritise areas where it has the highest control over the first- and middle-mile factors and leakages are high. Fertiliser and within-government transfers stand out as good candidates.

There are clear maps that show the inadequacy of the last mile reach of the banking network and the varied penetration of mobile coverage across states. A JAM Preparedness Index has been constructed in rural and urban areas across states: There is as expected significant variation across states. When it comes to urban areas, some, like Madhya Pradesh and Chattisgarh, show preparedness scores of about 70 per cent. Others, like Bihar and Maharashtra, have scores of only about 25 per cent. The DBT rural preparedness scores are significantly worse than the urban scores, with an average of 3 per cent and a maximum of 5 per cent (Haryana).

The analysis concludes that unless the bank network is fixed at the last mile, the best strategy for the government is to go for BAPU – in other words – Biometrically Authenticated Physical Uptake. Beneficiaries verify their identities through scanning their thumbprint on a POS machine while buying the subsidised product—say kerosene at the PDS shop. This calls for automation of all PDS shops as well as installing Aadhaar-enabled POS machines at these shops.

The chapter notes: BAPU preparedness is much better than for Rural DBT preparedness. The average state preparedness is 12 per cent (Figure 12), but there are some states – like Andhra Pradesh (96 per cent), Chattisgarh (42 per cent) and Madhya Pradesh (27 per cent) – that with some policy push could be well-prepared for BAPU in the near future.

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