The National Payments Corporation of India (NPCI) is fast emerging as the most important payments system in India. The government has tended to favour the use of the NPCI, as an RBI backed entity, and also in part due to its ownership structure where state run banks account for a majority of shareholding. Private banks have limited ownership, and non-banks are not a part of the ownership structure at all. The NPCI operates the key switches in retail payments and its services are vigorously promoted by the government, with the latest proposal to give GST rebates on payments through RuPay, UPI, BHIM etc. (Indian Express, August 5, 2018).
The results of the government promotion over the last two years are showing - the value of IMPS transactions crossed INR 1000 billion in March 2018 and stood at INR 1130.1 billion in June 2018. UPI transactions increased from INR 100 crores in November 2016 to cross INR 40,000 crores in June 2018. However preferential treatment not only works against the principle of level playing field, but brings into focus other potential risks that come out of concentration or dominance. Interoperability between wallets has also been routed through UPI and card networks, further raising the importance of NPCI at the centre of India’s payments system.
The NPCI is not yet classified as a Financial Market Infrastructure (FMI) which will then have greater regulatory oversight. “An authorized payment system would be categorised as an FMI as and when it reaches systemic importance which could be based on various parameters such as (i) volume and value of transactions; (ii) share in the overall payment systems; (iii) markets in which it is operating; (iv) degree of interconnectedness and interdependencies; (v) criticality in terms of concentration of payment activities etc (RBI, Regulation and Supervision of Financial Market Infrastructures regulated by RBI). Recently, the RBI Governor noted, “In a span of about a decade of its existence, NPCI has gained the status of being a Systemically Important Payment Infrastructure (SIPI). Such a status brings with it added responsibility and I am sure that NPCI will continue to excel in its role of a pioneer payment system provider. I also believe that as a designated SIPI, NPCI will continue to pursue the highest levels of good governance, sustenance, innovation, reliability, and resilience. It should also continually assess the performance of its systems and products by benchmarking expected performance metrics in respect of technical declines, business declines, processing speed & capacity, etc.”(Urjit Patel, August 16, 2018).
However, in its Annual Report 2017-18, we find a stark contrast between the way NPCI and CCI are monitored (See BOX). While NPCI is supervised by the RBI DPSS, there is no public disclosure of the risk assessment and steps taken to mitigate the risks. There is also no visibility into the performance metrics such as technical declines, business declines etc, that the Governor has referred to in his speech. Further, any governance and HR issues raised by RBI etc may be more advisory in nature than mandated.
[BOX: “In the NPCI inspection, special emphasis was laid on assessing the various risks (i.e., legal, operational, settlement and reputation) and steps/measures are being put in place by NPCI for mitigating the same. Issues related to governance and human resources were also covered during the inspection. IX.16 Inspection of CCIL was undertaken in September 2017. CCIL was assessed for its performance as a central counterparty and trade repository against the 24 principles for financial market infrastructures (PFMIs) using the ‘Committee on Payments and Market Infrastructures - International Organization of Securities Commissions (CPMI-IOSCO) - Assessment Methodology’. As a measure of enhanced transparency, CCIL continued to disclose its self-assessment in compliance with the PFMIs on an annual basis, as per the ‘Disclosure Framework and Assessment Methodology’, prescribed in the PFMIs. CCIL also published its quantitative disclosures on a quarterly basis as per the public disclosure standards for CCPs.” RBI Annual Report 2017-18 ]
THE WAY FORWARD
When it comes to concentration in the retail digital payments space in India, while most segments are competitive, NPCI has become the main cog of the entire system, managing the dominant platform and key products. While there are definite advantages to this critical emerging role of the NPCI, certain reforms in governing its functioning must be initiated.
To begin with, there is a case for the NPCI to be dealt with as public good. Hence, in its communication with the Inter-Ministerial Committee for Finalisation of Amendments of the PSS Act, 2007 (Ministry of Finance, Government of India, August 2018), the DFS had recommended that there should be public/ government ownership of at-least 51% equity ownership in the NPCI and nominee directors on the board. However, the Inter-Ministerial Committee did not agree with this recommendation. It categorically stated that the government should not get involved into the ownership and management of payment systems and infrastructure systems, “if the concerns can be addressed without that”, and further went to recommend that the NPCI should be dealt with as an infrastructure system, with governance rules applicable to all designated payments and infrastructure systems. The view of the Committee is the appropriate way forward for India. Rather than increasing direct participation of the government in governance of payments system providers, we need a regulatory framework that focuses on ensuring the key principles guiding competition, keeping financial stability and customer protection at the front.
The crucial issue of separation of platform from product has been specified in the RBI guidelines when setting up the Bharat Bill Payments System. However, this separation remains to be addressed across the board for all segments in the payment process. The digital payments ecosystem is still in its early phase of evolution in India, and great innovation can still come from outside of NPCI, if it is allowed to. Concentration, whether public or private, can impact both competitiveness and innovation and over-dependence on a single platform has its risks, even if in the public sector. The way forward lies in ensuring interoperability, open access and free entry and exit, under transparent monitoring and supervision.
 Take the case of China where the new clearing platform, WangLian has a stake from Alipay, Tencent etc. Though WangLian is a non-bank payments settlement house, of its 45 shareholders, seven are backed by the Central Bank and hold 37% stake. The remaining 63% is held by third party-payment companies based on the scale of their transactions and the contribution they made to set up the platform (Six Payment Providers Secure Board Seats at Wanglian, China’s New Non-Bank Settlement Platform, YICAI, August 23, 2017).
 Committee on Digital Payments, Medium Term Recommendations to Strengthen Digital Payments Ecosystem, pp 68-69, December 2016, Ministry of Finance, Government of India.
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