The Reserve Bank of India (RBI) has permitted non-banks to access Central Payment Systems. The RBI has taken the step to encourage the participation of non-banks in Reserve Bank of India-operated Central Payment Systems (CPS) viz. Real-Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) systems.
Direct access for non-banks to CPS lowers the overall risk in the payments ecosystem. It also brings advantages to non-banks like reduction in the cost of payments, minimizing dependence on banks, reducing the time taken for completing payments, eliminating the uncertainty in the finality of the payments as the settlement is carried out in central bank money, etc. The risk of failure or delay in the execution of fund transfers can also be avoided when the transactions are directly initiated and processed by the non-bank entities.
Access to the Central Payment Systems: Why was this required?
In India, the RBI operates both Central Payment Systems – Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) systems. The Reserve Bank has been taking steps to strengthen the payment ecosystem in general, and CPS in particular, as part of its push to encourage people to switch to digital payments.
One of the ways to encourage digital payments is to extend access to payment systems to more entities. This is also engaging the attention of other central banks globally. Apart from banks, very few select non-banks have been given the approval to participate in CPS so far. The non-banks which are permitted membership/access to CPS are standalone primary dealers, clearing corporations of stock exchanges, central counter parties, retail payment system organisations, select financial institutions (NABARD, EXIM Bank), and DICGC.
Banks have been providing services to non-banks for their payment and settlement needs. However, if the bank, which provides payment services to non-banks, is impacted, it can cause business disruption to the non-banks also. The disruption, even if temporary, could have the potential to cause and spread instability in the system. Consequently, the customers of the non-banks, who are using their products and services, would also get affected.
Therefore, direct access to CPS will improve the functioning of the non-banking entities and will bring an overall efficiency in the financial sector.
Direct Access: Meaning
Under the RBI’s circular by direct access to the CPS, non-banks can have a separate Indian Financial System Code (IFSC), open a Current Account with the Reserve Bank in its core banking system (e-Kuber), maintain a settlement account with the Reserve Bank, become a member of Indian Financial Network (INFINET) and use of Structured Financial Messaging System (SFMS) to communicate with CPS.
Benefits of Direct Access
- Efficiency: For non-banks, the cost of routing payments through banks can be minimised. The risk of failure or delay in execution of fund transfers can be eliminated if the transactions are directly initiated by non-banks.
- Competition and innovation: Non-banks increasingly and actively offer financial services which hitherto were the sole domain of banks. As non-banks compete in the same segment that banks operate, direct access can provide a level playing field, minimising the need to use intermediaries.
- Risk management and stability: As the settlement is carried out in central bank money, it greatly reduces the uncertainty in finality of the payments and settlement risk. Expanding access and participation facilitates diversity and resiliency of the ecosystem.
- Data protection: Direct access to CPS can enable the non-banks to safeguard customer information and fund flows, which may not be possible when using banks to provide payment services.
Access to non-banks in CPS will be enabled in a phased manner. In the first phase, only the following authorized non-bank PSPs shall be provided access:
- Prepaid Payment Instrument (PPI) Issuers;
- Card Networks; and
- White Label ATM Operators.
Non-banks include entities like Payment System Providers (PSPs) and Non-Banking Financial Companies (NBFCs) that are regulated by Reserve Bank as also entities that are under the remit of other financial sector regulators like PFRDA, IRDAI, SEBI, etc.
For access to CPS the non-bank PSPs shall fulfil the following criteria:
- Valid Certificate of Authorisation (CoA) from Reserve Bank under the Payment and Settlement Systems Act, 2007 (PSS Act).
- Net-worth of ₹25 crore or as prescribed as per CoA, whichever is higher.
- Incorporation in India under the Companies Act, 1956 / 2013. Entities not fulfilling this requirement shall empower their Indian subsidiary / associate to enter into valid agreements with RBI.
- Implementation of centralised processing systems.
- Adequate technical / system readiness including cyber resilience.
- Compliance with local payment data storage requirements issued by Reserve Bank from time to time.
- Adherence to Master Directions on Access Criteria for Payment Systems, RTGS System Regulations, NEFT Procedural Guidelines and other instructions prescribed by Reserve Bank from time to time.
- Satisfactory record of compliance to conditions laid out in CoA and regulatory guidelines.
- Recommendations of the concerned regulatory / supervisory department of Reserve Bank.
You can read the RBI’s Notification here.