India: Digitalization Of The Indian Economy|Payment Systems

Last Updated: 1 September 2017
Article by Mansukhlal Hiralal & Company

The demonetization action by the Government of India aimed to encourage and promote a digital India by making payments through digital means and thereby creating a cashless economy to enhance transparency for all transactions throughout India and make every transaction accountable.

In the recent years, the use of mobile banking, smart cards, e-wallets, prepaid cards etc have been increasing in India significantly. Such instruments are called Prepaid Payment Instruments (PPI) and are governed by the Payment & Settlement Systems Act, 2007 (PSS Act) and the Reserve Bank of India (RBI) Guidelines on PPI. Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments which represents the value paid for by the holders by cash, by debit to a bank account, or by credit card.

Some of the important features of the PSS Act and RBI Guidelines on PPI are as follows:

There are 3 types of PPI:

  • Closed System Payment Instruments: These payment instruments are issued to facilitate the purchase of goods and services. These instruments do not permit cash withdrawal or redemption. As these instruments do not facilitate payments and settlement for third party services, they are not classified as payment systems. For eg- online shopping wallets like Amazon Pay, Ola Money, MakeMyTrip Wallet, BookMyShow Wallet;
  • Semi-Closed System Payment Instruments: These are payment instruments which can be used for purchase of goods and services, including financial services at a group of clearly identified merchant locations/ establishments which have a specific contract with the issuer to accept the payment instruments. For eg- Paytm Wallet, MobiKwik Wallet;
  • Open System Payment Instruments: These are payment instruments which can be used for purchase of goods and services, including financial services like funds transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawal at ATMs/BC's. For eg- Vodafone mPesa;

Eligibility & Capital Requirements: The Banks and Non Banking Financial Companies (NBFCs) which comply with the capital adequacy requirements prescribed by the RBI from time to time shall be permitted to issue PPI. However, only those banks which have been permitted to provide Mobile Banking Transactions by the RBI shall be permitted to launch mobile based pre-paid payment instruments (mobile wallets & mobile accounts). Any other person/institution which seeks authorization to issue PPI shall have a minimum paid-up capital of Rs 5 crores and positive net worth of Rs 1 crore at all times.

Safeguard against Money-Laundering: The guidelines on Know-Your Customer(KYC)/Anti-Money Laundering issued by RBI to Banks shall also apply to all the persons issuing PPI.

Value: The maximum value of any PPl shall not exceed Rs 50,000 (Rupees Fifty Thousand) and in case of semi closed payment instruments, after carrying out a Customer Due Diligence, the balance in such PPI shall not exceed Rs 1,00,000 (Rupees One Lakh) at any time.

Customer Protection: The issuers of PPI shall disclose all terms and conditions in simple language including the expiry period. The non-bank PPI issuer shall put in place an effective mechanism for redressal of customer complaints along and publicize the same for the benefit of customers.In case of PPI issued by banks, customers shall have recourse to Banking Ombudsman Scheme for grievance redressal.

PAYMENTS BANK: RBI has issued guidelines for setting up Payments Bank in India to further financial inclusion by providing small savings accounts and remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users. In 2016, Airtel Payments Bank got the license from the RBI for launching a Payments Bank. Paytm has recently launched the Paytm Payments Bank in India. Important features of a Payments Bank:

  • Activities: A Payments Bank is a licensed bank which can perform various banking services including acceptance of demand deposits, issuance of debit cards etc. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 (Rupees One Lakh) per individual customer.However, a Payments Bank cannot undertake lending activities.
  • Cards: A Payments Bank can issue ATM/debit cards but not credit cards.
  • Eligible Promoters: Existing non-bank PPI issuers; and other entities such as individuals / professionals;NBFCs, corporate Business Correspondents, mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.
  • Deployment of Funds: A Payments Bank will be required to invest minimum 75% of its demand deposit balances in Statutory Liquidity Ratio eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 % in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
  • Capital requirement and Promoter's Contribution: The minimum paid-up equity capital of the Payments Bank shall be Rs 100 crore (Rupees Hundred crore) and the Payments Bank should have a leverage ratio of atleast 3% (three percent). The promoter's minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.
  • Other conditions: The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms and the bank should have a high powered Customer Grievances Cell to handle customer complaints.

MHCO COMMENT:

The launching of Payments Bank is helpful for small households and rural areas to mobilize their savings and undertake small scale transactions. The prepaid payments instruments is a boon to the public in India as it encourages digital payments and offers convenience to the customers by way of simply using their mobile phones for undertaking transactions. However, the prepaid payment instruments require a more stringent security system to be put in place to secure the payments being made through such instruments.

This update was released on 25 May 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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