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India’s digital payments policy updates for January 2021- Digital lending, the PIDF, and the DPI
The last decade has seen exponential growth in digital payments and a significant shift in payments preferences, recording, as per the Reserve Bank of India (‘RBI’), a compounded annual growth rate of 12.54% and 43.01% in volume and value of digital payments from 2010-2020. The myriad efficient and real-time payment options made available, the increase in mobile and internet penetration, the introduction of lightweight acceptance infrastructure like QR codes, to name a few, have all played their part. With 2021 marking the onset of the new decade and the journey towards the next goals and challenges to address, the Payments Digest aims to provide a quick view of key payments policy initiatives taken each month.
For January, 2021, Edition 1:
Tackling illegal instant loans- the RBI’s Working Group on Digital Lending
The recent spurt of unregulated online/mobile lending platforms (digital lending platforms or ‘DLPs’) and related illegal activities has led to the RBI’s Working Group on Digital Lending. This is to provide its report within 3 months, discussing issues like standards and risks of outsourced lending activities, suggested regulatory changes for orderly growth including a Fair Practices Code for DLPs, and measures for consumer protection, privacy, etc. The RBI is also simultaneously aiming to revamp the regulatory framework for Non-Banking Finance Companies (‘NBFCs’), via its Discussion Paper on the subject.
Takeaways For the Fintech Industry
|For the Payments Industry||For the Fintech Industry|
|For the payments industry or any other player servicing such apps, this could result in clearer means of identifying legitimate DLPs which can be serviced, allowing strengthened KYC and due diligence measures. Current payment aggregator (‘PA’) checks for instance include verifying the NBFC-DLP agreements and authorization letters; the NBFC’s license, Fair Practices Code and bank account, etc. pre-onboarding, and periodic license verifications, capping monthly beneficiary payouts, etc. post activation. The recent events also led to strengthening these checks further, like requiring lending collections deposits only in the NBFC’s bank account, or new checks like verifying disclosure of backing NBFC/bank by the DLP to customers and listing of the DLP’s name on the NBFC’s website (as required by the RBI in June), et||The approach taken by the RBI will bring in one indicator of the Indian regulatory stance and future relationship between regulated entities and unregulated disruptors like fintechs and as-a-service services, specifically lending-as-a-service or a proposal like OCEN here. The RBI has a challenge in achieving a balance between preventing abuse while promoting innovation.|
The events also demonstrate the blurring lines between tech and fintech disruption, with technology allowing easy availability of traditionally regulated services outside of the regulatory ambit, app stores forced to take action beyond their traditional role as intermediaries, and the Working Group’s mandates leading to new sector-specific privacy regulation to safeguard consumers.
(Related Read: What are the KYC procedures for merchant onboarding?)
Zero MDR- Operationalization of the Payments Infrastructure Development Fund (‘PIDF’)
The RBI operationalized the PIDF in January, which aims to subsidise deployment of payments acceptance infrastructure. This will initially be operational for 3 years, with an initial corpus of Rs. 345 crores and targeting 30 Lakh new payments touch points each year. The notification also specifies the target geographies (tier 3-6 centers, north-eastern states), merchant categories (essential services, govt payments, fuel pumps, PDS, etc.) and the acceptance device types (physical PoS, mPoS, QR code payments, etc.).
|For Merchants||For Banks and the Payments Industry|
|The targets set by the scheme focus on increased digital payments penetration in rural India and eligible merchants will gain subsidies of 30-50% physical Point of Sale terminal (PoS) costs, and 50-75% of digital PoS costs. Increased PoS penetration and digital payments will also encourage customers to make payments despite the pandemic, by reducing cash payment risks. Merchants in turn can additionally turn to digitized and more efficient account keeping, etc.||Banks and the payments industry have been hard hit by revenue losses due to the zero MDR rule last year, and are continuing efforts for MDR’s reintroduction. A key concern for the industry, particularly with the Budget in February, is with the PIDF being seen or cited as an adequate substitute.|
An additional issue for card-issuing banks is that they need to mandatorily contribute annually to the PIDF, despite there being no respite on the horizon from the revenue losses from zero MDR.
A Legal Entity Identifier (LEI) for Large Value Transactions in Centralised Payment Systems
The RBI has introduced an LEI for transaction of Rs. 50 Crores and above undertaken by entities (non-individuals) via RTGS and NEFT. The LEI is a code to identify distinct legal entities and improve financial data and risk management. In India, it is so far mandated for OTC derivative markets, non-derivative markets and large corporate borrowers. The RBI, in its Booklet on Payment Systems (see below), has also discussed exploring the use of the LEI for payment system participants, agents and distributors for large value cross-border payments.
|For Merchants||For Banks|
|Any entities undertaking transactions of this value need to obtain an LEI if they don’t already have one, available from the RBI recognized LEI issuer- Legal Entity Identifier India Ltd.||Banks need to include remitter and beneficiary LEI information in RTGS and NEFT payment messages and maintain records of all such transactions.|
Digital Payments Index (‘DPI’)
The RBI introduced the DPI this January. This aims to capture the extent of digitization of payments in the country, based on 5 broad parameters- (i) Payment Enablers (weight 25%), (ii) Payment Infrastructure – Demand-side factors (10%), (iii) Payment Infrastructure – Supply-side factors (15%), (iv) Payment Performance (45%) and (v) Consumer Centricity (5%). Taking March 2018 as the base period, i.e., 100, the DPIs are:
- March 2018- 100
- March 2019- 153.47
- March 2020- 207.84
Going forward, the RBI will publish the DPI on a semi-annual basis.
Digital payment policies which came into effect in January
The following policies were issued previously and came into effect from January:
- RBI’s additional factor of authentication relaxations for UPI and card-based e-mandates, and for contactless card transactions to Rs. 5000/- from the erstwhile Rs. 2000/- easing digital payments particularly in the pandemic.
- NPCI’s 30% volume cap on UPI based transactions for all Third-Party App Providers potentially changing the UPI playing field.
- SEBI’s UPI facility for public issues of specified debt securities furthering UPI and customer convenience.
- NPCI Press Release: UPI balances consumer experience with growth outlook with a 30% volume cap for Third-Party App Providers (TPAPs), dated November 05, 2020.
- RBI Notification: Loans Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines, RBI/2019-20/258, dated June 24, 2020.
- RBI Notification: Card transactions in Contactless mode – Relaxation in requirement of Additional Factor of Authentication, RBI/2020-21/71. Dated December 04, 2020.
- RBI Notification: Processing of e-mandates for recurring transactions, RBI/2020-21/74, dated December 04, 2020.
- RBI Publication: Payment and Settlement Systems in India- Booklet, dated January 01, 2021.
- RBI Press Release: Reserve Bank of India introduces the RBI-Digital Payments Index, dated January 01, 2021.
- RBI Notifications: Introduction of Legal Entity Identifier for Large Value Transactions in Centralised Payment Systems, RBI/2020-21/82, dated January 05, 2021.
- RBI Notification: Operationalisation of Payments Infrastructure Development Fund (PIDF) Scheme, RBI/2020-21/81, dated January 05, 2021.
- RBI Press Releases: Reserve Bank constitutes a Working Group on digital lending including lending through online platforms and mobile apps, dated January 13, 2021.
- RBI Press Releases: RBI releases Discussion Paper on Revised Regulatory Framework for NBFCs- A Scale-Based Approach, dated January 22, 2021.
- SEBI Circular: Introduction of Unified Payments Interface (UPI) mechanism and Application through Online interface and Streamlining the process of Public issues of securities under – SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (NCRPS Regulations), SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (SDI Regulations) and SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (ILDM Regulations), SEBI/HO/DDHS/CIR/P/2020/233, dated November 23, 2020.
- Section 10A, Payments and Settlement Systems Act, 2007, The Gazette of India (2019), Ministry of Law and Justice (Legislative Department), The Finance (No. 2) Act, 2019.
- Media Report: Zero MDR: FinMin says no to banks’ compensation plea, The Hindu Business Line, dated January 07, 2020.