RBI IMPOSES RESTRAINTS ON UNSPECIFIED CARD NETWORK

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TAG: GS 3: ECONOMY

THE CONTEXT: The Reserve Bank of India (RBI) has recently imposed restrictions on a yet-to-be-named card network in the country, citing unauthorized payments made through business cards.

EXPLANATION:

• The regulatory action is grounded in concerns over the violation of the Payment and Settlement Systems (PSS) Act, 2007, and non-compliance with Know Your Customer (KYC) norms in transactions facilitated by the network.

Card Networks in India:

• India boasts five authorized card networks – Visa, Mastercard, RuPay, Diners Club, and American Express.
• Unspecified Network: The RBI refrained from specifying the card network involved but pointed out that only one has operationalized the arrangement allowing unauthorized card payments via business cards.

Modus Operandi of Alleged Violations:

• Unauthorized Payments:
  • The RBI identified a card network enabling businesses to make payments to entities not authorized to accept card transactions, a direct infringement of the PSS Act, 2007.
• Payment Routing:
  • The alleged arrangement involved businesses making card payments through intermediaries to non-card-accepting entities.
• Fund Transfer:
  • Intermediaries accepted card payments from corporates for commercial purposes and then transferred funds through IMPS, RTGS, or NEFT to non-card-accepting recipients.

RBI’s Concerns and Observations:

• Payment System Qualification:
  • The RBI deemed the identified arrangement as constituting a payment system, necessitating authorization under Section 4 of the PSS Act.
  • The absence of such authorization rendered the activity without legal sanction.
• Funds Pooling and Account Designation:
  • The intermediary pooled substantial funds into an account not designated under the PSS Act, raising regulatory concerns.
• KYC Non-Compliance:
  • Transactions under this arrangement failed to comply with ‘originator and beneficiary information’ requirements, as stipulated in the ‘Master Direction on KYC.’

RBI’s Regulatory Action:

• Directive to Cease Operations:
  • The RBI has directed the card network to suspend all such arrangements until further orders.
• Clarification on Business Credit Cards:
  • While restraining the unauthorized arrangements, the RBI clarified that no restrictions were placed on the regular use of business credit cards.

Visa’s Response and Implications:

• Visa’s Confirmation:
  • Although the RBI did not explicitly name the card network, Visa issued a statement acknowledging the regulatory directive.
• Suspension of BPSP Transactions:
  • Visa confirmed suspension of all Business Payment Service Provider (BPSP) transactions until further notice, aligning with the RBI’s directive.
• Normal Usage Continues:
  • The RBI clarification emphasized that normal business credit card usage remains unaffected.

Reserve Bank of India (RBI):

• The origins of the Reserve Bank of India can be traced to 1926.
• Royal Commission on Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the creation of a central bank for India to separate the control of currency and credit from the Government and to augment banking facilities throughout the country.
• The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935.
• Since then, the Reserve Bank’s role and functions have undergone numerous changes, as the nature of the Indian economy and financial sector changed.
• Starting as a private shareholders’ bank, the Reserve Bank was nationalised in 1949.
• It then assumed the responsibility to meet the aspirations of a newly independent country and its people.
• The Reserve Bank’s nationalisation aimed at achieving coordination between the policies of the government and those of the central bank.

Functions of RBI:

• The functions of the Reserve Bank today can be categorised as follows:
  • Monetary policy
  • Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
  • Regulation of money, forex and government securities markets as also certain financial derivatives
  • Debt and cash management for Central and State Governments
  • Management of foreign exchange reserves
  • Foreign exchange management—current and capital account management
  • Banker to banks
  • Banker to the Central and State Governments
  • Oversight of the payment and settlement systems
  • Currency management
  • Developmental role
  • Research and statistics

Payment and Settlement Systems (PSS) Act, 2007:

• The PSS Act, 2007 received the assent of the President on 20th December 2007 and it came into force with effect from 12th August 2008.
• Under the PSS Act, 2007, two Regulations have been made by the Reserve Bank of India, namely, the Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 and the Payment and Settlement Systems Regulations, 2008.
• Both these Regulations came into force along with the PSS Act, 2007 on 12th August 2008.
• The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters.
• The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), to exercise its powers and perform its functions and discharge its duties under this statute.
• The Act also provides the legal basis for “netting” and “settlement finality”. This is of great importance, as in India, other than the Real Time Gross Settlement (RTGS) system all other payment systems function on a net settlement basis.

SOURCE: https://indianexpress.com/article/explained/explained-economics/rbi-restraints-card-network-9164676/