Comments on the RBI Draft Master Directions on Issuance and Operation of Prepaid Payment Instruments in India

By Bhusan Jatania, IFMR Finance Foundation

The Reserve Bank of India (RBI) released the Master Directions on Issuance and Operation of Pre-paid Payment Instruments (PPIs) in India (Draft Circular) on 20 March 2017. The IFMR Finance Foundation’s Future of Finance Initiative has provided its response to the Draft Circular.

While the Draft Circular builds upon a series of PPI related circulars issued by the RBI, it proposes significant changes such as:

  • increasing a PPI issuer’s net-worth requirement to Rs. 25 crores (from the existing Rs. 1 crore),
  • allowing PPI issuers to access payment systems in the future (without providing details),
  • requiring comprehensive system audit of PPI issuers on an annual basis (and before granting licenses to new applicants), and
  • compulsory conversion of existing PPIs (which hold minimum information about the user) to full KYC PPIs (this has to be achieved within 60 days of the Draft Circular coming into force).

In our comments to RBI we have recommended that the Draft Circular:

  • provide a higher standard of customer data protection,
  • create a more level-playing field for bank-led and non-bank led PPI issuers, and
  • clarify customer liability for unauthorised / fraudulent transactions involving PPIs.

In our response we have also compared the Draft Circular to the recent draft rules for security of prepaid payment instruments released by the Ministry of Electronics & Information Technology on 8 March 2017 (to which we also provided a response, available here).

We believe that the proposed regulatory revamp of wallet providers is driven by the principle that emergence of dominance should lead to greater supervision. The RBI appears to have taken a view that the digital payments sector, characterised by significant user expansion, has emerging customer abuse, data security and systemic risk considerations. And while the industry has raised some concerns of regulatory extravagance around the Draft Circular, it should largely be seen as a step in the right direction.

Our response to RBI’s public consultation is available here.

About the Future of Finance Initiative:

The Future of Finance Initiative (FFI) is housed within IFMR Finance Foundation and aims to promote policy and regulatory strategies that protect citizens accessing finance given the sweeping changes that are reshaping retail financial services in India – including those driven by Indiastack, Payments Banks, mobile usage and the growing P2P market.


Replug – Interview with Dr. Viral Acharya

The Government today appointed Dr. Viral Acharya, Professor of Economics at the New York University Stern School of Business, as RBI Deputy Governor for 3 years. We had the pleasure of interviewing Dr. Acharya few years ago on aggregation of risks in a financial system especially with respect to the Indian context. In the below video we share Dr. Acharya’s conversation with Bindu on the subject. You can read the full transcript of the conversation here.

Dr. Viral Acharya in conversation with Bindu Ananth


A brief comparison of Regulatory Requirements of Payments Banks, Small Finance Banks and Universal Banks

By Madhu Srinivas, IFMR Finance Foundation 

RBI recently released the operating guidelines for the Small Finance banks and Payments Banks on October 6, 2016. To take stock of these, we have put together a brief comparison of the regulatory requirements of these banks against those for universal banks.

Payments Banks (PB) Small Finance Banks (SFB) Universal Banks (scheduled commercial bank /
Payments and Remittances Yes Yes Yes
Credit No


a)75% of ANBC to qualify under PSL. While 40% of its ANBC should be allocated to different sub-sectors under PSL as per the extant PSL prescriptions, SFBs can allocate the balance 35% to any one or more sub-sectors under PSL where it has competitive advantage, and,

b) Atleast 50% of loan portfolio should have loans and advances not exceeding Rs. 25 Lakhs

SFBs can participate in securitisation as originators for risk transfer but not as purchasers of other banks’ loans


40% of ANBC to qualify under PSL

Savings Yes, only demand deposits (savings and current accounts), aggregate limit per customer shall not exceed ₹100,000. Amounts beyond this limit can be swept into accounts opened for customer at a SFB/SCB, with prior written consent of customer. Yes – both demand and term deposits Yes – both demand and term deposits
Business Correspondent (BC) Yes. Can become BC to another bank, and in the process offer credit. Also can engage BCs, including those of promoter/ partner/ group companies at an arm’s length basis, for expanding their business. Cannot be a BC to another bank. Yet can engage BCs, including those of promoter/ partner/ group companies at an arm’s length, for expanding their business. Interoperability of BCs is allowed, though it is unclear what interoperability means in this context, except for opening of deposit accounts. Offline BCs will not be allowed. No requirements to have base branch for a set number of BCs/ access points. Can use BCs to expand their business with no restrictions on having a set number of BC’s to be mapped to a base branch. While a BC can be a BC for more than one bank, at the point of customer interface, shall represent and provide banking services of only one bank. Offline BCs are allowed provided that all off-line transactions are accounted for and reflected in the books of the bank by the end of the day.
Prudential Requirements
Capital Adequacy Requirements 15% – their risk exposure would be almost entirely limited to operational risk* 15% – risk exposure includes credit risk, market risk, operational risk* 9% – risk exposure includes credit risk, market risk, operational risk
CET1 Capital 6.0% 6.0% 5.5%
Minimum Tier 1 Capital 7.5% 7.5% 7.0%
Capital Conservation Buffer NA NA 1.25%
SLR/CRR Yes Yes Yes
Investment Norms Only in Govt Securities (atleast 75% of Demand Deposit Balances) and in demand and time deposits in SCBs As applicable to commercial banks As per extant guidelines
Other Activities
Products Some form of prior RBI approval required for
products to be sold by PB. RBI also reserves the right to restrict or discontinue the products being sold by the PB
Derivatives Only for the purposes of hedging foreign currency positions arising from business activities. Only the below mentioned derivatives can be used. Also no credit derivatives cannot be purchased or sold:
a) interest rate futures for proprietary hedging;
b) Foreign exchange derivatives to hedge foreign currency positions arising from business activities
No such restrictions
Para Banking Activities Can undertake other non-risk sharing simple financial services activities, not requiring any commitment of their own funds, such as distribution of mutual,fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products Same as PBs Can undertake other financial activities like investment in VC Funds, equipment Leasing , Hire Purchase and Factoring,
Primary Dealership, Mutual fund (both Risk Sharing and Broking), insurance (both Risk Sharing and Broking),Portfolio Management Services, among other activities
Risk Management As applicable to commercial banks As applicable to commercial banks As per extant guidelines

Please let us know your thoughts/feedback on the above comparisons in the comments section below.

* The prudential frameworks for market risk and operational risk are being examined by RBI and the instructions in this regard are expected to be issued separately.


Being ‘Sachet’ in Curbing Illegal Money Deposits

By Monami Dasgupta, IFMR Finance Foundation

Taking a significant step towards curbing illegal collection of deposits by unauthorized and illegal entities, RBI recently set up a website named ‘Sachet‘ (Alert). This initiative is in line with a recommendation made by the Committee for Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS, 2014)[1] on Citizen led-surveillance, namely that “RBI should create a system by which any customer can effortlessly check whether a financial firm is registered with or regulated by RBI.”

The website is a one-stop point for citizens to lodge and track a complaint against illegal acceptance of deposits/money by any scrupulous individual or entity. The website will enable citizens to lodge a complaint with a plethora of regulators. The information provided here is expected to be immediately shared with the concerned Regulator/Law Enforcement Authority who would initiate necessary action as per their procedures and processes. Citizens can also check whether an entity is registered with any regulator and whether they are permitted to accept deposits. The website also serves as an easy point of access to inform citizens about the regulations prescribed by all financial regulators and across central and state legislations. Having said this, it would have been greatly beneficial for the public to understand legislation if there were links that would direct to helpful content such as that on the NCFE website that provides impartial and easy to understand financial educational content (a similar example in another jurisdiction is that provided by ASIC’s MoneySmart website for Australia).

The Sachet website is also a platform for State Level Coordination committee[2] (SLCC) to disseminate information among members of SLCC, which in turn will help in curbing illegal and unauthorized money raising activities.

A snapshot of the regulators listed on the website (provided below) interestingly excludes certain categories of institutions in whose name fraudulent activities can be performed, such as banks, cooperative banks, and regional rural banks, as well as those types of entities that do not fall under the purview of any of the financial sector regulators, such as cooperative societies, trusts, NGOs and so on.


The Complaint Filing process is illustrated below:


If the SLCC does not forward the complaint to the respective authority within 30 days, the complainant can send a reminder to them.

It is important to note that this website is not intended as a solution to the last mile problem of difficulties in accessing external customer grievance redressal mechanisms. There is no link to the external grievance redressal mechanisms such as the Banking Ombudsman (for banks), Insurance Ombudsman (for insurance companies), SCORES for SEBI-regulated entities, or PFRDA (for pension products). Once a complaint enters the Sachet system, a seamless link to these websites would bring down customer distress considerably.

This is a significant first step in the right direction towards protecting customers from illegal and unauthorized individuals or entities that collect deposits, whether or not they are able and willing to repay these deposits. For a holistic last-mile solution, practitioners like various financial institutions as well as post-offices and district-level government offices can also get involved in the process of disseminating information about Sachet.

1 – CCFS Report – https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf, Pg 187.
2 – State Level Coordination Committee (SLCC) is the joint forum formed in all States to facilitate information sharing among the Regulators viz. RBI,SEBI,IRDA,NHB, PFRDA, Registrar of Companies (RoCs) etc. and Enforcement Agencies of the States viz Home Department, Finance Department, Law Department, Economic Offences Wing (EOW)


Response to the Reserve Bank of India’s Consultation Paper on Peer To Peer Lending

By Linda George, IFMR Finance Foundation

Recently the Reserve Bank of India released a Consultation Paper on Peer to Peer Lending aimed at defining the contours of regulating Peer to Peer (P2P) Lending in India. The below table lays out our responses to some of the themes that are covered in the paper.

Theme Potential risks Mitigatory steps considered by RBI Responses and Comments
Systemic Risks, risk of contagion Currently, platforms do not create any threat of systemic risk. There are chances that the platforms will grow into being systemically important.

Considering these entities as NBFCs.

Applying a leverage ratio if needed.

If the Platform is not to take any credit exposure to its borrowers (through guarantees), or co-lend along with its lenders, it will therefore be a pure marketplace, and would therefore not be holding any credit risk on its balance sheet. In this regard, the approach taken by UK’s Financial Conduct Authority (FCA) is worth exploring. Prudential Standards are being based on the total value of the firm’s loaned funds outstanding instead of the total amount of cumulative loans that the firm may have provided during the lifetime. The volume-based financial resources requirement calibration is provided in Annex.
Information Disclosures Lack of information and/or other signals about the performance of the platforms will make it hard for participants as well as regulators to gauge their performance, quality of underwriting and size. Submission of regular reports to RBI.

Detailed reporting requirements should be established which includes book size, default statistics, returns performance, and complaints and their resolution, at the minimum.

UK Peer to Peer Finance Association reporting requirements can be emulated[1] (these include disclosures on cumulative lending, outstanding loan book, net lending, number of lenders and borrowers and so on).

Quality of Underwriting, Suitability Assessments When the problem of information asymmetry[2] exists, the understanding of the lender with respect to the risk involved in the activity of lending would need to be robust, and therefore, platforms’ ability to assess the credit risk involved and its implications to the lender would be important. RBI has left this to the markets to decide.

P2P Platforms must be required to uphold RBI’s Charter of Customer Rights, just as other credit providers are, and within this they should therefore be required to undertake borrower debt servicing capability analysis before they get connected to lenders. Similarly, the platform must undertake an assessment to ensure that the unsophisticated lender (akin to a debt investor) is entering into a contract that is suitable for him/her financial conditions, needs and goals.

UK’s FCA is considering the introduction of rules of suitability of advice, which will make it an obligation for the firms to make sure the recommendations are suitable for the clients[3].

P2P platforms can be provided access to credit bureau reports on their borrowers provided the Credit Information Companies Regulations 2005 is suitably amended as required and robust data sharing guidelines are followed.

Customer protection concerns for borrowers Fair treatment of the borrower, strong-arm tactics being used etc. Lack of information to the borrower about the redressal mechanism. RBI’s NBFC Fair Practice Code is to be applicable. This is a welcome move, and it would ensure that both lenders and borrowers have access to clear grievance redressal processes. However, the Fair Practice Code itself needs to be evolved into a Code for all formal credit providers such that it can take into account new types of intermediaries like P2P platforms.
Customer protection concerns for unsophisticated lenders

When individual lenders get involved, there is a concern that they may not be fully aware of risks involved.

Unclear processes could lead to opacity, with the lenders being misled about defaulting borrowers.

Not considered

Individual unsophisticated lenders should have sufficient information to make informed decisions about whether or not to participate on the P2P Platform.

This includes obligations towards the lenders to inform them about delinquencies if any in a timely manner, and have a clear process in place regarding delinquency management that is disclosed to lenders.

Risk of exclusion Discrimination based on race, caste, or gender, might arise which will lead to the exclusion of certain customers from getting correctly priced credit. Not considered It becomes very necessary from a regulatory point of view to ensure that these forms of discrimination do not exist in the system. This is however a problem that exists with all other forms of lending, and could get compounded by the fact that the regulator has limited information on underwriting methodologies.
Privacy and data security risk Privacy and data protection concerns with respect to personal and sensitive information of lenders and borrowers. RBI places this responsibility on the platform. The platform needs to take steps to adhere to all existing data privacy norms, as well as comply with the Right to Privacy covered by the RBI Charter of Customer Rights.
Unsecured lending Usurious and unfair practices may get adopted by P2P platforms if secured lending is to be allowed. RBI clarifies that P2P platforms will engage in only unsecured lending. It is unclear why this requirement is necessary as, as long as existing norms are not violated, and customer protection requirements are met, if furnishing security can bring down costs of borrowing, it must be permitted.

Regulating peer to peer lending platforms is necessary, as justified in the Consultation Paper, and it will enable a more trust-worthy environment for both lenders and borrowers. Intervention of the regulatory authorities should be focused towards creating a level playing field for P2P platforms among all other market players to ensure better competition and more efficient allocation of resources across the system.


In the context of UK, the volume- based financial resources requirement calibration placed by FCA on P2P platforms is the sum of:

  1. 0.2% of the first £50 million of the total value of the total loaned funds outstanding
  2. 0.15% of the next £200 million of the total value of the total loaned funds outstanding
  3. 0.1% of the next £250 million of the total value of the total loaned funds outstanding
  4. 0.05% of any remaining balance of the total value of the total loaned funds outstanding above £500m

[1] http://p2pfa.info/wp-content/uploads/2015/09/Operating-Principals-vfinal.pdf

[2] Learning by doing with asymmetric information: Evidence from prosper.com. Freedman (2011). http://www.nber.org/papers/w16855.pdf

[3] https://www.fca.org.uk/news/innovative-finance-and-peer-to-peer-discussion-paper

[4] http://www.fca.org.uk/static/documents/policy-statements/ps14-04.pdf