What is RBI new umbrella entity?
Reserve Bank of India will set up a committee under the chairmanship of P. Vasudevan, Chief General Manager, RBI has been directed to review license applications, analyze macroeconomic impact and security risks in light of the proposed framework
- NUEs will establish their own payment infrastructure to compete with National Payments Corp. of India (NPCI).
What are NUEs?
As envisaged by the RBI, an NUE will be a non-profit entity that will set-up, manage and operate new payment systems, especially in the retail space such as ATMs, white-label PoS; Aadhaar-based payments and remittance services. In addition to this, they will develop new payment methods, standards and technologies as well as operate clearing and settlement systems.
- Currently, the umbrella entity for providing retail payments system is NPCI, which is a non-profit entity, owned by banks.
- Players in the payments space have indicated the various pitfalls of NPCI being the only entity managing all of retail payments systems in India.
- To Increase Competitiveness RBI plans to allow other organizations to set up umbrella entities for payments systems aims to expand the competitive landscape in this area.
- An NUE license can help the entity gain greater autonomy in processing digital payments in India.
- That will help establish a firm presence in the financial services ecosystem through value-added lending and insurance services
Six consortiums apply to RBI for NUE license
The bank consortium is led by Axis Bank and ICICI Bank, with 20% each and co-promoting an entity called MoPay. This consortium also has BillDesk, Pine Labs, Amazon and Visa with 15% stake each
A consortium led by Reliance Industries and Infibeam Avenue has also submitted its proposal. Facebook and Google are set to have minority stakes in this entity
Tata Group has also applied for the NUE licence through its subsidiary Ferbine Payments. It will own 40% in the entity while Airtel Digital, Mastercard and Nabard will hold 10% each.
- Flipkart, through its subsidiary FlipPay, and Naspers-backed PayU will own about 5% each in the Tata entity. HDFC Bank and Kotak Mahindra Bank will hold 9.99% each in Ferbine.
A Paytm led consortium has set up another prospective NUE called Foster Payments. Paytm entities are set to co-promote with Electronic Payment and Services (EPS) and will together pick up 50%.
- Ola Financial and Policybazaar along with IndusInd Bank may each pick less than 10% non-controlling stake in the NUE.
Non-bank lender Centrum Finance, Suryoday Small Finance Bank, data analytic platform Think360.ai and fintech Zeta are the remaining consortium players that will have partial stakes in the NUE
Another consortium led by technology provider FSS, payment gateway RazorPay and payments bank India Post have also applied for the licence. The sixth consortium is led by start-up iserveU technology
Background about New Umbrella Entity (NUE) for Retail Payment Systems
A large part of the retail payments is processed by NPCI. For example, the popular unified payments interface, or UPI, the Immediate Payment Service, or IMPS, Bharat Bill Pay, Aadhaar-enabled Payment System, and RuPay are some retail payment platforms operated by NPCI, which is incorporated as a non-profit.
On 10 February 2020, the Reserve Bank of India (RBI) released Draft Framework for authorization of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems. Such an entity shall be a Company incorporated in India under the Companies Act, 2013. The Company may be a ‘for-profit’ or a Section 8 Company as may be decided by it, RBI has said in a statement.
Objective: To set up new pan-India umbrella entity / entities focusing on retail payment systems. Such an entity shall be a Company incorporated in India under the Companies Act, 2013. The Company may be a ‘for-profit’ or a Section 8 Company as may be decided by it.
Authorization: The umbrella entity shall be a Company authorized by Reserve Bank of India (RBI) under Section 4 of the PSS Act, 2007. It shall be governed by the provisions of the PSS Act and other relevant statutes and directives
Eligible Promoters: All entities eligible to apply as promoter / promoter group of the umbrella entity shall be owned and controlled by resident Indian citizens’ with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP)
Shareholding Pattern: The shareholding pattern shall be diversified. Any entity holding more than 25% of the paid-up capital of the umbrella entity shall be deemed to be a Promoter.
Foreign Investment: In case of any Foreign Direct Investment (FDI) / Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII) in the applicant entity, it shall Fulfil, additionally, the capital requirements as applicable under the extant Consolidated FDI policy guidelines of the Government of India.
Capital: The umbrella entity shall have a minimum paid-up capital of ₹500 crore. No single Promoter / Promoter Group shall have more than 40% investment in the capital of the umbrella entity.
- The Promoters / Promoter Groups shall upfront demonstrate capital contribution of not less than 10% i.e., ₹50 crore at the time of making an application for setting up of the umbrella entity.
Capital Dilution: The Promoter / Promoter Group shareholding can be diluted to a minimum of 25% after 5 years of the commencement of business of the umbrella entity.
- A minimum net-worth of ₹300 crore shall be maintained at all times.
Governance Structure: The umbrella entity shall conform to the norms of corporate governance along with ‘fit and proper’ criteria for persons to be appointed on its Board.
- The Reserve Bank retains the right to approve the appointment of Directors as also to nominate a member on the Board of the umbrella entity.
Scope of Activities: Set-up, manage and operate new payment system(s) in the retail space comprising of but not limited to ATMs, White Label PoS; Aadhaar based payments and remittance services; newer payment methods, standards and technologies; monitor related issues in the country and internationally; take care of developmental objectives like enhancement of awareness about the payment systems.
Why was NUE envisaged?
In India, over the last decade and especially after the demonetization of 2016, innovations in payment modes have picked up the pace, from the online payment mode to Unified Payments Interface (UPI) apps. NPCI’s RuPay cards now allow offline transactions in areas with low internet connectivity. The lockdowns and social distancing triggered by the COVID-19 pandemic have accelerated the shift to digital methods.
With the MSMEs (micro, small and medium enterprises) and mom-and-pop stores also joining the digital retail payment mainstream, there has been a big jump in such transactions. Against this backdrop of rising volumes and to protect the country’s only digital retail payment system from monopolies and other threats, NPCI introduced a set of guidelines this year under which third-party app providers “are required to ensure that the total volume of transactions initiated through their respective UPI applications does not exceed 30% of the total volume of transactions in the country during the preceding three months.”
Being a non-profit organization, NPCI’s ability to improve and expand its technological base or build a more robust and dynamic digital payment network is limited. It has been five years since the development of UPI in India, but it has not seen much technological progress.
Therefore, on August 18, 2020, the RBI announced a framework for authorization of a pan-India NUE for retail payment systems. Further, it invited applications for an NUE licence by February 26, 2021. However, this deadline was extended to March 31, 2021, because of the pandemic.
Benefits of NUE
Open New Opportunities
- The shared responsibility between NPCI and NUEs will open opportunities for an improved digital payment ecosystem.
- Moving towards a privately-held setup with government guidelines will promote healthy competitive efficiency.
Participation of Private Player
- The introduction of the “for-profit” NUE will open business opportunities for domestic and foreign players.
- Unlike before, the players will earn interest on the balance that the consumers maintain for their daily shopping.
- Further, the players will be allowed to charge fees for online transactions.
- A single domestic player will not be allowed to hold more than 40% investment in the capital of an NUE.
- A foreign entity can hold only 25%.
Competitive Advantages
- The competitive atmosphere will also encourage research, development, and innovation.
- The players will work towards customer convenience and safety.
- The payment system will be more interactive and interoperable.
Reduce Monopoly of one Entity
- The introduction of an alternative to NPCI will dilute the latter’s monopoly characteristics and concentration of risk due to cybercrime and other threats.
Concerns About New Umbrella Entity (NUE) :
Data Security Concern: A plan to allow new entities to create digital payment platforms and end the NPCI's dominance in online transactions has been put on hold by the regulator over data safety concerns
Allowing Foreign Entity: The unions raised concerns about allowing foreign entities to set up payment networks in India.
Recent Data Breach: Further, the recent data breaches at MobiKwik and Bigbasket could have made RBI take cognizance of the risks involved in allowing private sector manage payment transactions.
Data Localization: The recent ban on Mastercard for non-compliance with data localization norms could also have led RBI to take a relook at the NUE proposals.
Reference : RBI Guidelines
(Disclaimer: Part of this Article has been taken from a syndicated feed and various news website for Educational Purpose by giving the due credit. No copyright Infringement intended)
