NPCI: From Not for Profit to For Profit

Context

Demand to convert National Payments Corporation of India into a profit making body to withstand competition.

Background

Among the shareholders of the NPCI, the demand is on table to convert the company into a for-profit body to withstand competition. Shareholders of the NPCI can have windfall gains too. NPCI, during its journey, has made a significant impact on the retail payment systems in the country.

National Payments Corporation of India

It is an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India and Indian Banks’ Association under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.

Considering the utility nature of the objects of NPCI, it has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems. The Company is focused on bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.

The ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC. In 2016 the shareholding was broad-based to 56 member banks to include more banks representing all sectors.

Revolutionary payment systems developed by the NPCI are Ru Pay UPI, Aadhaar Payment Bridge, Immediate Payment Service, National Automated Clearing House, Bharat Bill Payment System, National Electronic Toll Collection etc.

Rise of Digital Payment System In India

The payments industry has witnessed a monumental revolution in the last decade. There have been remarkable innovations and initiatives that have changed the way India transacts. For instance, Government’s push towards digital payments with initiatives like FASTags, the introduction of interoperability on wallets, cash recyclers, or innovations by FinTech players like RFID based fuelling apps, all-in-one QR code for merchants and UPI QR-based cash withdrawals on ATMs, digital India clearly holds an extremely promising future.

Primarily the Digital payment system was steered and piloted by RBI. A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004. The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS. The RBI introduced National Electronic Funds Transfer, or NEFT, and bulk debits and credits to support retail payments around the same time. Now, NEFT is available round the clock and RTGS will follow from December 2020 only a few countries have achieved this.

Many stakeholders played a critical role in getting us to this point. The National Payments Corporation of India (NPCI), oversees electronic retail payment systems in the country, created an infrastructure for payments and settlements in India. In fact, the development of the UPI system, payment applications such as Bharat Interface for Money (BHIM) and RuPay were catalysts for increased use of digital payments in India.

This is a great achievement for the NPCI. Additionally, since transferring money digitally is now so simple, thanks to the UPI system, there are now several private players in the market like Google Pay, Amazon Pay, PayTm, PhonePe, and, now, WhatsApp Pay.

During the lockdown, due to COVID-19 pandemic, even though consumer’s discretionary spends were at an all-time low, there has been an increased adoption of digital payments. Categories under person to merchant (P2M) transactions such as supermarkets, medical stores, recharges and bills showed promising growth.

India is at an inflection point of a systemic change and the Covid19 crisis provided an impetus to test the reliability of the systematised settlements system in India. This distinct shift in consumer behaviour, owing to Covid19, is the keystone based on which the entire transaction poised for a revolution. We have seen that previous financial crises and pandemics have helped spur innovation and push reforms that enabled the penetration of technology. There is a slew of emerging trends and enablers in this context.

NPCI : A Game Changer in Digital Payment System

NPCI has been playing a crucial role in this robust payment system, especially retail payments, structured and promoted by 10 lead banks at the instance of the RBI in 2009.

Idea for this umbrella retail payments institution emerged in the vision document on payments system, 2005-08 released by RBI in 2005.
It is inspired by the Bangirocentralen (BGC AB), a not-for-profit organisation owned by eight Swedish banks for providing retail payment and related services.

The model appeared as an attractive proposition as payments is basically a public good. Thus the idea of the NPCI as a not-for-profit company has a link from the BGC.

The NPCI’s success against deeply entranced formidable international players, supported by innovative technology, like Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries. The Bank for International Settlements’s endorsement of the NPCI model in 2019 is a major accolade.

Conclusion

It would be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications. Instead, like the RBI providing free use of the RTGS and other products, the strategy should be to assist the NPCI financially, either by the RBI or the government, to provide retail payment services at reduced price (in certain priority areas). This may also help support expansion of the payment system network and infrastructure in rural and semi-urban areas in partnership with Fin-Tech companies and banks.

Connecting the Article :

Question for Prelims

With reference to the National Payments Corporation of India, consider the following statements:

1. It is an apex body for digital payments fully owned by the Government of India.
2. It provides infrastructure to the entire Banking system in India for physical as well as electronic payment system.

Which of the statements given above is/are correct ?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question for Mains

Converting the National Payments Corporation of India, from a not-for-profit company into for-profit, will reverse the success of digital payment popularity and acceptance in India. Comment.