The stage is set for enhanced competition for setting up a pan-India New Umbrella Entity (NUE) in India, one of the fastest growing digital economies in the world. The extension of the deadline by the Reserve Bank of India (RBI) to submit applications seeking a licence for the NUE to March 31 is likely to bring at least three-four more players in the fray. Though the RBI has not specified the exact number of licences to be issued, it is unlikely to choose more than one or two applicants.

The RBI’s desire to build competition for the National Payments Corporation of India (NPCI)-led digital payments ecosystem and support the growing digital payments in the country is being shared by top corporates, private banks, and fintech firms. According to a study by the Ministry of Electronics and Information Technology, India’s digital economy was valued at $200 billion in 2018, accounting for 8% of the GDP. It is slated to grow to 18%-23% of the GDP by 2025. India can’t depend on just one payments ecosystem as the data suggests an explosive growth.

As of now, several consortiums of top corporates, banks, and fintech firms have already queued up to seek a licence and create an organisation for retail payments to cash in on the ongoing shift to digital payments.

Just like the NPCI, which enables digital payments and settlement systems in the country via the Unified Payments Interface (UPI), IMPS, and other payment modes, the proposed umbrella entity will create a rival mechanism. NPCI is an initiative of the RBI and the Indian Banks’ Association (IBA). Once licensed by the RBI, the new entities can own and operate a private payments network like the UPI, holding similar powers enjoyed by the NPCI.

The RBI is of the view that NUEs will help the central bank to achieve its stated objective of de-risking India’s retail payments ecosystem where the NPCI currently holds a dominant position.

The central bank said on Friday (February 26) that requests have been received from various stakeholders including the IBA for extending the timeline, keeping in view the Covid-19-related disruptions and inconveniences. It has accordingly decided to extend the timeline for making the application up to March 31, 2021.

A consortium led by the Tata group along with HDFC Bank and Kotak Mahindra Bank (KMB) has applied for the NUE licence. A few other consortiums led by ICICI Bank and Amazon (along with Axis Bank and Visa), as well as Paytm with IndusInd Bank and Ola Financial, have also reportedly applied for the licence. According to reports, Reliance Industries (RIL) has partnered with technology behemoths Google and Facebook to seek a licence, but the consortium is yet to apply for the licence. Google and Facebook will hold a small stake in the proposed company which will be jointly promoted by an RIL subsidiary and ‘So Hum Bharat’, a subsidiary of Infibeam Avenues.

Soon after the finance ministry raised a red flag over the State Bank of India’s (SBI) plan to bid for an NUE licence, with concerns over potential competition risk, the public sector banks and institutions had taken a back step. Apart from the SBI, Bank of Baroda and Nabard were also part of the consortium earlier.

The Tata group has set up a consortium taking the lead through its subsidiary Ferbine. While Ferbine is expected to hold the majority stake, Bharti Airtel unit Airtel Digital will have 10%, HDFC Bank and KMB will hold 9.9% each. Mastercard and PayU will also be a part of the consortium.

Both HDFC Bank and KMB said in separate regulatory filings on Friday (February 26) that they have picked 9.9% stake each in the venture. Subject to the approval of the application by the RBI, the main business of Ferbine, incorporated on January 18, 2021, would be to operate a pan-India umbrella entity for retail payment systems, as would be allowed/authorised by the central bank, said HDFC Bank in the filing. Since the acquisition of shareholding is below 10%, the bank doesn’t require any regulatory approval.

A licence for the RIL-led consortium will help it cement its dominance in the fast-growing online market while a licence for the Tata group-led consortium will help it compete in the market, where it operates Tata Digital, a subsidiary for its electronics platform Croma, and an e-commerce platform, Tata CLiQ.

According to the guidelines issued by the RBI in August 2020, the NUE will be incorporated in India under the Companies Act, 2013 and may be a ‘for-profit’ or a Section 8 company as may be decided by it. The promoters and directors should conform to the RBI’s ‘fit and proper’ criteria. The umbrella entity shall have a minimum paid-up capital of ₹500 crore. No single promoter/promoter group should have more than 40% investment in the capital of the entity.

According to the RBI, the NUE will set up, manage, and operate new payments systems in the retail space comprising of but not limited to ATMs, white label PoS; Aadhaar-based payments and remittance services; and newer payment methods. It will also operate clearing and settlement systems for participating banks and non-banks; identify and manage relevant risks such as settlement, credit, liquidity and operational, and preserve the integrity of the systems; monitor retail payment system developments and related issues in the country and internationally to avoid shocks, frauds and contagions that may adversely affect the systems and the economy in general.

It can also introduce any other business to further strengthen the retail payments ecosystem in the country. It is expected that the umbrella entity should offer innovative payments systems to include all sections of the society and enhance access, customer convenience, and safety.

The application for setting up the umbrella entity should be accompanied by a detailed business plan covering the payments systems proposed to be set up and operated along with other documents to establish its experience in the payments ecosystem. The plans should include issues related to technology; security features; market analysis; research benefit, if any, of such payments systems; operational structure of the payments systems; time period for setting up the payments systems and proposed scale of operations, among others. The umbrella entity needs to commence operations within six months, extendable to a maximum of one year, if required, from the date of the in-principle approval.

Given the explosion in the country’s Internet data consumption and proliferation of various digital platforms, the growth in digital payments is likely to go up substantially.

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