Context
The Reserve Bank of India (RBI) has issued the Master Directions on Authorisation to Operate a Payment System, consolidating existing guidelines on the authorisation of Payment System Operators (PSOs). The directions, which come into effect immediately, provide a unified framework covering eligibility criteria, authorisation, perpetual validity of licences, voluntary surrender, and cooling-off requirements. New PSO authorisations will be perpetually valid, while existing operators may receive perpetual validity at renewal subject to regulatory compliance. The framework retains FATF-based restrictions on investment from non-compliant jurisdictions, capping aggregate voting rights below 20 per cent for such investors. Authorisation remains on-tap, allowing entities to apply throughout the year.
The Framework
- Name: Master Directions on Authorisation to Operate a Payment System.
- Issued by: Reserve Bank of India (RBI).
- Aim: Consolidate existing guidelines on PSO authorisation.
Key Features
Perpetual Validity of Licences
- New PSOs: Authorisation perpetually valid.
- Existing PSOs: May receive perpetual validity at renewal, subject to:
- Meeting regulatory requirements.
- No supervisory concerns.
- Non-compliant operators: May receive 1-year renewals until deficiencies are addressed.
On-Tap Authorisation
- Entities can apply for payment system licences throughout the year.
- Applications to be submitted through the RBI’s portal.
- Must comply with capital and net-worth requirements prescribed for specific payment systems.
Fit and Proper Criteria
- Applicants must meet the RBI’s “fit and proper” criteria:
- Integrity.
- Financial soundness.
- Governance standards.
FATF Restrictions
- Investments from FATF non-compliant jurisdictions are restricted.
- New investors from such jurisdictions cannot acquire significant influence.
- Aggregate voting rights capped below 20 per cent.
Voluntary Surrender of Authorisation
- Entities seeking to discontinue operations must:
- Settle outstanding liabilities to customers, merchants, agents, and banks.
- Obtain auditor-certified confirmation before surrendering licences.
Cooling-Off Period
- A 1-year cooling-off period may be imposed on entities whose:
- Authorisation has been revoked.
- Renewal has been rejected.
- Authorisation has been voluntarily surrendered.
- Application for authorisation has been rejected.
- During this period, such entities cannot apply for permission to operate any payment system.
What is a Payment System Operator (PSO)?
- An entity authorised by the RBI to operate a payment system under the Payment and Settlement Systems Act, 2007 (PSS Act).
- Examples of PSOs:
- Card networks: Visa, Mastercard, RuPay, American Express.
- Prepaid Payment Instruments (PPI): PhonePe, Paytm, Google Pay, Mobikwik, Amazon Pay.
- UPI third-party app providers.
- Cross-border payment players.
- ATM networks.
What is the Payment and Settlement Systems Act, 2007 (PSS Act)?
- The legal framework for payment systems in India.
- Effective from: 12 August 2008.
- Empowers the RBI to regulate and supervise payment systems in India.
- Provides for authorisation of PSOs.
India’s Payment Systems Landscape
- UPI (Unified Payments Interface): Operated by NPCI, India’s flagship real-time payments platform.
- RTGS (Real Time Gross Settlement): For large-value transactions, above ₹2 lakh, 24×7.
- NEFT (National Electronic Funds Transfer): For smaller value transactions, 24×7.
- IMPS (Immediate Payment Service): Instant interbank transfers.
- Card networks: RuPay, Visa, Mastercard.
- Cheque Truncation System (CTS): For electronic cheque clearing.
- Bharat Bill Payment System (BBPS): For utility bill payments.
- AEPS (Aadhaar Enabled Payment System).
- FASTag: For electronic toll collection.
FATF-Based Restrictions in India’s Financial System
- Restrictions on FDI from FATF non-compliant jurisdictions in critical sectors.
- Enhanced due diligence for transactions involving these jurisdictions.
- Restrictions on PSO investments from such jurisdictions (as per the new RBI master directions).
What is NPCI?
- National Payments Corporation of India.
- A non-profit company under the Ministry of Finance.
- Founded: 2008.
- Promoted by: RBI and Indian Banks’ Association (IBA).
- Functions:
- Operates UPI, RuPay, IMPS, BHIM, AEPS, BBPS, NETC (FASTag).
- Sets standards for retail payment systems in India.
- NPCI International Payments Limited (NIPL): For global UPI expansion.
About RBI
- Reserve Bank of India, India’s central bank.
- Established under the RBI Act, 1934; began operations on 1 April 1935.
- Headquartered: Mumbai.
- Current Governor: Sanjay Malhotra (since 11 December 2024).
- Deputy Governor in charge of Payments: As per current allocations.
Why is This Important?
- Streamlines PSO authorisation with unified framework.
- Encourages innovation in digital payments.
- Strengthens financial integrity through FATF-based safeguards.
- Supports India’s leadership in digital payments globally.
- Provides business certainty to payment system operators.
Key Terms (Simple)
- Payment System Operator (PSO): An entity authorised by the RBI to operate a payment system under the PSS Act, 2007.
- Payment and Settlement Systems Act, 2007 (PSS Act): The legal framework for payment systems in India, empowering the RBI to regulate and supervise payment systems.
- Perpetual Validity: A licence that remains valid indefinitely subject to ongoing regulatory compliance, without periodic renewals.
- On-Tap Authorisation: An authorisation mechanism that allows entities to apply for licences throughout the year, instead of in specific windows.
- Fit and Proper Criteria: A regulatory test to assess the integrity, financial soundness, and governance of applicants for financial licences.
- FATF (Financial Action Task Force): An intergovernmental body founded in 1989, headquartered in Paris, that sets global standards for combating money laundering, terrorist financing, and proliferation financing.
- Grey List: A list of FATF jurisdictions under increased monitoring for AML/CFT deficiencies.
- Black List: A list of FATF high-risk jurisdictions with strategic AML/CFT deficiencies (currently North Korea, Iran, Myanmar).
- Cooling-Off Period: A mandatory waiting period before an entity can re-apply for an authorisation after revocation, non-renewal, voluntary surrender, or rejection.
- NPCI (National Payments Corporation of India): A non-profit company founded in 2008, promoted by RBI and IBA, that operates UPI, RuPay, IMPS, AEPS, BBPS, NETC.
- UPI (Unified Payments Interface): India’s flagship real-time payments platform, operated by NPCI, launched in 2016.
- CBDC (Central Bank Digital Currency): A digital form of fiat currency issued by a central bank, also called e-Rupee in India.
- AML/CFT: Anti-Money Laundering / Counter Financing of Terrorism, a global regulatory framework to prevent illicit financial flows.
Practice MCQs
Q1. With reference to the RBI’s Master Directions on Authorisation to Operate a Payment System (June 2026), consider the following statements:
- New PSO authorisations will be perpetually valid.
- Existing operators may receive perpetual validity at renewal, subject to regulatory compliance.
- Authorisation will continue to be available on an on-tap basis throughout the year.
- The directions take effect from 1 January 2027.
How many of the above statements are correct?
(a) Only one (b) Only two (c) Only three (d) All four (e) None
(Statement 4 is wrong; the directions take effect immediately, NOT from 1 January 2027.)
Q2. With reference to FATF-based restrictions under the new framework, consider the following statements:
- Investments from FATF non-compliant jurisdictions are restricted.
- New investors from such jurisdictions cannot acquire significant influence in PSOs.
- Aggregate voting rights from such investors are capped below 20 per cent.
- The directions allow unrestricted investment from FATF non-compliant jurisdictions.
Which of the above are correct?
(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
(Statement 4 is wrong; the directions RESTRICT investment from FATF non-compliant jurisdictions.)
Q3. With reference to the Payment and Settlement Systems Act, 2007 (PSS Act), consider the following statements:
- The PSS Act, 2007 came into effect on 12 August 2008.
- It provides the legal framework for payment systems in India.
- It empowers the RBI to regulate and supervise payment systems.
- It provides for the authorisation of Payment System Operators (PSOs).
How many of the above statements are correct?
(a) Only one (b) Only two (c) Only three (d) All four (e) None
Q4. With reference to the Financial Action Task Force (FATF), consider the following statements:
- FATF is an intergovernmental body founded in 1989 by the G7 nations.
- FATF is headquartered in Paris, France.
- India became a full member of FATF in 2010.
- FATF’s current black list includes the United States and the United Kingdom.
Which of the above are correct?
(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
(Statement 4 is wrong; FATF’s current black list includes North Korea, Iran, and Myanmar, NOT the US or UK.)
Q5. With reference to NPCI and India’s payment systems, consider the following statements:
- NPCI is a non-profit company founded in 2008, promoted by the RBI and the Indian Banks’ Association (IBA).
- NPCI operates UPI, RuPay, IMPS, BHIM, AEPS, BBPS, and NETC (FASTag).
- UPI is India’s flagship real-time payments platform, launched in 2016.
- NPCI is a private foundation with no link to the Government of India or RBI.
Which of the above are correct?
(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
(Statement 4 is wrong; NPCI is promoted by the RBI and IBA, NOT a private foundation.)
Answer Key
- (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the directions take effect immediately.
- (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the directions restrict such investment.
- (d), All four statements are correct.
- (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the black list includes North Korea, Iran, and Myanmar.
- (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because NPCI is promoted by the RBI and IBA.
