Interview with Mr. G Padmanabhan, Chairman, Bank of India (Former ED, Reserve Bank of India)

What are the current policy initiatives and trends that you find promising for advancing digital transactions, especially for mass adoption by small merchants and low-income consumers?

During my days in the Reserve Bank itself, successive Governors, be it Subba Rao or Raghuram Rajan had recognised that given the size and diversity of India we need to permit “a hundred flowers to bloom”.

Concrete outcomes of this approach are becoming visible. For inclusion and mass adoption it was imperative that the country found low-cost acceptance infrastructures. With operationalisation of UPI, Aadhaar Pay and Bharat QR, we have provided the infrastructure for facilitating mass adoption.

Unless the authorities get it hopelessly wrong for instance by trying to micro manage adoption and cost I think we are poised for a quantum leap in digital transactions in the years to come.

What role do you see for the government and the regulators playing in providing an enabling environment with several players and stakeholders coming into this rapidly evolving financial landscape – one that is conducive to innovation, and allows effective interplay of stakeholders?

I sincerely hope the government/ regulator does not attempt to micro manage. I would recommend principle-based regulation to ensure innovation and effective interplay of stakeholders.

Let me amplify. Regulation always lags innovation. That is universal truth whether one likes it or not. At the same time it is important in a country like ours to ensure that in the name of innovation and convenience, customers do not get taken for a ride. Therefore regulators and government will have to baseline standards, which any new product will need to adhere to.

As the innovation rapidly scales up, more detailed regulation may be warranted but such new rules will not prove disruptive if base line standards are already in place. Second, rules of the game cannot change too soon as this will lead to uncertainty as regards new investment in infrastructure.

Finally, there is a need for structured meetings between the regulator and the stakeholders. RBI has such an arrangement in the area of Foreign Exchange Management Act administration. I would recommend similar interactions and responses being emulated in the payments area also when fast changes are happening.

It is widely understood that to accelerate adoption of digital payments we need a model that makes transacting digitally cheaper than cash. However, levying MDR charges to small merchants with very thin margins are doing the opposite. In that context, what are your views on rationalizing MDR charges for merchants and on navigating a path to a more fair, transparent and balanced regime?

My recommendation is for the government and the RBI to stay away from micro management. There is very little research to substantiate the view that charges drive customer adoption.

Second, in a country where infrastructure development is just beginning to happen to support digital payments, the charges will have to be market determined as any mandated structure could either bias the customer or the service provider.

Having said that, today the common perception is that charges for these transactions are based out of card transactions and these are therefore too high and inappropriate. This is perhaps true. But then what is the right kind of charges for digital transactions through other form factors has to be evolved under a certain broad set of guidelines and not mandated.

Today we either try to look to other countries or turn to work out models based on what the regulator or the government considers as the correct set of assumptions. This is a questionable approach. To my mind as long as based on opportunity cost principle, we are able to offer lower costs, then the cost cannot deter digital acceptance.

As infrastructure development matures, and transactions scale up, and as more research driven data becomes available, these charges can be revisited.

But today, we seem to think that from day one, digital transactions will have to happen at minimum or no cost to the customer. This to my mind is not the right approach as anything mandated in this country has never scaled up.

It is widely understood that to accelerate adoption of digital payments we need a model that makes transacting digitally cheaper than cash. However, levying MDR charges to small merchants with very thin margins are doing the opposite. In that context, what are your views on rationalizing MDR charges for merchants and on navigating a path to a more fair, transparent and balanced regime?

This is an excellent approach. Experience in other countries proves that this approach has succeeded in countries (eg: South Korea). This should also be supported by making cash transactions more expensive.

Can GST spark large-scale digitization across merchants and their supply chains? How do you see this dynamic working?

If GST achieves its stated objective of reducing if not totally eliminating tax avoidance, then the cost of cash transactions which is often not well understood becomes more apparent. Once this happens, I am hopeful of people moving more and more into cash less mode of transactions.

That is why I strongly believe that disincentivisation of cash is an important element of digitisation agenda.

Despite an influx of digital payment solutions and business models, there isn’t a significant traction from merchants and consumers. What strategies can be adopted to break the demand supply gridlock, where the merchants feel the consumer does not make enough demands for digital payments.

In Consumer to Business segment, it is the lure of tax avoidance that encourages cash transactions. Once we address this, then other blocks automatically fall in place.

As I stated earlier once the cost of cash starts hitting the stakeholders, digital acceptance will automatically scale up quicker.

UPI seems to be a promising platform, but it is still nascent in its adoption. What in your opinion are the current roadblocks in scaling? What do different stakeholders such as banks, non-banks, regulator, and policymakers need to do to drive the large-scale adoption of UPI?

We need to give time for any innovation to become a product. When it comes to digital adoption, we seem to want too much to happen too soon. As Adam Smith once remarked “of all sorts of luggage, man is the most difficult to transport” meaning changing habits and mind set is the most difficult part of a change process.

So I would advocate patience. But having said that, I think there are few issues relating to UPI that needs to be looked into with an open mind and resolved to the satisfaction of all the stakeholders.

First, as per the model accepted in UPI the participating institutions will have to allow their system to interact with any app (what I would call white modelling of app) even those they don’t own. Banks had raised concerns over this arrangement in the beginning but ultimately fell in line. What does this mean technically? One could think of a cloud like arrangement where once an app enters through an approved institution, they can serve customers of any bank. This can raise operational issues unless a set of security standards are prescribed and adherence to these on an ongoing basis are validated either by NPCI or a trusted third party appointed by NPCI.

Second related issue is that there have to be transparent rules as regards the data privacy and standards that is sadly lacking in this country.

Third, UPI has not yet been opened up to non-bank participants. This is strange considering fact that majority of IMPS (and UPI is a superstructure on IMPS) transactions are accounted for by non-bank participants.

Shri G. Padmanabhan is a post graduate in Economics from the University of Kerala and an MBA (International Banking and Finance) from the Birmingham University, UK.

He joined Reserve Bank of India in March 1979 and was elevated as Executive Director on 4th July, 2011, the position from which he superannuated on 31st May, 2015. During his successful career in RBI, Shri Padmanabhan has handled various challenging assignments including Regional Director of a major regional office of RBI from November 2003 – April 2005 and Head of Department of Payment & Settlement Systems in the Bank.

As Executive Director in Reserve Bank of India, Shri Padmanabhan was looking after Department of Information and Technology, Department of Payment and Settlement Systems and Foreign Exchange Department.

Shri Padmanabhan has been appointed as Non-Executive Chairman of Bank of India on 14th August, 2015 for a period of three years.