When Parliament passed the Payment and Settlement Systems Act last year, there was not a murmur of dissent. The power to issue payment cards in exchange for cash is obviously open to misuse; it would be easy for scamsters to collect cash for cards and disappear. So cards needed to be regulated, and who better to do so than the Reserve Bank of India? Under its draft regulations, the RBI wants to restrict the right to issue open-system prepaid instruments — cards that can be used to make payments for anything to anyone — to banks and non-banking finance companies already under its regulation. Obviously, the RBI wants to create business for the institutions it looks after, especially for government-owned banks, and dreads competition to them. Such an inference may be unfair; perhaps the RBI is just being conservative and risk-averse. But the two inferences are not mutually incompatible. And even if the motive of the RBI were so selfish, there are better ways of realizing it.

Payment cards are perhaps the greatest financial innovation after banks. They are a form of debit cards, which are already a preserve of RBI-regulated institutions. They have the capacity to spread elementary banking services to the population not reached by the banking system. The government is aware of this unbanked population, has tried to reach it through commercial banks, cooperative banks, regional rural banks and other devices, and has failed. It now has a chance to break this deadlock; but now that it has given the RBI the power, the RBI is intent to ensure that this innovation should fail. Even if the RBI wants to reward its own, there is a more intelligent way of doing it. Card issuers will be raking in enormous amounts of cash; the RBI can decree that all that cash has to be deposited in banks if it exceeds a certain minimum. It should impose a maximum cash reserve ratio on card issuers, say, 10 per cent of the value of cards issued; and it should also impose an equivalent minimum deposit ratio on them, denoting the proportion of their assets they must hold in bank deposits. And it should think of rules on where the remaining 80 per cent should be invested. The safest place would be bank deposits; but it could also be invested in liquid mutual funds or a variant of them that the RBI is comfortable with. Instead of looking after its own, the RBI should do some thinking on principles of safety.