Payment and Settlement Systems Act: Section 17 – Power to issue directions

Where the Reserve Bank is of the opinion that,–

(a) a payment system or a system participant is engaging in, or is about to engage in, any act, omission or course of conduct that results, or is likely to result, in systemic risk being inadequately controlled; or

(b) any action under clause (a) is likely to affect the payment system, the monetary policy or the credit policy of the country,

the Reserve Bank may issue directions in writing to such payment system or system participant requiring it, within such time as the Reserve Bank may specify–

(i) to cease and desist from engaging in the act, omission or course of conduct or to ensure the system participants to cease and desist from the act, omission or course of conduct; or

(ii) to perform such acts as may be necessary, in the opinion of the Reserve Bank, to remedy the situation.

Simplified Explanation

Section 17 of the Payment and Settlement Systems Act, 2007 grants the Reserve Bank of India (RBI) the authority to issue directions to a payment system or a system participant if it determines that certain conditions related to systemic risk or national monetary policy are at risk.

Key Provisions of Section 17:

1. Circumstances Leading to Issuance of Directions: The Reserve Bank can issue directions under this section if it believes that:
   • A payment system or system participant is engaging in, or is about to engage in, actions (acts, omissions, or conduct) that might result in systemic risk being inadequately controlled, or
   • Such actions are likely to negatively affect:
     • The payment system,
     • The monetary policy of the country,
     • The credit policy of the country.
2. In these situations, the RBI steps in to ensure that systemic risks are controlled and that the country’s monetary and credit policies are not adversely impacted.
3. Actions the RBI Can Take:
   • If the RBI identifies potential risks, it can direct the concerned payment system or system participant to:
     • Cease and desist: The payment system or participant may be instructed to stop the problematic conduct or prevent the same from occurring.
     • Take corrective actions: The RBI may require specific corrective measures to address the situation, such as making changes to operations, improving controls, or adjusting practices to mitigate risks.
4. The directions issued will specify a timeframe within which these actions must be completed.
5. Purpose of the Directions:
   • The primary goal of these directions is to protect the stability of the payment system and prevent any adverse effects on the monetary or credit policy of India. By issuing such directives, the RBI can safeguard against systemic risks that could impact the overall financial stability of the country.

Why This Section is Important:

• Systemic Risk Management: Section 17 empowers the RBI to intervene in situations where systemic risks are inadequately controlled, ensuring the resilience and stability of the financial and payment systems in India.
• Protecting National Policies: By allowing the RBI to intervene when actions threaten the country’s monetary or credit policy, the section helps ensure that the broader economic policies, such as inflation control and financial stability, are not compromised.
• Preemptive Action: This section enables the RBI to take proactive measures to prevent risks before they escalate, thus acting as a preventive mechanism in the payment system’s operations.
• Enforcement: The section empowers the RBI to directly influence the behavior of payment system operators and participants to maintain the integrity of the financial system.

In Summary:

Section 17 grants the Reserve Bank of India the power to issue directions to payment systems or system participants if their actions threaten to create or exacerbate systemic risks or disrupt monetary or credit policy. The RBI can instruct them to cease specific actions or take corrective measures to mitigate the identified risks, ensuring the stability and security of India’s payment systems and financial policies.