RBI Notification on Escrow Account of Scheduled Commercial Bank

Varun Hariharan

13 Sep, 2022

The Reserve Bank of India (RBI) brought out a notification on maintenance of escrow account with a scheduled commercial bank in India. This notification was brought into force on 17 November 2020. Such notification was brought vide RBI/2020-21/68 DPSS.CO.PD.No.660/02.14.008/2020-21. This notification is not only directed to schedule commercial banks, but also affects different participants in the digital banking sector. Such participants will include Payment Aggregators (PA), Payment Gateways (PG) and Pre-paid payment Instruments (PPI).

What does the notification on Escrow for Scheduled Commercial bank mean?

The notification is an order from the RBI that all authorised PPI and PA are allowed to maintained escrow account with scheduled commercial bank. Apart from this, the RBI considered the risk system where diversification can be established. To spread out the risk, such operators are allowed to maintain another escrow account with a scheduled commercial bank.

This notification was given considered section 18 read with section 10(2) of the Payment and Settlement of Systems Act, 2007. Such notification has amended the master direction on ‘Issuance and Operation of PPI (PPI-MD) which was issued in the year 2017-18. This notification also affected the master direction on PA and PG.

What are the amendments for maintenance of escrow account with a scheduled commercial bank?

The following amendments have been considered by the RBI for Operation of PPI (PPI-MD) :

• Paragraph 12.3- Under the amended instructions as per this notification, Non- Bank PPI can maintain more than one escrow account with another scheduled commercial bank^[1]. This is completely done at the discretion of the PPI. Such decision for maintaining an account with another scheduled commercial bank would be in accordance to section 23 of the PSS Act, 2007.

• Paragraph 12.3(i) has been deleted in this notification.

• Paragraph 12.3(ii)- Payment accounts from one scheduled commercial bank can be migrated to another scheduled commercial bank. However, before migrating the same, prior consent of the RBI is required. When migration is allowed, there has to be minimum disruption caused to the usual banking system.

• Paragraph 12.3 (iv)- When it comes to permitted debits and credits which are allowed under this system, credits and debits can be carried from one escrow account to another escrow account. System of credits and debits for Inter-escrow accounts will not be permitted. The certificate from the auditor would mention the requirements pertaining the above transactions.

• Paragraph 12.3(v)- There has to be an agreement between the issuer or the operator and the scheduled commercial bank which is maintaining the escrow account. Under such system, the bank will be enabled to consider escrow only as per this notification.

• Paragraph 12.3(x)- The certificate of format as under Annexure 5 will be certified and signed by the auditor. Such certificate has to be submitted to the regional office of the DPSS, RBI. Certificates have to be submitted quarterly indicating that sufficient funds have been maintained in the escrow account. The same auditor would be appointed to carry out the transactions in both the escrow accounts. Any other entity would also be required to submit the annual certificate.

• Paragraph 12.4 (e)- Core portion would be calculated based on the system of escrow accounts. All these would be linked to a single escrow account. Such balances between the escrow and the core portions would be disclosed to the auditor.

Other amendments related to escrow account in scheduled commercial bank  for Regulation of Payment Aggregators (PAs) and Payment Gateways (PGs):

• Paragraph 8.1- Escrow account can be maintained in more than one scheduled commercial bank. However, the discretion to maintain this is in the PA or PG direction.
• Paragraph 8.2- Shifting of escrow accounts between scheduled commercial banks is allowed. Payment accounts from one scheduled commercial bank can be migrated to another scheduled commercial bank. However, before migrating the same, prior consent of the RBI is required. When migration is allowed, there has to be minimum disruption caused to the usual banking system.

• Paragraph 8.9- When it comes to permitted debits and credits which are allowed under this system, credits and debits can be carried from one escrow account to another escrow account. System of credits and debits for Inter-escrow accounts will not be permitted. The certificate from the auditor would mention the requirements pertaining the above transactions.

• Paragraph 8.13- The certificate of format as under Annexure 3 will be certified and signed by the auditor. Such certificate has to be submitted to the regional office of the DPSS, RBI. Certificates have to be submitted quarterly indicating that sufficient funds have been maintained in the escrow account. The same auditor would be appointed to carry out the transactions in both the escrow accounts. Any other entity would also be required to submit the annual certificate.
• Paragraph 8.15.5- Core portion would be calculated based on the system of escrow accounts. All these would be linked to a single escrow account. Such balances between the escrow and the core portions would be disclosed to the auditor.

Conclusion

Read our article:Guidelines mandated by RBI on Regulation of Payment Aggregators