Payment and Settlement System in India: Present and Future

By Puneet Rajiv
INTRODUCTION
Payments are important part of our daily transactions and happen from consumer to business, business to consumer and consumer to consumer. Payments raise the GDP of a country and are the most essential part of the economic system. Therefore ways to make Payments more convenient are the centre of the focus for the controlling authority of Payments. The Payment and Settlement Systems Act, 2007 came into effect from 12th Aug 2008. This act has appointed Reserve Bank of India as the controlling authority for the regulation and supervision of payment systems in India. RBI is also authorized under this act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). In terms of Section 4 of the PSS Act, no person other than the Reserve Bank of India (RBI) can commence or operate a payment system in India unless authorized by RBI.

BPSS is a committee of the central board of directors of the RBI which exercises the powers on behalf of the RBI for regulation and supervision of the payment and settlement systems.

Traditional Mode of PaymentsTraditional methods dominating the Indian payments market have been cheques and cash. Cash is the most popular modes of payment. However, it poses a security- risk for the customer if he is carrying too large an amount of cash. Therefore cheques make things simpler and hence they are the second most popular mode of payment.

Terminologies used under PSS Act 20071. Payment Obligation- It is the amount which is owed by one of the 2 participants in a payment system to the other participant resulting from any transaction. 2. Payment Instruction- It is an Instrument/Authorization in any form which effects to a payment from 1 participant of payment system to another participant of payment system. Ex- Cheque. 3. Settlement- It means the settlement of payment instructions received. Settlement can take place either on a net basis or on a gross basis. 4. Payment System- It is a system which enables payment between a payer and a beneficiary excluding the case of Stock exchange. All systems carrying out either clearing or settlement or payment operations or all of them are regarded as payment systems. All entities operating such systems will be known as system providers.

Guidelines to operate a payment systemAny person desirous of commencing or operating a payment system needs to apply for authorization from RBI under the PSS Act, 2007. Any unauthorized operation of a payment system would be an offence under the PSS Act, 2007 and accordingly liable for penal action under that Act. A sum of Rs 10,000/- is required to be submitted as application fee in favour of RBI. The RBI can dispose of all applications received for authorization within six months from the date of their receipt. The RBI can also revoke the authorization granted by it, if the system provider fails to comply with its orders or violates the terms and conditions under which the authorization was granted to it. The Aggrieved system provider can appeal to the Central Government within 30 days from the date on which the order of refusal or revocation is conveyed to him.

Payment and Settlement Systems in India : Present Paper-based PaymentsUse of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of the volume of total non-cash transactions in the country. In value terms, the share is presently around 11%. This share has been steadily decreasing over a period of time and electronic mode gained popularity due to the concerted efforts of RBI to popularize the electronic payment products in preference to cash and cheques. RBI had introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and bringing in efficiency in processing of cheques.

High Value Clearing was introduced for clearing cheques of value Rupees one lakh and above. This clearing was available at select large centers in the country. Recent developments in paper-based instruments include1. Speed clearing- Speed Clearing refers to collection of outstation cheques (a cheque drawn on non-local bank branch) through the local clearing. It facilitates collection of cheques drawn on outstation core-banking-enabled branches of banks, if they have a net-worked branch locally. The collection of outstation cheques, till now, required movement of cheques from the Presentation centre (city where the cheque is presented) to Drawee centre (city where the cheque is payable) which increases the realization time for cheques. Speed Clearing aims to reduce the time taken for realization of outstation cheques.

2. Cheque Truncation System- Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the Drawee bank branch. In its place an electronic image of the cheque is transmitted to the Drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. This effectively eliminates the associated cost of movement of the physical cheques and reduces the time required for their collection.

Electronic PaymentsDue to the efforts of the RBI and the BPSS now over 75% of all transactions are made in the electronic mode, including both largevalue and retail payments. Out of this 75%, 98% come from the RTGS (large-value payments) whereas a meager 2% come from retail payments. E-Payment systems include

1. Electronic Clearing Service (ECS Credit)- Known as Creditpush facility or one-to-many facility this method is used mainly for large-value or bulk payments where the receivers account is credited with the payment from the institution making the payment. Such payments are made on a timelybasis like a year, half a year, etc. and used to pay salaries, dividends or commissions

2. Electronic Clearing Services (ECS Debit)- Known as manyto-one or debit-pull facility this method is used mainly for small value payments from consumers/ individuals to big organizations or companies. It eliminates the need for paper and instead makes the payment through banks/corporates or government departments. It facilitates individual payments like telephone bills, electricity bills, online and card payments and insurance payments.

3. National Electronic Funds Transfer (NEFT)- NEFT is a facility provided to bank customers to enable them to transfer funds easily and securely on a one-to-one basis. It is done via electronic messages. In order to speed up the transactions there are up to 6 transactions in one day. Even though it is not on real time basis like RTGS (Real Time Gross Settlement), NEFT facilities are available in 30.000 bank branches all over the country and work on a batch mode.

4. Real Time Gross Settlement (RTGS) System- RTGS is a funds transfer systems where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. "Gross settlement" means the transaction is settled on one to one basis without bunching or netting with any other transaction. Once processed, payments are final and irrevocable.

5. Mobile Banking System- Reserve Bank brought out a set of operating guidelines on mobile banking for banks in October 2008, according to which only banks which are licensed and supervised in India and have a physical presence in India are permitted to offer mobile banking after obtaining necessary permission from Reserve Bank.

Payment and Settlement Systems in India: Future

The Vision statement of RBI for future of Payment and Settlement Systems in India is To proactively encourage electronic payment systems for ushering in a less-cash society in India and to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards. Some of the steps that would be taken are as follows-

1. Efficiency enhancement in the payment systemsTo provide speed, efficiency, interoperability and standardization in payments systems that would enable all stakeholders (users and providers) to realize their needs without compromising the quality of service. The focus of cheque clearing operations in the coming years would be consolidation, rationalization and centralization, through the

implementation of grid-based CTS solution (which is Information Technology Act compliant) across the country by NPCI. The gridbased CTS will usher in a standardized cheque clearing scenario across the country. Currently there are many avatars of ECS operating in the country with ECS on a standalone mode available in 81 centers. The way forward would be to consolidate local ECS into RECS and ultimately to NECS.

2. Standardization, portability and inter-operabilityDevelopment of common standards for payment systems and strive towards interoperability and portability of payment systems. Currently the account numbers maintained across various banks are different based on their requirements and range from 10 digits to 17 digits. In this regard, the adoption of International Bank Account Number (IBAN)/ Basic Bank Account Number (BBAN) could be explored. IBAN/BBAN provides a format for account identification and also contains validation information in the form of check digits which can be validated at source based on a prescribed single standard procedure. The IBAN/BBAN in itself contains all the routing information needed to get a payment from one bank to another. The concept of a payment hub is being perceived to allow consolidation of multiple payment systems into one centrally managed payment system. Such a payment hub with the latest technology would result in facilitating faster and smoother electronic payment transfers as opposed to the current system of individual interfaces being responsible for inputting electronic payment instructions into various systems. Once a payment hub becomes functional an individual bank would simply need to input an electronic payment instruction to the hub which would then automatically route the instructions to various payment systems.

3. Development of Infrastructure and an integrated payment system- The payment system infrastructure in
the country which is well developed and robust is to be further augmented to ensure safety, security, robustness for providing low cost transaction processing capability and flexibility to system participants.

4. Promote Access and Inclusion- The Bank is committed

to ensuring the reach of payment systems at a reasonable cost to the people at large. RBI has so far played the role of an enabler in this regard by opening up the payment systems space to non-banks, liberalizing the norms for issue of prepaid payment instruments, conduct of mobile banking etc. Success in future would involve devising an appropriate policy framework in which authorized private sector entities would play a significant role as in the case of White Label ATMs. Other initiatives in the directions could be revisiting the current KYC norms for various prepaid payment products.