PAYMENT AND SETTLEMENT SYSTEMS

Overview of Payment Systems in India

The central bank of any country is usually the driving force in the development of national
payment systems. The Reserve Bank of India as the central bank of India has been playing
this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient,
Accessible and Authorised payment systems in the country.

The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a
sub-committee of the Central Board of the Reserve Bank of India is the highest policy
making body on payment systems in the country. The BPSS is empowered for authorising,
prescribing policies and setting standards for regulating and supervising all the payment and
settlement systems in the country. The Department of Payment and Settlement Systems of the
Reserve Bank of India serves as the Secretariat to the Board and executes its directions.

In India, the payment and settlement systems are regulated by the Payment and Settlement
Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well
as the Payment and Settlement System Regulations, 2008 framed thereunder came into effect
from August 12, 2008. 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 authorised
by RBI. Reserve Bank has since authorised payment system operators of pre-paid payment
instruments, card schemes, cross-border in-bound money transfers, Automated Teller
Machine (ATM) networks and centralised clearing arrangements.
(http://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043)

Payment Systems

The Reserve Bank has taken many initiatives towards introducing and upgrading safe and
efficient modes of payment systems in the country to meet the requirements of the public at
large. The dominant features of large geographic spread of the country and the vast network
of branches of the Indian banking system require the logistics of collection and delivery of
paper instruments. These aspects of the banking structure in the country have always been
kept in mind while developing the payment systems.

Paper-based Payments

Use 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 Reserve Bank of India to popularize
the electronic payment products in preference to cash and cheques.

Since paper based payments occupy an important place in the country, Reserve Bank had
introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and
bringing in efficiency in processing of cheques.

Later, a separate High Value Clearing was introduced for clearing cheques of value Rupees
one lakh and above. This clearing was available at select large centres in the country (since
discontinued). Recent developments in paper-based instruments include launch of Speed
Clearing (for local clearance of outstation cheques drawn on core-banking enabled branches
of banks), introduction of cheque truncation system (to restrict physical movement of
cheques and enable use of images for payment processing), framing CTS-2010 Standards (for
enhancing the security features on cheque forms) and the like.

While the overall thrust is to reduce the use of paper for transactions, given the fact that it
would take some time to completely move to the electronic mode, the intention is to reduce
the movement of paper – both for local and outstation clearance of cheques.

Electronic Payments

The initiatives taken by RBI in the mid-eighties and early-nineties focused on technology-
based solutions for the improvement of the payment and settlement system infrastructure,
coupled with the introduction of new payment products by taking advantage of the
technological advancements in banks. The continued increase in the volume of cheques
added pressure on the existing set-up, thus necessitating a cost-effective alternative system.

Electronic Clearing Service (ECS) Credit

The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive
payment requirements (like salary, interest, dividend payments) of corporates and other
institutions. ECS (Credit) facilitates customer accounts to be credited on the specified value
date and is presently available at all major cities in the country.

During September 2008, the Bank launched a new service known as National Electronic
Clearing Service (NECS), at National Clearing Cell (NCC), Mumbai. NECS (Credit)
facilitates multiple credits to beneficiary accounts with destination branches across the
country against a single debit of the account of the sponsor bank. The system has a pan-India
characteristic and leverages on Core Banking Solutions (CBS) of member banks, facilitating
all CBS bank branches to participate in the system, irrespective of their location across the
country.

Regional ECS (RECS)

Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of the
NECS is confined to the bank branches within the jurisdiction of a Regional office of RBI.
Under the system, the sponsor bank will upload the validated data through the Secured Web
Server of RBI containing credit/debit instructions to the customers of CBS enabled bank
branches spread across the Jurisdiction of the Regional office of RBI. The RECS centre will
process the data, arrive at the settlement, generate destination bank wise data/reports and
make available the data/reports through secured web-server to facilitate the destination bank
branches to afford credit/debit to the accounts of beneficiaries by leveraging the CBS
technology put in place by the bank. Presently RECS is available in Ahmedabad, Bengaluru,
Chennai and Kolkata

Electronic Clearing Service (ECS) Debit

The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting
periodic and repetitive collections of utility companies. ECS (Debit) facilitates consumers /
subscribers of utility companies to make routine and repetitive payments by ‘mandating’
bank branches to debit their accounts and pass on the money to the companies. This
tremendously minimises use of paper instruments apart from improving process efficiency
and customer satisfaction. There is no limit as to the minimum or maximum amount of
payment. This is also available across major cities in the country.

Electronic Funds Transfer (EFT)

This retail funds transfer system introduced in the late 1990s enabled an account holder of a
bank to electronically transfer funds to another account holder with any other participating
bank. Available across 15 major centers in the country, this system is no longer available for
use by the general public, for whose benefit a feature-rich and more efficient system is now
in place, which is the National Electronic Funds Transfer (NEFT) system.

National Electronic Funds Transfer (NEFT) System

In November 2005, a more secure system was introduced for facilitating one-to-one funds
transfer requirements of individuals / corporates. Available across a longer time window, the
NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time
transfer of funds. Certain other unique features viz. accepting cash for originating
transactions, initiating transfer requests without any minimum or maximum amount
limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time
of credit to the account of the beneficiaries, etc., are available in the system.

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. This was introduced in in 2004 and settles all
inter-bank payments and customer transactions above `2 lakh.

Other Payment Systems

Pre-paid Payment Systems

Pre-paid instruments are payment instruments that facilitate purchase of goods and services
against the value stored on these instruments. The value stored on such instruments represents
the value paid for by the holders by cash, by debit to a bank account, or by credit card. The
pre-paid payment instruments can be issued in the form of smart cards, magnetic stripe cards,
internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.

Subsequent to the notification of the PSS Act, policy guidelines for issuance and operation of
prepaid instruments in India were issued in the public interest to regulate the issue of prepaid
payment instruments in the country.
The use of pre-paid payment instruments for cross border transactions has not been permitted,
except for the payment instruments approved under Foreign Exchange Management Act,1999
(FEMA).

Mobile Banking System

Mobile phones as a medium for providing banking services have been attaining increased
importance. 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. The guidelines focus on systems for
security and inter-bank transfer arrangements through Reserve Bank's authorized systems. On
the technology front the objective is to enable the development of inter-operable standards so
as to facilitate funds transfer from one account to any other account in the same or any other
bank on a real time basis irrespective of the mobile network a customer has subscribed to.

ATMs / Point of Sale (POS) Terminals / Online Transactions

Presently, there are over 61,000 ATMs in India. Savings Bank customers can withdraw cash
from any bank terminal up to 5 times in a month without being charged for the same. To
address the customer service issues arising out of failed ATM transactions where the
customer's account gets debited without actual disbursal of cash, the Reserve Bank has
mandated re-crediting of such failed transactions within 12 working day and mandated
compensation for delays beyond the stipulated period. Furthermore, a standardised template
has been prescribed for displaying at all ATM locations to facilitate lodging of complaints by
customers.

There are over five lakh POS terminals in the country, which enable customers to make
payments for purchases of goods and services by means of credit/debit cards. To facilitate
customer convenience the Bank has also permitted cash withdrawal using debit cards issued
by the banks at PoS terminals.

The PoS for accepting card payments also include online payment gateways. This facility is
used for enabling online payments for goods and services. The online payment are enabled
through own payment gateways or third party service providers called intermediaries. In
payment transactions involving intermediaries, these intermediaries act as the initial recipient
of payments and distribute the payment to merchants. In such transactions, the customers are
exposed to the uncertainty of payment as most merchants treat the payments as final on
receipt from the intermediaries. In this regard safeguard the interests of customers and to
ensure that the payments made by them using Electronic/Online Payment modes are duly
accounted for by intermediaries receiving such payments, directions were issued in
November 2009. Directions require that the funds received from customers for such
transactions need to be maintained in an internal account of a bank and the intermediary
should not have access to the same.

Further, to reduce the risks arising out of the use of credit/debit cards over internet, Reserve
Bank mandated that all transactions should be additionally authenticated based on
information not available on the card and an online alert should be sent to the cardholders for
such transactions.
Oversight of Payment and Settlement Systems

Oversight of the payment and settlement systems is a central bank function whereby the
objectives of safety and efficiency are promoted by monitoring existing and planned systems,
assessing them against these objectives and, where necessary, inducing change. By
overseeing payment and settlement systems, central banks help to maintain systemic stability
and reduce systemic risk, and to maintain public confidence in payment and settlement
systems.

The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems
Regulations, 2008 framed thereunder, provide the necessary statutory backing to the Reserve
Bank of India for undertaking the Oversight function over the payment and settlement
systems in the country.