PAYMENT AND SETTTLEMENT SYSTEM IN INDIA

PRESENT AND FUTURE

BY

KRISHAN PRATAP SINGH

ROLL NO. 20

The Payment and Settlement Systems(PSS) Act, 2007 received the assent of the President on 20th December 2007 and it came into force with effect from 12th August 2008.

The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), to exercise its powers and perform its functions and discharge its duties under this statute.  The Act also provides the legal basis for “netting” and “settlement finality”. This is of great importance, as in India, other than the Real Time Gross Settlement (RTGS) system all other payment systems function on a net settlement basis.

Under the PSS Act, 2007,  two Regulations have been made by the Reserve Bank of India, namely,  the Board for Regulation and Supervision of Payment and Settlement Systems Regulation, 2008 and   the Payment and Settlement Systems Regulations, 2008. Both these Regulations came into force along with the PSS Act, 2007 on 12th August 2008.

The Board for Regulation and Supervision of Payment and Settlement Systems Regulation, 2008 deals with the constitution of the Board for Regulation and Supervision of Payment and Settlement System (BPSS), a Committee of the Central Board of Directors of the Reserve Bank of India. It also deals with the composition of the BPSS, its powers and functions,  exercising of powers on behalf of BPSS, meetings of the BPSS and quorum, the constitution of Sub-Committees/Advisory Committees by BPSS, etc.,  The BPSS exercises the powers on behalf of the Reserve Bank, for regulation and supervision of the payment and settlement systems under the PSS Act, 2007.

The Payment and Settlement Systems Regulations, 2008 covers matters  like form of application for authorization for commencing/ carrying on a payment

system and grant of authorization, payment instructions and determination of standards of payment systems, furnishing of returns/documents/other information, furnishing of accounts and balance sheets by system provider etc., .

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

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

In India, the Payment and Settlement system 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 Regulation, 2008 framed there under came into effect from August 12, 2008. In terms of Section 4 of PSS Act, no person other than the RBI can commence or operate a payment system in India unless authorized by RBI. Reserve Bank has since authorized payment system operators of pre-paid payment instruments, card schemes, cross-border in-bound money transfers, Automated Teller Machine (ATM) networks and centralized clearing arrangements.

WHAT IS PAYMENT SYSTEM?Section 2(1) (i) of the PSS Act 2007 defines a payment system to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange (Section 34 of the PSS Act 2007 states that its provisions will not apply to stock exchanges or clearing corporations set up under stock exchanges).  It is further stated by way of an explanation that a “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer

operations or similar operations.

All systems (except stock exchanges and clearing corporations set up under stock exchanges) 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. Also all entities operating money transfer systems or card payment systems or similar systems fall within the definition of a system provider. To decide whether a particular entity operates the payment system, it must perform either the clearing or settlement or payment function or all of them.

TYPES OF PAYMENT INSTRUMENTS

MANDATES GIROs

This is considered to be a This is considered to be a

Pull System. They are also Push System. It is also

Known as Paper based known as Electronic

Payments. It includes Payments. It includes

- CHEQUES - ECS

- DRAFTS - NEFT

- RTGS

- CARDs

- EFT

- IMPS

- Internet Banking &

E-Commerce

CHEQUES

Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument

Different Kinds / Types of Cheques

1. Bearer Cheque

When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.

2. Order Cheque

When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

3. Uncrossed / Open Cheque

When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.

4. Crossed Cheque

Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account.

5. Anti-Dated Cheque

If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto six months from the date of the cheque.

6. Post-Dated Cheque

If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on the cheque.

7. Stale Cheque

If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A stale cheque is not honoured by the bank.

DEMAND DRAFT

Demand draft is defined as per Section 85(a) of NI Act 1881as an order to pay money drawn by one office of a bank upon another office of a same bank for a sum of money payable to order on demand.

FEATURES

It is payable to order on demand(85-A NI Act) It cannot be issued as payable to bearer(Sec 31 RBI Act) If a Bank fails to honour a bank draft, it renders itself liable for

damages. Similarly omission of signatures or wrong signatures can also make the bank liable.

By prior arrangement, the bank paying could be a different bank also.

ELECTRONIC CLEARING SERVICE (ECS)

ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa using the services of a ECS Centre at a ECS location.

TYPES OF ECS

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 corporate 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.

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.

REGIONAL ELECTRONIC CLEARING SERVICE (R-ECS)

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 Ahmadabad, Bengaluru, Chennai and Kolkata.

NATIONAL ELECTRONIC CLEARING SERVICE (NECS)

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.

NATIONAL AUTOMATED CLEARING HOUSE (NACH)

It is launched recently on January 1, 2013. It is same as NECS, it is initiated by NPCI, launched to overcome the NECS drawback as it deals with both Debit and Credit w.r.t to NECS only Credit is possible although Debit can also be done but it makes the system more complex. It has been launched to overtake all the existing system. Basically the major problem occur to maintain all the mandate information so NPCI has launched MMS (Mandate management System) which manages all the information of customers if the mandate information is updated by the Sponsors bank than the due diligence is required or else if the customer information is updated by customer bank than no need of due diligence.

NATIONL ELECTRONIC FUND TRANSFER (NEFT) SYSTEM

In November 2005, a more secure system was introduced for facilitating one-to-one funds transfer requirements of individuals / corporate. 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 SETTLEME T (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 2004 and settles all inter-bank payments and customer transactions above 2 lakh.

ELECTRONIC FUND 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.

CARDS

A bank card is a plastic card issued by a bank to its clients that may perform one or more of the following services:

ATM card, card used for transactions at automatic teller machines DEBIT card, card linked to a bank account and used for making purchases CREDIT card, card attached to a revolving credit line

DEBIT CARD

A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account(s) at a financial institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a payee's designated bank account. The card, where accepted, can be used instead of cash when making purchases. In some cases, the primary account number is assigned exclusively for use on the Internet and there is no physical card.

In many countries, the use of debit cards has become so widespread that their volume has overtaken or entirely replaced cheques and, in some instances, cash transactions. The development of debit cards, unlike credit cards and charge cards, has generally been country specific resulting in a number of different systems around the world, which were often incompatible. Since the mid 2000s, a number of initiatives have allowed

debit cards issued in one country to be used in other countries and allowed their use for internet and phone purchases.

Unlike credit and charge cards, payments using a debit card are immediately transferred from the cardholder's designated bank account, instead of them paying the money back at a later date.

Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash. Merchants may also offer cash back facilities to customers, where a customer can withdraw cash along with their purchase

CREDIT CARD

A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card.

The size of most credit cards is 85.60 × 53.98 mm (33/8 × 21/8 in), conforming to the ISO/IEC 7810 ID-1 standard. Credit cards have an embossed bank card number complying with the ISO/IEC 7812 numbering standard.

INTERBANK MOBILE PAYMENT SERVICE

Currently majority of interbank mobile fund transfer transactions are channelized through NEFT mechanism. Under NEFT, the transactions are processed and settled in batches, hence are not real time. Also, the transactions can be done only during the working hours of the RTGS system.

In the above context, NPCI has carried out a pilot on mobile payment system initially with 4 member banks viz State Bank of India, Bank of India, Union Bank of India and ICICI Bank in August 2010. Yes Bank, Axis Bank and HDFC Bank have joined this pilot in month of September, October and November 2010 respectively. Interbank Mobile Payment Service (IMPS) public launch happened on 22nd November 2010 by Smt. Shyamala Gopinath, DG RBI at Mumbai and this service is now available to the Indian public.

IMPS offer an instant, 24X7, interbank electronic fund transfer service through mobile phones. IMPS facilitate customers to use mobile instruments as a channel for accessing their bank accounts and put high interbank fund transfers in a secured manner with immediate confirmation features.

This facility is provided by NPCI through its existing NFS switch.

The eligible criteria for the Banks who can participate in IMPS are that the Bank should have approval from RBI for Mobile Banking Service.

OBJECTIVES OF IMPS

To enable bank customers to use mobile instruments as a channel for accessing their banks accounts and remit funds

Making payment simpler just with the mobile number of the beneficiary         

To sub-serve the goal of Reserve Bank of India (RBI)  in electronification of retail payments

To facilitate mobile payment systems already introduced in India with the Reserve Bank of India Mobile Payment Guidelines 2008 to be inter-operable across banks and mobile operators in a safe and secured manner

To build the foundation for a full range of mobile based Banking services.   

Participants for IMPS will be as follows:

Remitter (Sender)

Beneficiary (Receiver)

Banks

National Financial Switch - NPCI

INTERNET BANKING & E- COMMERCE

Online banking (or Internet banking or E-banking) allows customers of a financial institution to conduct financial transactions on a secure website operated by the institution, which can be a retail or virtual bank, credit union or building society. It may include of any transactions related to online usage

To access a financial institution's online banking facility, a customer having personal Internet access must register with the institution for the service, and set up some password (under various names) for customer verification. The password for online banking is normally not the same as for telephone banking. Financial institutions now routinely allocate customer numbers (also under various names), whether or not customers intend to access their online banking facility. Customer numbers are normally not the same as account numbers, because a number of accounts can be linked to the one customer number. The customer will link to the customer number any of those accounts which the customer controls, which may be cheque, savings, loan, credit card and other accounts

Features

Account Details: View your bank account details, account balance, download statements and more. Also view your Demat, Loan & Credit Card Account Details too all in one place.

Fund Transfer: Transfer fund to your own accounts, other Axis Bank accounts or Other Bank account seamlessly.

Request Services: Give a request for Cheque book, Demand Draft, Stop Cheque Payment, Debit Card Loyalty Point Redemption etc.

Investment Services: View your complete Portfolio with the bank, Create Fixed Deposit, Apply for IPO etc.

Value Added Services: Pay Utility bills for more than 160 billers, Recharge Mobile, Create Virtual Cards, Pay any Visa Credit Card bills, Register for estatement and sms banking etc.

ATM/POINT OF SALE (POS)/ ONLINE TRANSACTION

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.

PSS 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 systems- To 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 grid-based 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-operability- Development 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.

RISK INVOLVED IN PSS

There is basically two types of risk arises.

1. Systematic Risk2. Settlement Risk

SYSTEMATIC RISKRisks in payment systems refer to the possibility of payments being incomplete. The impact can be measured in terms of damaging value or level of confidence in payment systems. For example, in case of incorrect or delayed payments, there are costs arising from transferring funds back, interest charges, replacement costs and other types of charges. In case of not receiving or receiving partial payments, there will be a principal loss, while in some cases, which involve high value payments or payment participants at large, this may cause systemic risks among financial institutions and eventually affect the stability of the financial system.Such risks generally exist in the payment systems that are not settled on a real-time basis i.e. net settlement systems, whereby the longer the time difference between payment and settlement time, the higher the risk exposure it is. Moreover, the risks will also depend on the volume and value of transactions in the payment system.

SETTLEMENT RISKSettlement risk is the risk that a counterparty does not deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement.One form of settlement risk is foreign exchange settlement risk or cross-currency settlement risk, sometimes called Herstatt risk.

CHALLENGES OF PSS

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 there under, 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.