- Payments and settlement systems in India is managed by the RBI.
- In recent years, the payment culture of the country has changed from paper based payment devices like cheques to RTGS, NEFT, Prepaid Payments Instruments etc.
- The Payments and Settlements System Act 2007 is the relevant regulation for payments and settlements activities.
- In recent years, digital payments led by mobile banking, PPIs etc are quickly changing the payment system.
- Institutions including the NPCI in digital payment innovations and CCIL in clearing activities are performing an exceptional role.
RBI and Payment and Settlement System in India
An efficient payment and settlement system that transfers and settles payments is necessary to promote economic activities. Such a payment system comprises of networking between banks, money transfer facilities, clearing houses and other institutions, instruments for payments and rules and regulations for administering the entire payment activities. When we use the NEFT, RTGS, pre-paid instruments, cheques, Core Banking System and any of the National Payment Corporation of India mechanism (IMPS, AEPS etc), we are using the RBI managed payment and settlement system.
RBI as a central bank, creates, regulate and manages the national payments system of India. It has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country.
What is Payment and Settlement System?
According to the European Central Bank, “Payment system from the central banking terminology ‘refers to the set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area.” Central banks are the managers of payment and settlement system in any country.
The legal system that frames the national payment system
A legal system comprised of regulation for payment system is necessary for cementing a well-functioning payment system. In the context of rising electronic payment practices and emergence of Prepaid Payments Instruments, (PPIs), the government has enacted Payment and Settlement Systems Act, 2007 (PSS Act) to regulate activities related to payments. The PSS Act that became effective from 2008 says that no person other than the RBI can commence or operate a payment system in India unless authorised by RBI.
Paper based payments to digital payments
In the past, the RBI’s national payment system was dominated by paper based payment devices like Cheques. But now situation has changed, electronic payment methods have emerged as leader in terms of value of transactions (only 11% payments are paper based according to the RBI statistics). At the same time, RBI is inventing several electronic payment platforms to promote the movement of money electronically. It has created the National Payments Corporation of India (NPCI) in 2008 to promote digital payment technologies.
The speed of digital payment culture and infrastructure is amazing over the last few years; driven by technology. For example, as per the RBI data, the RTGS (Real Time Gross Settlement) has transferred nearly 82% of the total digitally paid money during the month of March 2017. But in terms of number of transactions its share is 21%. The PoS (Point of Sale), NEFT and NACH (National Automatic Clearing House), Mobile banking were also used significantly.
Formation of CCIL
For settling financial asset payments, the RBI created Clearing Corporation of India (CCIL) in April 2001 for clearing and settlement of trades in money market, government securities and foreign exchange markets.
Creation of RTGS, NEFT, Prepaid Payments Instruments (PPIs), Mobile Banking, PoS and NPCI
Besides the RTGS and NEFT, several digital payment devices designed by the NPCI including IMPS, AEPS etc., are changing the digital payments space especially small payments. After the enactment of the PSS Act in 2007, RBI issued guidelines for PPI players. Similarly, a variety of instruments like UPI, BHIM App etc were also launched to revolutionize the payments system. With the rapid change in technology, the PSS Act 2007 is expected to be amended soon to bring more progress in digital payments.