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“The power of the future is the power of the mind.

” - Winston
Churchill

Payment and Settlement Systems in India

1. Background and History

The history of the payment system can be said to be virtually co-


terminus with the evolution of money. The earliest form of payment system
could perhaps be traced back to the pre-historic days of barter trade when
the settlement of consideration took place through exchange of conch shells,
goods, cattle and later commodities. Such a system, in the absence of
money as a medium of exchange, was obviously very cumbersome due to
highly improbable ‘coincidence of wants’ of the two parties to a barter
transaction. Subsequently, more formalized payment instruments, such as
coins, developed. The earliest payment instruments known to have been
used in India were coins, which were either punch-marked or cast in silver
and copper; even leather is known to have been used for making coins. Thus,
with the advent of institutionalized forms of money, initially in the form of
coins and later as paper money, the barter trade withered away and the
usage of currency became the order of the day. With the further
advancement of monetary system and growth of economies the transactions
grew complex and a need for replacement of currency by other payment
instruments became the order of the day. In the eighties and nineties the
emerging world economies started opening up to each other resulting in
even more complex nature of financial settlement which cleared the way for
electronic settlements to take over the manual ones. The enormity of
transactions brought about the challenge of mitigating systemic risk which
finally resulted in the birth of Real Time Gross Settlement and other payment
and settlement Systems.

2. Emergence of Paper Money and Cheques.

Paper money, in the modern sense, has its origin in India in the late
18th century with the note issues of private banks as well as semi-
government banks. Amongst the earliest issues were those by the Bank of
Hindustan, which was the first joint stock bank established in 1770, the
General Bank in Bengal and Bihar, and the Bengal Bank. Later, with the
establishment of three Presidency Banks since 1809, the work of issuing

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notes was taken over by them and each Presidency Bank had the right to
issue notes within certain limits. The private banks and the Presidency Banks
introduced other payment instruments in the Indian money market and
Cheques were introduced by the Bank of Hindustan. Buying and selling bills
of exchange became one of the items of business to be conducted by the
Bank of Bengal from 1839. The Paper Currency Act of 1861 conferred upon
the Government of India the monopoly of Note Issue, thus, bringing to an
end the note issues of private and Presidency Banks. In 1881, the Negotiable
Instruments Act (NI Act) was enacted, formalizing the usage and
characteristics of instruments like the cheque, the bill of exchange and
promissory note. The NI Act provided a legal framework for non-cash, paper
payment instruments in India and continues to be an operative legislation
even today.
While the modern cheques came into being in India only in the 19th
century, it is noteworthy that India had pioneered the use of non-cash based
payment systems long ago, which established themselves as strong
mechanism for the conduct of trade and business. The most important form
of credit instrument that evolved in India was termed as ‘Hundis’ and their
use was reportedly known since the twelfth century. Hundis were used as
instruments of remittance, credit and trade transactions, and were of various
types, each type with its own unique features.

3. Evolution of Clearing Houses and MICR based Clearing

With the steady rise in volumes of trade and commerce and the
growing confidence of the public in the usage of cheques, etc., there was
also rapid growth in the payment transactions using these instruments. With
the development of the banking system and higher volume of cheques used,
the need for an organised cheque clearing process emerged amongst the
banks. Clearing associations were formed by the banks in the Presidency
towns and the final settlement between member banks was effected by
means of cheques drawn upon the Presidency Banks. With the setting up of
the Imperial Bank in 1921, settlement was done through cheques drawn on
that bank. After the establishment of the RBI in 1935, the Clearing Houses in
the Presidency towns were taken over by the RBI, and continued with it for
more than five decades.
It is noteworthy that the volume of paper-based clearing we handle is
the sixth largest in the world.

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4. Clearing House Regulations

The bankers’ clearing houses constitute the critical nodes in the entire
payment system of the country and their efficient and orderly functioning is
crucial for a robust payment system. However, prior to 1986, there were no
formal regulations and rules governing the transaction of business in the
clearing houses and each clearing house had its own rules and regulations,
based on local conventions and convenience. Hence, in case of disputes,
resolution of the problem proved to be difficult. In 1986, therefore, the
Reserve Bank formulated a set of guidelines known as the Uniform
Regulations and Rules (URR) for the Bankers' Clearing Houses, so as to
harmonize, across the country, the framework governing the conduct of the
clearing houses. These guidelines had also become necessary in the
backdrop of increasing computerization in the banking industry and the
consequential changes in the functioning of the clearing houses. The
Regulations have since been adopted individually by the general body of
each clearing house in the country. Individual clearing houses are free to
frame their own rules consistent with the broad framework provided by the
Regulations. The Uniform Rules and Regulations represent a significant step
forward in providing a formal institutional framework for the payment system
in the country.

5. MAGNETIC INK CHARACTER RECOGNITION (MICR) BASED


CLEARING

The solution was the introduction of Magnetic Ink Character


Recognition (MICR) based mechanized cheque processing technology. The
existing cheques had to be redesigned incorporating a MICR codeline4 which
could be read by document processing machines called reader-sorters. The
RBI introduced two types of reader-sorters - the Medium Speed Reader
Sorters, capable of processing 300 instruments per minute for Inter-city
instruments and the High Speed Reader Sorter Systems (HSRS) with speeds
of 2400 documents per minute, for the clearing of local instruments. Driven
by mainframe computers the HSRS systems were the state of- the-art
systems available at that time. These were installed in Mumbai (1986)
followed by Chennai, New Delhi, (1987) and Calcutta(1989). By the middle of
1989 MICR cheque clearing operations in the four metropolitan cities had
become fully operational and stabilized. 3 Several committees of the Reserve

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Bank recognized the importance of reforms in the clearing systems and
underscored the need for computerization on a priority basis. (See Annexure
for details). 4 MICR Code line contains basic cheque information in
designated fields for data capture and mechanical sorting of the cheques.
The code line is both pre-printed and later encoded using special MICR ink,
using standardized E13B Font.
In the wake of financial sector reforms, the maturing of the banking
system and the rising volume of paper-based clearing, the RBI has now
adopted a policy stance of moving away from the actual management of
retail payment and settlement systems. Thus, for a few years now, the task
of setting up new MICR-based cheques-processing centers has been
delegated to the commercial banks. The management of clearing houses
also stands decentralized to a large extent and in many cities and towns, the
commercial banks have been entrusted with the management of the
bankers’ clearing houses.
Just to provide an overview, there are 1089 Bankers’ Clearing Houses
operating in India, of which 1036 are managed by State Bank of India and its
Associates, 17 by the Reserve Bank, and the remaining 36 by 12 nationalized
banks. The mechanized cheques processing using MICR technology
(Magnetic Ink Character Recognition) is now available at 60 locations and six
more locations are being upgraded with this technology. Thus, the
computerized clearing houses numbering 915 (including the 60 MICR
centers), account for 84 per cent of the total number of clearing houses in
the country. This demonstrates that our payment system has indeed made
remarkable progress during the last two decades, with ongoing adoption and
up-gradation of technology.

6. CLEARING HOUSE INSTITUTIONAL FRAMEWORK

6(1).INTER-BANK CLEARING:

Inter-bank payments are usually settled among banks by issuing


cheques drawn on their accounts with Reserve Bank of India. This practice
resulted in a large number of cheques being presented to Deposit Accounts
Department (DAD) of the Reserve Bank, leading to heavy work pressures
throughout the day. It was therefore, decided to start a separate Inter-bank
clearing. In the Inter-bank clearing banks no longer use the RBI cheques to
settle their claims against each other. Instead, they use their own Bankers
Cheques. The settlement is carried out through Floppy Based input
statements, submitted to the Clearing House. The pay orders are however,

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dropped in the designated receptacles, from where they are collected by
banks' representatives. Since there is no return for these instruments, the
credit / debit are instantaneous.
Inter-bank clearing is used by banks mainly for four types of
transactions: call money transactions, Rupee payment of foreign currency
transactions, Bank to Bank transfers for funding upcountry requirements and
Inward remittances. Inter-bank clearing was introduced in Chennai in April
1989, followed by Mumbai, Calcutta and New Delhi. This clearing which is
basically a debit clearing has been converted into a credit clearing at
Chennai from 1996 onwards. Instead of bankers' cheques, banks generate
credit advices using software provided to them by the Reserve Bank and
settlement is effected at the Clearing House on the basis of the consolidation
of the credit data furnished by all the member banks. This has been rendered
possible due to computerization of all the service branches in Chennai.
Computerization of service branches which accompanied the
computerization of the clearing houses (both MICR and Floppy based) at
banking centers with large volumes of business has resulted in the creation
of a base for the introduction of automated clearing operations at other
centres. This has also enabled the introduction of electronic payments
services on an experimental basis so that future expansion of these services
using the clearing infrastructure is possible. However, there is a lot of scope
for developing backward and forward linkages to fully utilise the advantage
of the item-wise data base created by the MICR cheque processing.

6(2).INTER-CITY CLEARING:

The four metropolitan centers viz., Mumbai, New Delhi, Calcutta and
Chennai are covered by two way inter-city clearing. The other offices of the
RBI are connected with these four centers under one way inter-city clearing.
Under this system, inter-city cheques drawn on any of the metropolitan
centers are processed at the MICR clearing and are sent to the drawee
centre by postal courier where they are integrated with the local clearing of
that centre. This National Clearing has sharply reduced the time taken for
realization of these cheques.

6(3).REGIONAL GRID CLEARING OPERATIONS:

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As a logical step towards extension of Inter-city clearing at all the
major cities, a regional grid clearing was introduced in a small way.
Important commercial centers/district headquarters in a region were
connected for one way clearing with the nearest MICR centre. Thus, cities
such as Coimbatore, Madurai, and Pondicherry were linked to Chennai, Pune
and Vadodara to Mumbai, Asansol and Jamshedpur to Calcutta etc. The
benefits of reduced time for inter-city clearing were thus extended to such
cities too.

6(4).CLEARING HOUSES MANAGED BY THE RBI:

The settlement operations in all non-MICR based clearing centres


managed by the RBI viz., the clearing houses at Ahmedabad, Kanpur,
Bangalore, Hyderabad, Nagpur, Patna, Jaipur, Thiruvananthapuram,
Guwahati and Bhubaneshwar were also computerised by the introduction of
a magnetic media based input settlement software package, developed in-
house. The clearing data from the banks aggregated as receivables, are
submitted in floppies to the clearing house and settlement is carried out.
The magnetic media based input settlement represents an
intermediate step towards complete automation of cheque clearing through
MICR processing and enables banks and the clearing house to get
accustomed to a computerised environment. The system has been in
operation for nearly four years and is functioning satisfactorily. It covers
presentation clearing, return clearing, High Value/High Value return clearings
and inter-bank clearing but does not cover inter-city clearing.

6(5).HIGH VALUE CLEARING:

High value clearing is a value added service. In this clearing select


branches located in a central business/commercial area and in the vicinity of
the Clearing House/Service Branches of banks present instruments with a
face value of Rs.100,000/- and above deposited by their customers within a
specified cut-off time, to the clearing house. The instruments are dropped
into the respective receptacles of the drawee banks and settlement is carried
out through floppy based input statement. The return clearing is held before
close of banking hours on the same day. In 1994, the total value of
instruments presented in this clearing at the 4 metros was Rs.522,871
crores. By 1997, this had gone up to Rs.949,502 crores. (1 crore is equivalent
to 10 million).

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High value clearing enables a customer who deposits a cheque on day
1 to withdraw the amount on day 2 itself, provided, there is no return. High
value clearing is therefore, faster compared to regular MICR clearing where
credit is afforded on Day 2 and withdrawals are permitted on Day 3, after the
Return discipline cycle is completed. High value clearing was first introduced
in Chennai in April 1989, and was then extended to Mumbai, Calcutta and
New Delhi respectively. It has since been extended to Ahmedabad,
Bangalore, Hyderabad, Jaipur and Kanpur. The 5 remaining RBI managed
clearing centres are likely to introduce high value clearing shortly.

7. COMPUTERIZATION OF CLEARING AND SETTLEMENT


OPERATIONS

Computerization of clearing operations was the first major step


towards modernization of the payments system3. The introduction of
technology for clearing operations began with the setting up of 'Claim Based
Settlement System' using Microprocessor based computer systems at
Mumbai, Chennai and Delhi, in the early eighties. These systems were used
for generating settlement reports on the basis of input statements containing
the aggregate value of (cheques presented) claims of one bank over the
other banks in the clearing house. Clearing balancing and settlement, which
used to take a long time due to differences and errors in manual balancing,
were reduced, apart from providing accuracy in the final settlement.
The next important milestone was fully automating the clearing
operations. The rapid growth of cheque volumes in the eighties made the
task of manual sorting and listing a very difficult task. Banks were unable to
cope with the huge volume of cheques which had to be physically handled
prior to their presentation in the clearing house. Though the clearing
settlement became easy because of computerization, the heavy volumes of
paper that had to be processed introduced delays in presentation, resulting
in delayed credit to the customers. The growth in the volumes could
therefore, be managed only by mechanization of the entire clearing process.

8. EMERGENCE AND OBJECTIVES OF THE PAYMENT SYSTEM

A monograph on Payment Systems in India was prepared by the RBI


in 1998 to increase the awareness, both within the country and abroad, of
the payment systems existing in India. The monograph also detailed the
objectives that needed to be achieved. To that end, a Payment System Vision

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Document for 2001-04 was prepared to draw up the roadmap for
consolidation, development and integration of payment systems in the
country. Once these objectives were achieved, a Vision Document for 2005–
08 was published in May 2005, articulating the Reserve Bank’s vision for the
coming four years for the payment and settlement area. The mission
enshrined in the Vision Document is the establishment of safe, secure,
sound and efficient payment and settlement systems for the
country, towards which all the up gradation efforts are focused. Whereas
safety in payment and settlement systems relates to risk reduction
measures, security pertains to confidence in the integrity of the payment
systems. All payment systems are envisaged to be on sound footing with
adequate legal backing for operational procedures and transparency norms.
The Principle of Safe Secured Sound and efficient Payment and Settlement
System is a Core BASEL requirement to prevent Systemic Risk. Efficiency
enhancements are envisaged by leveraging the benefits of technology for
cost-effective solutions. Thus, as part of its public policy objectives, the
Reserve Bank has played a major role in the design, development and
functioning of payment and settlement systems, and the multidimensional
efforts of the RBI over the years have been geared to realize this vision.

9. MICR AND ELECTRONIC CLEARING

9(1).DETAIL GUIDELINES REGARDING MICR ENCODERS

MICR CHEQUE ENCODER is a table top machine which can print the
coded particulars of cheques and other instruments in magnetic ink in the
5/8” read band in the specified position. A conventional encoder of
standalone type has a keyboard, a programmable journal printer and a MICR
cassette/ribbon typewriter. The machine can simultaneously with encoding,
endorse on the reverse of the instrument, a fixed or variable stamp i.e.
clearing stamp of the presenting bank/branch. The encoder can, during
encoding, proof the pay-in-slip amount or the control total by marking off
successive amounts of encoded cheques thus arriving at a zero balance
when all the cheques are encoded, bringing out during the process any
discrepancy in the totals or wrong encoding, if any. The encoder should have
facility to encode all the five fields or any of the fields desired to be
completed by pressing the relevant functional keys and by keying in the
digital information i.e. the code number of the field concerned. There should
also be a provision to automatically endorse the clearing stamp on the

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reverse, simultaneously with the encoding. In addition, it should be possible
to skip the encoding or endorsement when needed, say when amount field is
already encoded and the instrument is being represented.

There should be a provision for multiple positioning of endorsement on


the reverse to take care of such cases. At the end of encoding each lot of
cheques, the encoder should have facility to encode the branch-wise Batch
Ticket for the number and amount of cheques in the lot and ultimately the
Block Ticket prepared for the bank as a whole on the basis of the cumulated
batch values of instruments presented by a bank.
Initially, when MICR technology was introduced at the four
metropolitan centers a decade ago, banks had installed stand alone encoder
machines without PC interface. Presently, however, the technology has
advanced and encoders with P.C. interface are available, by use of which
additional data including the information of pay-in-slip can be entered so that
full outward clearing information could be taken on the P.C. at the branch for
balancing of outward clearing and also for further processing of the data so
captured for accounting purposes. MICR Readers are available with PC
interface for capturing the preprinted information in the MICR code line to
save on data entry and also ensuring accuracy. Recently, MICR Reader-cum-
Encoders have also come in the market, using which it is possible to capture
the 27 data of the pre-printed fields in the MICR code line and supplement
the information with data entry as also encoding of the instruments
simultaneously. This will enable balancing of the outward clearing and also
building up the data base on cheques presented for subsequent use say for
posting of the ledgers, etc. Encoding of the instruments could be done
simultaneously or later on by encoding the instruments at one go (power
encoding) on the basis of the data file. The type of encoder to be purchased

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by a member bank would, therefore, depend upon the existing and proposed
level of computerization in the branches/ Service Branch where the encoders
are to be located.
Depending upon the total volume of the cheques presented in clearing
and the volume handled at the individual branches, encoders may have to be
installed at the Service Branch to encode cheques centrally or having
encoders also at some branches having adequate volume so that the
cheques could be encoded at the branches and the completed batches could
be forwarded to Service Branch for presentation. The banks will have to take
their own decision on whether to encode cheques centrally or decentralize
encoding work, fully or partly, depending upon the cheque volume, space
and organizational availability. Necessary guidance in this regard could also
be obtained by the banks from their Service Branch at any of the existing
MICR centers.

Presently, some MICR Document Encoders are manufactured /


assembled locally. Several companies are also supplying imported MICR
Document Encoders/Readers/ Reader-cum-Encoders with PC interface. M/s
APLAB Industries Ltd., M/s Bradma India Ltd., M/s Kores India Ltd., M/s NCR
Corporation (India) Pvt., Ltd.,M/s Tata Infotech Ltd., etc., are some of the
companies who supply such equipments. The list is only indicative and not
exhaustive, there could be more such suppliers. For further information and
guidelines for procurement, the member banks are advised to get in touch
with their Service Branches at the four metropolitan cities or their Computer
Policy and Planning Department.
The encoders, being computer peripherals, need dust free
environment. Suitable site preparation, power connection, air-conditioning,
etc., may have to be provided in consultation with the suppliers of the
machines. Encoder operation, being quite simple, the existing staff could
handle the work with minimum training. The vendors supply the necessary

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operation manuals along with the equipment and also provide training to the
operators. They also provide post-warranty maintenance of the machines.
The quality of encoding is crucial to the MICR cheque processing
system since bad quality encoding or use of sub-standard MICR ribbon could
lead to large number of rejects during machine processing of the instruments
at the MICR centres. This, apart from increasing the workload at the cheque
processing centre, could also lead to errors in reading/data correction
resulting in avoidable clearing differences. It is, therefore, necessary that the
encoders are placed in clean environment and are serviced by vendors
regularly. The quality of the MICR ribbon used on the encoder machines is
also another important factor. The bank should procure good quality MICR
ribbons. The ribbons have a limited shelf life and hence should not be
procured in bulk and also should be stored properly in dust free environment.
The banks should peruse the Reject Analysis Report furnished by the MICR
Cheque Processing Centre regularly and take prompt corrective action.

9(2).Electronic Payments through MICR

Cheque is still being predominantly used as an important instrument of


cashless paper based mode of payment and, therefore, sustaining and
promoting efficiency in this system for clearing and settlement of cheques
assumes importance. During 2008-09, six new MICR cheque processing
centres (Belgaum, Bhavnagar, Jamnagar, Kota, Tirunelveli and Anand) were
opened. At present there are 71 MICR-CPCs functioning in the country. At
centres where setting up of MICR-CPC was not found to be viable, the
settlement operations have been computerised (1064 clearing houses) so
that the settlement is done electronically even though the instruments still
continue to be sorted manually. So far, operations of more than 99.3 per
cent of the total number of 1138 Clearing Houses in the country have been
computerised. The year 2008-09 registered a decline of 5.0 per cent in the
volume and 3.0 per cent in the value of MICR transactions. This decline could
be attributed to shift to electronic modes of payment and general slowdown
in the economy.

Payment System Indicators - Annual Turnover


Item Volume (000s) Value (Rupees crore)
2005-06 2006-07 2007-08 2008-09 2005-06 2006-07 2007-08 2008-09

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1 2 3 4 5 6 7 8 9

Others
MICR Clearing 10,15,912 11,25,373 12,01,045 11,40,492 44,92,943 54,01,429 60,28,672 58,49,642
Non-MICR Clearing 2,54,922 2,23,177 2,37,600 2,33,566 18,54,763 16,06,990 18,67,376 20,60,893
Retail Electronic 83,241 1,48,997 2,18,800 2,80,610 1,06,598 1,86,160 9,71,485 4,16,419
Clearing
Cards 2,01,772 2,29,713 3,16,509 3,87,215 39,783 49,533 70,506 83,903
Total Others (5 to 8) 15,55,847 17,27,260 19,73,954 20,41,883 64,94,087 72,44,112 89,38,039 84,10,857
(1.8) (1.8) (1.9) (1.6

9(3).Reserve Bank’s initiatives for electronic payments and banking :

As part of its public policy objective of promoting a safe , secure ,


sound and efficient payment system , the Reserve Bank has taken several
initiatives to develop and promote electronic payments infrastructure.
Towards this end, the RBI introduced the Electronic Clearing Service (ECS)
and the Electronic Funds Transfer (EFT) system in 1995, the Real Time Gross
Settlement (RTGS) system in March 2004, the National Electronic Funds
Transfer (NEFT) system in November 2005 and Cheque Truncation System
(CTS) in February 2008.

9(4).Electronic clearing Service

With a view to upgrading our payment system to the international


standards, the Reserve Bank took the initiative and set up Electronic Clearing
Service in India, in the mid 1990s, which is the counterpart of the automated
clearing house (ACH) system in certain other countries. It has two variants –
ECS - Credit Clearing and ECS - Debit Clearing. While the Credit Clearing
operates on the principle of ‘single debit-multiple credits’ and is used for
making payment of salary, pension, dividend and interest, etc., the Debit
Clearing functions on the principle of ‘single credit-multiple debits’ and is
used for collecting payments by utility service providers like electricity,
telephone bills as well by banks for receiving principal / interest repayments
for housing and personal loans from the borrowers. At present, about 18
million transactions flow through the ECS system every month. This facility is
currently available at 70 centres in the country. Settlement takes place on
T+1 basis and the cycle gets completed on T+1. RBI is also in the process of
developing a National ECS system.

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9(5).National Electronic Clearing Service (NECS)

The National ECS is a product being developed by the RBI to enable


centralized processing of the ECS transactions, in contrast to the existing
ECS system that has decentralised operations at 70 locations, spread all over
the country. Under the National ECS, the processing of all the ECS
transactions would be centralised at the National Clearing Cell at Nariman
Point, Mumbai and sponsor banks would need to only upload the relative files
to a web server, with online data validation facility. Destination banks would
receive their inward clearing data / file at a central location, through the web
server. The National ECS would leverage the Core Banking platform of the
commercial banks, to enable around 50,000 core-banking-enabled branches
of the various banks, to avail of this service. The system would facilitate end-
to-end seamless posting of the NECS transactions in a straight-through-
processing (STP) environment. This would help the users and member banks
to send, receive and process the data files at one centralised place, thereby
improving the efficiency of the payment system.
The ECS Debit works on the strength of the mandates given by the
destination account holders to the user institution for effecting payment from
their accounts. The mandates are required to be authenticated (primarily for
signature verification of the bank’s customer) by the respective bank within
a period of seven days from the date of receipt of such requests. After
authentication, the branch would retain a copy for its record, and the
customer would submit the other copy to the user institution. At the time of

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authenticating the mandates, the destination bank should ensure the
nomenclature of the accounts vis-à-vis those appearing in the mandates. RBI
has issued guide lines to all the banks intending to participate in NECS to
obtain mandate from all their customers presently using ECS services
without which the ECS debit will not be passed in the accounts.

10. ELECTRONIC PAYMENTS (E-PAYMENTS)


10(1).National Electronic Funds Transfer System
Yet another product innovation by the RBI was the National Electronic
Funds Transfer System, which was introduced in November 2005 as a more
secure, nation-wide retail electronic payment system to facilitate funds
transfer by the bank customers, between the networked bank branches in
the country. It is a deferred net settlement system and is an improvement
over other modes in terms of security and processing efficiency. It provides
six settlement cycles a day and enables funds transfer to the beneficiaries
account on T+0 basis. This facility is currently available at over 46,300 bank
branches throughout the country. The daily average of the transactions is
over 80,000 by volume and over Rs.500 crores by value. It is envisaged that
all the RTGS-enabled bank branches would also be NEFT-enabled and the
customer would have a choice between the RTGS or the NEFT systems,
based on time criticality, value of the transaction and willingness of the
customer to pay different charges for the two systems. With the introduction
of NEFT, the Electronic Funds Transfer system, introduced in 1994 for retail
funds transfer, is now available only for Government payments.

10(2).Real Time Gross Settlement System

The payment system in the country largely follows the deferred net
settlement regime, under which the net amount is settled between the
banks, on a deferred basis. Such a dispensation entails an element of
settlement risk. Hence, as a step towards risk mitigation in the large value
payment systems, the RTGS was operationalised by the RBI in March 2004,
which enables settlement of transactions in real time, on a gross basis.
Almost all the inter-bank transactions in the country and many time-critical
customer transactions are now settled through this system. RTGS is fully
secured electronic funds transfer system where banks and customers can
receive payments on real time basis. The outreach of RTGS transactions has
also grown geographically. Out of about 75,000 bank branches in the
country, more than 48,300 bank branches now accept requests for
remittance through RTGS system for customer transactions as well as inter-

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bank transactions. A minimum threshold of rupees one lakh has been
prescribed for customer transactions to ensure that RTGS system is used
only for large value transactions and retail transactions take an alternate
channel of electronic funds transfer. The daily average of transactions is over
34,000 by volume and over Rs.2 lakh crore by value. The RBI also provides
collateralised Intra-Day-Liquidity (IDL) support to the member banks for the
RTGS operations. With the progressive expansion of the RTGS volume, a view
needs to be taken on the continued need and relevance of the high-value
clearing system – since the two systems have a functional overlap on
account of the same value threshold and the target clientele.
Payment System Indicators - Annual Turnover
Item Volume (000s) Value (Rupees crore)
2005-06 2006-07 2007-08 2008-09 2005-06 2006-07 2007-08 2008-09
1 2 3 4 5 6 7 8 9

High Value clearing 15,924 18,730 21,919 21,848 49,81,428 50,34,007 55,00,018 45,50,667
RTGS 1,767 3,876 5,840 13,366 1,15,40,836 1,84,81,155 2,73,18,330 3,22,79,881
Total SIPS (1+2) 17,691 22,606 27,759 35,214 1,65,22,264 2,35,15,162 3,28,18,348 3,68,30,548
(4.6) (5.7) (6.9) (6.9)

The number of RTGS enabled bank branches stood at 55,006 as on


March 31, 2009 with the addition of 11,494 branches to the RTGS network
during the year 2008-09. The increased network coverage is reflected in the
increase in the volume and value settled in RTGS. RTGS peak volume and
value in a day were 1,28,295 transactions and Rs.2,73,450 crore,
respectively, on March 30, 2009.

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RTGS being a systemically important payment system, which is
reflected in value settled in RTGS and also with other Multilateral Net
Settlements relating to important retail and large value payments being
settled in RTGS, it was imperative to assess the operations of the system
against the international standards. The assessment was done against the
Core Principles for Systemically Important Payment Systems, published by
the Committee on Payment and Settlement Systems of the Bank for
International Settlements (BIS). The Reserve Bank’s own assessment
published as part of the Report of the Committee on Financial Sector
Assessment (CFSA) assessed that the RTGS system in India fully complied
with 6 core principles and broadly complied with the Core Principle numbers
3, 7 and 8 relating to management of credit and liquidity risk, operational
reliability and efficiency. Core Principle 5 is not applicable to RTGS.

Reserve Bank also commissioned an external assessment of the RTGS


system by a team of experts from the Swiss National Bank. These experts
viewed that the RTGS system in India is compliant with all the Core
Principles, except the one on efficiency. The recommendations made by the
team for compliance with this Core Principle is to have a strategy and project
business development over the next 5 to 10 years, to monitor the
relationship with third-party vendors and ensure effective safeguards in
order to retain full control over all aspects of the RTGS system, to have a
cost-benefit-analysis, appropriate pricing of payment services, etc.

10(3).COMPARISION OF ECS, NECS & NEFT

Electronic fund transfer systems comprising electronic clearing service


(ECS), electronic funds transfer (EFT) and national electronic funds transfer
(NEFT) showed a decline of 57.1 per cent in value during 2008-09 as
compared to a rise of over 422.0 per cent during 2007-08. The sharp growth
in 2007-08 was due to the transactions relating to refund of oversubscription
amount relating to IPOs floated by companies through ECS Credit and NEFT.
The ECS Debit and EFT/NEFT showed a growth of 36.9 per cent and 79.6 per
cent, respectively, in terms of value. The coverage of ECS has been
increased to 75 centres and T+1 Settlement cycle (from earlier T+3) is
implemented across all the centres. A new system called National Electronic
Clearing Service (NECS) having centralised processing capabilities was
operationalised with effect from September 29, 2008 to bring in uniformity
and efficiency in the system. While NECS-Credit facilitates multiple credits to
beneficiary accounts at destination branches across the country against a

16
single debit in the account of a user with the sponsor bank from a single
central location at Mumbai, the NECS-Debit when implemented shall
facilitate multiple debits to destination account holders across the country
against a single credit to the user account at Mumbai. The NECS is a
nationwide system leveraging on core banking solutions (CBS) of member
banks. All CBS bank branches are participants in the system, irrespective of
their location. As of March 31, 2009 as many as 114 banks with 26,275
branches participate in NECS. Local ECS (Credit) at Mumbai was merged with
NECS-Credit effective from March 24, 2009.
It has been decided to extend the waiver of charges for processing
electronic payment products (ECS / NECS / NEFT / RTGS) for a further period
of one year, i.e., up to 31st March 2010.
Retail Electronic Funds Transfer Systems
Item Volume (000s) Value (Rupees crore)
2005-06 2006-07 2007-08 2008-09 2005-06 2006-07 2007-08 2008-09
1 2 3 4 5 6 7 8 9
ECS / NECS Credit 44,216 69,019 78,365 88,394 32,324 83,273 7,82,222 97,487
(10.4) (56.1) (13.5) (12.80) (60.2) (157.6) (839.3) (-87.5)
ECS Debit 35,958 75,202 1,27,120 1,60,055 12,986 25,441 48,937 66,976
(135.0) (109.1) (69.0) (25.9) (344.6) (95.9) (92.4) (36.9)
EFT/NEFT 3,067 4,776 13,315 32,161 61,288 77,446 1,40,326 2,51,956
(20.3) (55.7) (178.8) (141.5) (12.2) (26.4) (81.2) (79.6)
Note: 1. Figures in parentheses represent percentage change over previous year.
2. The ECS Credit figures of 2007-08 include transactions for refunds of oversubscribed IPOs by
various companies as mandated by the Stock Exchange.

10(4).Cheque Truncation System (CTS)

The latest electronic payment product introduced by the RBI is the


Cheque Truncation System, which was launched, on a pilot basis, in the
National Capital Region of New Delhi on February 1, 2008, with the
participation of 10 banks.the second phase of CTS implementation is
scheduled at Chennai.At present all the banks are participating in the system
through 53 direct member banks. The main objective of the CTS is to
improve the efficiency and substantially reduce the cheque processing time
in the system. The traditional clearing system requiring the physical
presentation of cheques in the clearing house for payment and settlement,
inevitably entails consequential inefficiencies in terms of clearing time and
infrastructure required. The enormity of the logistics needed for physical
cheque clearance can be gauged from the fact that we cleared about 1.46

17
billion cheques in the country during the year April 2007 to March 2008. In
contrast, the main advantage of cheque truncation is that it obviates the
physical presentation of the cheque to the clearing house; instead, the
electronic image of the cheque would be sent to the clearing house. The CTS
would enable the realization of cheques on the same day, and provide a
more cost-effective mode of settlement than manual and MICR clearing.
Smaller banks, which may find it unviable to set up the infrastructure, could
utilise the services of service bureaus set up for this purpose by a few larger
banks.
Once the CTS become fully operational, the system would be the
largest in the world and would leapfrog the country from the paper-based
instruments to a fully electronic mode of payment and settlement. Necessary
amendments have been made to the Negotiable Instruments Act, 1881,
which provides legal recognition to the electronic image of the truncated
cheque. These amendments provide a legal basis for the cheque truncation
system.
Truncation is the process of stopping the flow of the physical cheque
issued by a drawerto the drawee branch. The physical instrument will be
truncated at some point en-routeto the drawee branch and an electronic
image of the cheque would be sent to the drawee branch along with the
relevant information like the MICR fields, date of presentation, presenting
banks etc. Thus with the implementation of cheque truncation, the need to
move the physical instruments across branches would not be required,
except in exceptional circumstances. This would effectively reduce the time
required for payment of cheques, the associated cost of transit and delay in
processing, etc., thus speeding up the process of collection or realization of
the cheques.

10(5).Benefits of Cheque Truncation

Cheque Truncation speeds up collection of cheques and therefore


enhances customer service, reduces the scope for clearing related frauds,
minimizes cost of collection of cheques, reduces reconciliation problems,
eliminates logistics problems etc. With the other major product
offering in the form of RTGS, the Reserve Bank created the capability to
enable inter-bank payments online real time and facilitate corporate

18
customer payments. The other product, National Electronic Funds Transfer, is
an electronic credit transfer system. However, to wish away cheques is
simply not possible and that is the reason why the Bank decided to focus on
improving the efficiency of the Cheque Clearing Cycle. Cheque Truncation is
the alternative. Moreover contrary to perceptions, Cheque Truncation is a
more secure system than the current exchange of physical documents in
which the cheque moves from one point to another, thus, not only creating
delays but inconvenience to the customer in case the instrument is lost in
transit or manipulated during the clearing cycle.

In addition to operational efficiency, Cheque Truncation has several


benefits to the banks and customers which includes introduction of new
products, re-engineering the total receipts and payments mechanism of the
customers, human resource rationalization, cost effectiveness etc. Cheque
Truncation thus is an important efficiency enhancement initiative in the
Payments Systems area, undertaken by RBI.

10(6).Specifications and standards prescribed for data and images:

To ensure security, safety and non-repudiation the PKI (Public Key


Infrastructure) is being implemented across the system. The banks will send
the captured images and data to the central clearing housefor onward
transmission to the payee/drawee banks. For that purpose RBI will be
providing the banks software called the Clearing House Interface (CHI) that
willenablethem to connect and transmit data in a secure way and with non-
repudiation to the Clearing House (CH). The Clearing House will process the
data and arrive at the settlement figure for the banks and send the required
data to payee/drawee banks for processing at their end. The drawee/payee
banks will use the same CHI mentioned earlier for receiving the data and
images from the Clearing House. It will be the responsibility of the drawee
bank Capture System to process the inward data and images and generate
the return file for unpaid instruments.

10(7).The criteria for banks participating in the Cheque truncation system


are:

i. Membership of the clearing house in the NCR.

ii. Membership of the Indian Financial Network (INFINET)

10(8).Truncation in non-INFINET member banks

19
In respect of banks who are not members of the INFINET, the following
alternatives are available

(a) They may become the sub-members of the direct members or

(b) Such banks may use the infrastructure of the other banks having
INFINET membership without being the INFINET members themselves and
there clearing settlement can be done either directly or through the member
through whom they are participating.

10(9).Infrastructure requirement

The infrastructure required for CTS from banks end are connectivity
from the bank gateway to the clearing house, hardware and software for the
CTS applications. RBI shall be providing member banks with the CHI and the
banks have to procure other hardware and system software for the CHI and
the application software for their capture systems on their own.

The hardware requirement is based on the volume of the cheques


processed by the banks. Based on the volume the CHI is categorized into
four types and the hardware requirement is different for each category. The
band width requirement for each bank is calculated based a number of
factors like the peak inward and outward volume of the bank, average size of
an image, efficiency factor of the network etc. In addition to that future
requirement have been taken into consideration for calculating the band with
requirement.

10(10).Image specification

Imaging of cheques can be based on various technology options. The


cheque images can be black and white, Grey Scale or coloured. Black and
White images do not reveal all the subtle features that are there in the
cheques. Coloured Images increase storage and network bandwidth
requirements. So it was decided that the electronic images of truncated
cheques will be in gray scale technology. There will be three images of the
cheques i.e. front grey, front black & white and back black & white which will
be made available to member banks.

20
The image specifications are:

Image Type Minimum DPI Format


Compression

Front GrayScale 100 DPI JFIF JPEG

Front Black & White 200 DPI TIFF CCITT G4

Reverse Black & White 200 DPI TIFF CCITT G4

The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).

Gray-scale image (Truncated cheque-front view)

21
Gray-scale image (Truncated cheque-Back view)

Scanners also function like photo-copiers by reflecting the light passed


through narrow passage on to the document. Tiny sensors measure the
reflection from each point along the strip of light. Reflectance measurements
of each dot is called pixel. Images are classified as black and white, gray-
scale or colour based on hoe the pixels are converted into digital values. For
getting a gray scale image the pixels are mapped onto a range of gray
shades between black and white. The entire image of the original document
gets mapped as some shade of gray, lighter or darker, depending on the
colour of the source.

In the case of black and white images, such mapping is made only to
two colours based on the range of values of contrasts. A black and white
image is also called a binary image.

Preparatory steps for implementation of cheque truncation on a pilot


basis were initiated in the National Capital Region of Delhi during the year.
ATMs have become an important channel for delivering banking
transactions and services in India, particularly for cash withdrawal and
account balance enquiry. The spread of ATMs has increased from 34,789 in
March 2008 to 43,651 in March 2009.

Card-Based Payment Transactions


Item Volume (000s) Value (Rupees crore)
2005-06 2006-07 2007-08 2008-09 2005-06 2006-07 2007-08 2008-09
1 2 3 4 5 6 7 8 9
Credit Cards 156,086 169,536 228,203 259,561 33,886 41,361 57,985 65,356
(20.6) (8.6) (34.6) (13.7) (31.9) (22.1) (40.2) (12.7)

22
Debit Cards 45,686 60,177 88,306 127,654 5,897 8,172 12,521 18,547
(10.0) (31.7) (46.7) (44.6) (10.0) (38.6) (53.2) (48.1)

11. THE ROLE OF THE RBI IN DEVELOPMENT OF PAYMENT


AND SETTLEMENT SYSTEMS

The development of a payment system is one developmental role that


is common to most of the central banks. It is well recognized that an efficient
payment and settlement system is essential for efficient functioning of the
modern financial system. The Reserve Bank has, therefore, played a catalytic
role, over the years, in creating an institutional framework for development
of a safe, secure, sound and efficient payment system for the country. It has
also initiated a variety of institutional, procedural and operational measures
to strengthen and refine the payment system

12. REGULATION, SUPERVISION AND POWERS OF RESERVE


BANK OF INDIA:

12(1).POWER OF RBI TO DETERMINE STANDARDS:

(1) The Reserve Bank may, from time to time, prescribe—


(a) The format of payment instructions and the size and shape of such
instructions;
(b) The timings to be maintained by payment systems;
(c) The manner of transfer of funds within the payment system, either
through paper, electronic means or in any other manner, between
banks or between banks and other system participants.
(d) Such other standards to be complied with the payment systems
generally;
(e) The criteria for membership of payment systems including
continuation, termination and rejection of membership;
(f) The conditions subject to which the system participants shall
participate in such fund transfers and the rights and obligations of the
system participants in such funds.
(2) Without prejudice to the provisions of sub-section
(a) The Reserve Bank may, from time to time, issue such guidelines, as
it may consider necessary for the proper and efficient management of

23
the payment systems generally or with reference to any particular
payment system.

12(2).NOTICE OF CHANGE IN THE PAYMENT SYSTEM:

(1) No system provider shall cause any change in the system which would
affect the structure or the operation of the payment system without—
(a) The prior approval of the Reserve Bank; and
(b) Giving notice of not less than thirty days to the system participants
after the
approval of the Reserve Bank:
Provided that in the interest of monetary policy of the country or in
public interest, the Reserve Bank may permit the system provider to make
any changes in a payment system without giving notice to the system
participants under clause (b) or requiring the system provider to give notice
for a period longer than thirty days.
(2) Where the Reserve Bank has any objection, to the proposed change for
any reason, it shall communicate such objection to the systems provider
within two weeks of receipt of the intimation of the proposed changes from
the system provider.
(3) The system provider shall, within a period of two weeks of the receipt of
the objections from the Reserve Bank forward his comments to the Reserve
Bank and the proposed changes may be affected only after the receipt of
approval from the Reserve Bank.

12(3).POWER TO CALL FOR RETURNS, DOCUMENTS OR OTHER


INFORMATION:

The Reserve Bank may call for from any system provider such returns
or documents as it may require or other information in regard to the
operation of his payment system at such intervals, in such form and in such
manner, as the Reserve Bank may require from time to time or as may be
prescribed and such order shall be complied with.

12(4).ACCESS TO INFORMATION:

The Reserve Bank shall have right to access any information relating to
the operation of any payment system and system provider and all the
system participants shall provide access to such information to the Reserve
Bank.

24
12(5).POWER TO ENTER AND INSPECT:

Any officer of the Reserve Bank duly authorized by it in writing in this


behalf, may for ensuing compliance with the provisions of this Act or any
regulations, enter any premises where a payment system is being operated
and may inspect any equipment, including any computer system or other
documents situated at such premises and call upon any employee of such
system provider or participant thereof or any other person working in such
premises to furnish such information or documents as may be required by
such officer.

12(6).POWER TO CARRY OUT AUDIT AND INSPECTION:


The Reserve Bank may, for the purpose of carrying out its functions
under this Act, conduct or get conducted audits and inspections of a
payment system or participants thereof and it shall be the duty of the
system provider and the system participants to assist the Reserve Bank to
carry out such audit or inspection, as the case may be.

12(7).POWER TO ISSUE DIRECTIONS:

Where the Reserve Bank is of the opinion that,—


(a) A payment system or a system participant is engaging in, or is
about to engage in, any act, omission or course of conduct that results, or is
likely to result, in systemic risk being inadequately controlled or
(b) Any action under clause [a] is likely to affect the payment system,
the monetary policy or the credit policy of the country,
The Reserve Bank may issue directions in writing to such payment
system or system participant requiring it, within such time as the Reserve
Bank may specify –
(i) To cease and desist from engaging in the act, omission or course of
conduct or to ensure the system participants to cease and desist from the
act, omission or course of conduct; or
(ii) To perform such acts as may be necessary, in the opinion of the
Reserve Bank, to remedy the situation.

12(8).POWER OF RESERVE BANK TO GIVE DIRECTIONS GENERALLY:

25
Without prejudice to the provisions of the foregoing, the Reserve Bank
may, if it is satisfied that for the purpose of enabling it to regulate the
payment systems or in the interest of management or operation of any of
the payment systems or in public interest, it is necessary so to do, lay down
policies relating to the regulation of payment systems including electronic,
non-electronic, domestic and international payment systems affecting
domestic transactions and give such directions in writing as it may consider
necessary to system providers or the system participants or any other
person either generally or to any such agency and in particular, pertaining to
the conduct of business relating to payment systems.

12(9).DIRECTIONS OF RESERVE BANK TO BE COMPLIED WITH:

Every person to whom a direction has been issued by the Reserve


Bank under this Act shall comply with such direction without any delay and a
report of compliance shall be furnished to the Reserve Bank within the time
allowed by it.

12(10).RIGHTS AND DUTIES OF A SYSTEM PROVIDER

SYSTEM PROVIDER TO ACT IN ACCORDANCE WITH THE ACT, REGULATIONS,


ETC:

Every system provider shall operate the payment system in


accordance with the provisions of this Act, the regulations, the contract
governing the relationship among the system participants, the rules and
regulations which deal with the operation of the payment system and the
conditions subject to which the authorization is issued, and the directions
given by the Reserve Bank from time to time.

12(11).DUTIES OF A SYSTEM PROVIDER:

(1)Every system provider shall disclose to the existing or potential system


participants, the terms and conditions including the charges and the
limitations of liability under the payment system, supply them with copies of
the rules and regulations governing the operation of the payment system,
netting arrangements and other relevant documents.

(2) It shall be the duty of every system provider to maintain the standards
determined under this Act.

26
12(12).DUTY TO KEEP DOCUMENTS IN THE PAYMENT SYSTEM CONFIDENTIAL:

(1) A system provider shall not disclose to any other person the
existence or contents of any document or part thereof or other information
given to him by a system participant, except where such disclosure is
required under the provisions of this Act or the disclosure is made with the
express or implied consent of the system participant concerned or where
such disclosure is in obedience to the orders passed by a court of competent
jurisdiction or a statutory authority in exercise of the powers conferred by a
statute.

(2) The provisions of the Bankers’ Book Evidence Act, 1891 (18 of
1991) shall apply in relation to the information or documents, or other books
in whatever form maintained by the system provider.

12(13).INFORMATION, ETC., TO BE CONFIDENTIAL:

(1) Subject to the provisions of sub-section 2, any document or


information obtained by the Reserve Bank under sections 12 to 14 (both
inclusive) shall be kept confidential.
(2) Notwithstanding anything contained in sub-section 1, the Reserve
Bank may disclose any document or information obtained by it under
sections 12 to 14 (both inclusive) to any person to whom the disclosure of
such document or information is considered necessary for protecting the
integrity, effectiveness or security of the payment system, or in the interest
of banking or monetary policy or the operation of the payment systems
generally or in the public interest.

12(14).SETTLEMENT AND NETTING:

(1)The payment obligations and settlement instructions among the


system participants shall be determined in accordance with the gross or
netting procedure, as the case may be, approved by the Reserve Bank while
issuing authorization to a payment system.

(2)Where the rules providing for the operation of a payment system


indicates a procedure for the distribution of losses between the system
participants and the payment system, such procedure shall have effect

27
notwithstanding anything to the contrary contained in any other law for the
time being in force.

(3)A settlement effected under such procedure shall be final and


irrevocable.

(4)Where a system participant is declared by a court of competent


jurisdiction as insolvent or is dissolved or wound up, then notwithstanding
anything contained in the Companies Act, 1956 (1 of 1956) or the Banking
Regulation Act, 1949 (10 of 1949) or any other law for the time being in
force, the order of adjudication or dissolution or winding up, as the case may
be, shall not affect any settlement that has become final and irrevocable and
the right of the system provider to appropriate any collaterals contributed by
the system participant towards its settlement or other obligations in
accordance with the rules, regulations or bye-laws of such system provider.

12(15).PENALTIES:

(1) Where a person contravenes the provisions of section 4 or fails to


comply with the terms and conditions subject to which the authorization has
been issued under section 7, he shall be punishable with imprisonment for a
term which shall not be less than one month but which may extend to ten
years or with fine which may extend to one crore rupees or with both and
with a further fine which may extend to one lakh rupees for every day, after
the first during which the contravention or failure to comply continues.
(2) Whoever in any application for authorization or in any return or
other document or on any information required to be furnished by or under,
or for the purpose of, any provision of this Act, willfully makes a statement
which is false in any material particular, knowing it to be false or willfully
omits to make a material statement, shall be punishable with imprisonment
for a term which may extend to three years and shall also be liable to fine
which shall not be less than ten lakh rupees and which may extend to fifty
Iakh rupees.
(3) If any person fails to produce any statement, information, returns
or other documents, or to furnish any statement, information, returns or
other documents, which under section 12 or under section 13, it is his duty to
furnish or to answer any question relating to the operation of a payment
system which is required by an officer making inspection under section 14,

28
he shall be punishable with fine which may extend to ten Iakh rupees in
respect of each offence and if he persists in such refusal, to a further fine
which may extend to twenty-five thousand rupees for every day for which
the offence continues.
(4) If any person discloses any information, the disclosure of which is
prohibited under section 22, he shall be punishable with imprisonment for a
term which may extend to six months, or with fine which may extend to five
lakh rupees or an amount equal to twice the amount of the damages
incurred by the act of such disclosure, whichever is higher or with both.
(5) Where a direction issued under this Act is not complied with within
the period stipulated by the Reserve Bank or where no such period is
stipulated, within a reasonable time or where the penalty imposed by the
Reserve Bank under section 30 is not paid within a period of thirty days from
the date of the order, the system provider or the system participant which
has failed to comply with the direction or to pay the penalty shall be
punishable with imprisonment for a term which shall not be less than one
month but which may extend to ten years, or with fine which may extend to
one crore rupees or with both and where the failure to comply with the
direction continues, with further fine which may extend to one lakh rupees
for every day, after the first during which the contravention continues.
(6) If any provision of this Act is contravened, or if any default is made
in complying with any other requirement of this Act, or of any regulation,
order or direction made or given or condition imposed there under and in
respect of which no penalty has been specified, then, the person guilty of
such contravention or default, as the case may be, shall be punishable with
fine which may extend to ten lakh rupees and where a contravention or
default is a continuing one, with a further fine which may extend to twenty-
five thousand rupees for every day, after the first during which the
contravention or default continues.

13. THE BOARD FOR PAYMENT & SETTLEMENT SYSTEM


(BEFORE ENACTMENT OF PSS ACT 2007

In order to strengthen the institutional framework for the payment and


settlement systems in the country, the Reserve Bank constituted, in 2005, a
Board for Regulation and Supervision of Payment and Settlement Systems
(BPSS) as a Committee of its Central Board.

29
The Board is chaired by the Governor, RBI while all the four Deputy
Governors and two external Directors of the Central Board are its members.
The role of the BPSS is to lay down policies relating to the regulation and
supervision of all types of payment and settlement systems, set standards
for existing and future systems, approve criteria for authorisation of payment
and settlement systems, and determine criteria for membership to these
systems, including continuation, termination and rejection of membership.
Thus, the BPSS is the highest policy making body in regard to the payment
and settlement systems in the country and encompasses electronic, non-
electronic, domestic and cross-border payment and settlement systems
which affect the domestic transactions. In its relatively short span since its
inception, the BPSS has provided valuable guidance in shaping the emerging
contours of the payment and settlement system in the country and has
helped widen the reach of the payment services of the banks to the
hinterland areas.
Cross-country experience indicates that there are special
administrative arrangements for regulation and oversight on payment and
settlement systems. These arrangements are in the form of a board, council
or a committee, constituted either within the ambit of central banks or under
specific statutory provisions. In Australia, the Reserve Bank Act (1959) gives
the Payments System Board the responsibility for determining the Reserve
Bank of Australia payments system policy.
The European Central Bank (ECB) has set up the Payment and
Settlement Systems Committee (PSSC) to deal with issues of oversight and
development of payment systems. In contrast, the South African Reserve
Bank regulates and oversees the activities of the payment system
management body, called the Payments Association of South Africa (PASA)
and of its members. In Canada, the regulatory responsibility for payments
system is shared between the Bank of Canada and the Ministry of Finance.
Efforts are also underway in India to build the infrastructure for
effective regulation and supervision of payment and settlement systems in
anticipation of the statutory changes envisaged under the draft 'Payment and
Settlement Systems Bill'. A Board for Payment and Settlement Systems
(BPSS) is proposed to be constituted under the Reserve Bank of India Act,
1934, which will be in the form of a Committee of the Central Board of
Directors of the Reserve Bank. The mandate of the BPSS would cover:

• Laying down policies for regulation and supervision of the payment and
settlement systems, both electronic and non-electronic systems as well
as domestic and cross-border systems;

30
• Laying down the standards for both existing and future payment and
settlement systems;
• Determining the criteria for access to membership, continuance of
membership, removal from membership as well as denial of
membership of entities to the various payment and settlement
systems;
• Fixing and administering penalties for violation of
rules/guidelines/directions.
• Pending the enactment of the Payment and Settlement Systems Act,
the BPSS will create the necessary administrative structure within the
existing rules and regulations for ensuring the effective regulation and
supervision of the payment and settlement systems.

Reduction of the time taken for processing of paper-based instruments


has been engaging the attention of the Reserve Bank. To the extent that the
physical instrument needs to be transported from the collecting bank branch
to the drawee bank branch, delay is in-built into the paper based instrument
clearing mechanism. Cheque truncation is one of the measures adopted in
several countries to remove this systemic handicap. Payment instruments do
not get transported all the way, but get stopped or truncated at a point in the
cycle and thereafter, only information about the instrument and/or its image
flows electronically to the drawee bank branch for payment. A Working Group
on Cheque Truncation and E-cheques (Chairman: Dr. R.B. Barman) was
constituted to recommend a suitable model of cheque truncation for India.
The Group submitted its report in July 2003.

14. PAYMENT AND SETTLEMENT SYSTEMS ACT 2007

31
It is internationally acknowledged that payment and settlement
systems should function on a well-founded legal basis. This entails among
other things, proper authorization requirement for setting up and payment
systems, legal recognition for netting, settlement finality, providing for
regulation and oversight of the payment and settlement systems. Many
countries have either provided for these requirements in their central bank
statutes or have drafted separate and comprehensive laws for this purpose.
In India where the economy is growing at a fast pace increasingly large
volumes and values are being handled by payment systems. Non-bank
entities who are outside the explicit regulatory purview of the central bank
are running/ are likely to run important payment systems. A number of
innovative payment instruments/ systems have been introduced by
unregulated entities. While large payment systems which are unregulated
present risks to the stability of the financial systems, unauthorized retail
payment systems without proper management and operational structures
can undermine public confidence in the efficacy of the payment systems as a
whole. The Reserve Bank and the Government felt that there should be an
explicit law to regulate the payment and settlement systems.
The Parliament has enacted the Payment and Settlement Systems Act
in December 2007. This Act empowers the Reserve Bank to regulate and
supervise the payment and settlement systems and provides a legal basis for
multilateral netting and settlement finality. The Act empowers the Reserve
Bank to lay down the policies for regulation and supervision of the payment
and settlement systems, authorize their setting up/continuance, for issuing
directions, laying down standards, calling for information/data, initiating
prosecution/levying penalties for violation of the provisions of the Act, its
regulations and directions etc. The Act will come into operation very shortly.

14(1).BOARD FOR REGULATION AND SUPERVISION OF PAYMENT AND


SETTLEMENT SYSTEMS (BPSS)

In order to strengthen the institutional framework for the payment and


settlement systems in the country, the Board for Regulation and Supervision
of Payment and Settlement Systems (BPSS) as a Committee of its Central
Board was constituted by the Reserve Bank in March 2005 following the
notification of the Reserve Bank of India, Regulations, 2005. The BPSS was
reconstituted in August 2008 following the notification of the PSS Act and the
Board for Regulation and Supervision of Payment and Settlement Systems
Regulations, 2008. The Board met on five occasions during the period from

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July 2008 to June 2009. The operationalisation of the PSS Act, issuance of
guidelines for smooth operations of payment systems and transparency in
charges levied to customers for the services offered by banks were some of
the key focus areas of the BPSS at its meetings. The important directions of
the Board, inter-alia, include:
(i) Grant of authorisation to various payment system providers in terms of
the provisions of the PSS Act.
(ii) Guidelines on mobile payments.
(iii) guidelines on issuance and operation of prepaid payment instruments
in India
(iv) Rationalization of the charges for electronic payment products and
outstation cheque collection.
(v) Migration of large-value payments to more secure electronic modes
and
(vi) Incentivizing the usage of satellite communication for penetration of
banking services to remote places.
In accordance with the directions of the BPSS, operative guidelines on
mobile banking for banks were issued on October 8, 2008 and Guidelines for
prepaid payment instruments in India were issued on April 27, 2009. The use
of other bank ATMs for cash withdrawal has become free of charge with
effect from April 1, 2009. The Reserve Bank has also rationalised the service
charges for ‘Electronic Payment Products’ and outstation cheque collection.
Steps have been initiated to increase the threshold limit of cheques in ‘High
Value Clearing’ from Rs.1 lakh to Rs.10 lakhs and to progressively
discontinue this service in view of alternate channels being already available
to clear high value transactions.

14(2).SECRETARY'S DEPARTMENT

• Secretarial work connected with the meetings of the Central Board and
its Committee as also the Administrators of the Reserve Bank of India
Employees' Provident Fund and Reserve Bank of India Employees' Co-
operative Guarantee Fund.
• Secretarial work relating to Top Management Group.
• Secretarial work relating to the Deputy Governors' Committee
Meetings
• Conveying the decisions taken in all the meetings mentioned above to
the concerned Central Office departments and also all the Regional
Offices in case of Senior Management meeting and monitoring the
implementation thereof.
• Work relating to joining / retirement / relinquishing charges by
Governor and Deputy Governor.

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• Work relating to terms and conditions of service of Governor and
Deputy Governors.
• Work relating to constitution of Central Board / Local Board.
• Providing administrative support to the Top Management, including
staff support and various non-establishment payments.
• Work relating to administration and non-establishment payments
pertaining to Secretary's Department, IDMD and PRD.
• Providing hardware (computers, printers, fax machines, cell phone)
and software support to Secretary's Department, IDMD, PRD, Top
Management and their secretarial staff.
• Providing administrative Secretarial Support including hardware /
software to various Boards viz. Advisory Board on Banking, Commercial
& Financial Fraud (ABBCFF).
• Protocol Services to visiting foreign dignitaries, Parliamentary
delegations, Bank's Top Executives, Central Board Directors etc.
• Work relating to reservation of Conference Rooms, Auditorium,
Executive Lounge and the VVIP Guest House.

14(3).DEPARTMENT OF PAYMENT AND SETTLEMENT SYSTEMS

The Department of Payment and Settlement Systems (DPSS) is a new


department in the Reserve Bank which was operational with effect from
March 2005. The Department is responsible for regulation and oversight on
the Payment and Settlement Systems which encompass the cheque based
clearing systems managed by the Reserve Bank and other commercial
banks, Electronic Clearing Service (ECS), Electronic Funds Transfer (EFT)
System, the inter-institutional Government Securities clearing, the inter-bank
foreign exchange clearing as also the RTGS. The Department also provides
secretarial support to the newly constituted Board for regulation and
supervision of Payment and Settlement Systems (BPSS), which happens to
be a Committee of the Central Board.

The functions of the Department include the following:

• Formulation of Payment and Settlement Systems policies.


• Regulation of Payment and Settlement Systems.
• Supervision of Payment and Settlement Systems.
• Implementation of the Core Principles relating to payment systems (as
enunciated by the Bank for International Settlements).
• Laying down standards for payment and settlement systems.
• Designing, developing and integrating Systemically Important Payment
System (SIPS) projects and / or facilitating such implementation.
• Monitoring the operations of payment and settlement systems.

The National Clearing Cells assist the department at the Regional Offices.

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15. COMMUNICATION NETWORK AND PAYMENT GATEWAYS
FOR PAYMENT AND SETTLEMENT SYSTEMS

15(1).INDIAN FINANCIAL NETWORK (INFINET)

The INdian FInancial NETwork [INFINET] is the communication


backbone for the Indian Banking and Financial Sector. All Banks, Public
Sector, Private Sector, Cooperative, etc., and the premier Financial
Institutions in the country are eligible to become members of the INFINET.
The INFINET is a Closed User Group [CUG] Network for the exclusive use of
member banks and financial institutions. The communication backbone is
based on IP VPN Layer 3 Network with full mesh VPN network. Presently, the
network is spread across 300 cities in our country.

The INFINET is primarily based on Multi-Protocol Label Switching


network, where the packet and label switching takes place at service
providers’ level. A detailed IP addressing scheme has been devised by IDRBT
for all CUG members, which has to be followed by all CUG members, while
accessing RBI, CCIL and IDRBT applications.

INFINET MPLS Architecture

In order to build High Availability IP VPN Network, IDRBT has selected


two MPLS Service Providers. With a view to achieve High Availability
features, the network architecture was designed to have Link Level, Path

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Level, Device Level and Service Provider Level Redundancy through Network-
Network-Interface.

Under MPLS Phase 1A, IDRBT have successfully migrated 14 RBI


locations on to MPLS IP VPN Network from the existing Terrestrial Network
and also seamlessly integrated members banks through Terrestrial Leased
Lines. Under MPLS Phase – 1B, the supply of equipment, link and configuring
them is in progress.

16. INTERNATIONAL PAYMENT ARRANGEMENTS

16(1).SFMS (STRUCTURED FINANCIAL MESSAGING SYSTEM)

SFMS (Structured Financial Messaging System) - Message format


IBM’s S/390 mainframe system - The RTGS and RBI's Core banking system
MQ Series - Messaging system
Participant interface (PI) - RTGS Client for the participating banks

IFTP - Inter-bank Funds Transfer Processor


IAS - Integrated Accounting System
CFMS - Centralised Funds Management System
INFINET - Indian FInance NETwork
SSS - Securities Settlement System

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So when a bank needs to pay another bank, it uses the participant interface
to send the payment request to IFTP. The IFTP will remove all information
that is not needed by the settlement system and send the message to RTGS.

If the payment can be settled, the RTGS sends a response to the IFTP that
the settlement is successful. The IFTP will construct a message with the
RTGS information, add all the other information that came with the original
payment request and then send the response to the Bank that initiated the
request and the recipient bank.

If the payment can not be settled for any reason, the RTGS sends response
to the IFTP that the settlement failed. The IFTP will construct a message with
the RTGS information, add all the other information that came with the
original payment request and then send the response to the Bank that
initiated the request. Here Host means the banking system of the bank.

16(2).SWIFT

Introduction

The Society for Worldwide Interbank Financial Telecommunication


(SWIFT) is an industry-owned limited liability cooperative society set up
under Belgian law and controlled by its member banks (including central
banks) and other financial institutions. SWIFT’s business is to supply secure
messaging services and interface software, to contribute to greater
automation of financial transaction processes and to provide a forum for
financial institutions to address issues of common concern in the area of
financial communication services. Messaging services are provided to banks,
broker/dealers and investment managers, as well as to market
infrastructures in payments, treasury, securities and trade.
SWIFT was founded in 1973 by 239 banks from 15 countries.
Since then, there has been a steady increase in the number of financial
institutions and countries connected to SWIFT. There are three categories of
SWIFT users: members (shareholders), sub-members (ie subsidiaries
controlled by members) and participants. Members can benefit from all the
services offered by SWIFT, whereas participants only have restricted access
to a range of services that relates to their business. Types of participants
include securities brokers and dealers, investment management institutions,
fund administrators, money brokers and various other institutions, mainly

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from within the securities business. The average daily value of payment
messages on SWIFT is estimated to be above EUR 6 trillion.

SWIFT is a private member-owned cooperative connecting nearly


9,000 banking organizations, central banks, clearing and settlement
infrastructures, securities institutions and corporate in 209 countries
worldwide. SWIFT is also overseen by the central banks of the G10 countries.
Since June 2009, Database and FIN traffic can be broken down as
follows:

SWIFTNet FIN traffic (in number of messages)


Total number of messages (year to date) 1,501,829,160
Message growth (total traffic year to date) -4.38%
Average daily traffic (year to date) 14,781,783
Message growth (average daily) -2.78%
Latest peak day: 15 October 2008 17,860,068
SWIFTNet FIN availability
SWIFTNet FIN systems 99.999%
SWIFTNet FIN customer base
Live countries 209
Live members 2369
Live sub-members 3,321
Live participants 3,318
Total live users 9,008

SWIFT is the most widely used payment services provider


worldwide. As the main carrier for payment information, its message types,
formats and technical infrastructure set a kind of benchmark for the
processing of payments.
SWIFT’s core application is called FIN, a store-and-forward
messaging service. In 2002, availability of FIN was consistently above
99.99%. FIN traffic can be broken down as follows:
(1) FIN traffic distribution by market
__ Payments 60.7%
__ Securities 30.5%
__ Treasury 6.0%
__ Trade finance 2.4%
__ System 0.4%
(2) FIN traffic distribution by region
__ Europe 66.6%

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__ Americas 18.0%
__ Asia-Pacific 11.7%
__ Africa 2.4%
__ Middle East 1.2%
In 2002, SWIFT started the migration of its core FIN application
from an X.25 network (a network technology that is becoming obsolete) to
an IP-based network. With the introduction of IP-based technologies, SWIFT
will expand its services base, offering new interactive services.
The suite of new services is grouped under SWIFTNet services.
SWIFTNet business solutions that are currently being developed relate to
cash reporting, bulk payments processing and securities reporting. To
promote the use of SWIFTNet and XML-based cash reporting tools among
major cash clearing banks and their correspondents, a working group has
been set up to design the industry solution and to agree upon
query/response standards rule book. In bulk payments, a new XML-based
message standard was developed and introduced in 2002. In 2001 the first
domestic market infrastructures went live on SWIFTNet. The SWIFTNet
messaging services using the new Secure Internet Protocol Network (SIPN)
were fully implemented by the Deutsche Bundesbank’s RTGS plus and the
Bank of England’s Enquiry Link.
In the world of e-commerce, SWIFT is developing some of the tools
necessary to deliver the value that the internet can offer to the financial
industry and is also working with member institutions to develop e-payment
initiation standards.

17. FUTURE VISION OF PAYMENT AND SETTLEMENT IN


INDIA

The Mission Statement articulated for payments system objectives of the


Bank has six distinct and succinct components that would be integrated to
form the universe of scope and premise of action. To briefly elucidate, the
components represent -
• Safety – Keeping the risks in various payment system products
minimum and manageable if they are necessary and unavoidable.
• Security – Giving confidence to stakeholders that the payment systems
can be trusted and are reasonably protected from threats and
vulnerabilities.
• Soundness – Demonstrating the capability and ensuring the payment
systems function in a non-disruptive manner.
• Efficiency – Providing measures to assure that the payment systems are
cost-effective, reliable and promote financial and economic stability.

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• Accessibility – To ensure reach of various payment systems at
reasonable cost to various segments of the populace.
• Authorisation – According entities permission to operate payment
systems as per the provisions of the Payment & Settlement Systems
Act and the Regulations framed thereunder.

Conclusion

The payment and settlement system constitutes the backbone of


the financial sector and enables conclusion and settlement of financial
contracts. The country has made phenomenal progress in enhancing the
reach and improving the efficiency of the national payment system – in
which the RBI and the banking system have been equal partners. Creating a
world-class payment system in the country is a long, arduous but an exciting
journey in which a constant striving is needed to better the past
achievements. The banking community would surely make dedicated and
systematic efforts in this direction to meet the challenges ahead and actively
contribute to realizing the vision for the payment system has been set for the
country.

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Bibliography

1. http://rbidocs.rbi.org.in/rdocs/PublicationReport

2. wikepedia.com

3. google.com

4. RBI ANNUAL REPORTS

5. RBI TRENDS REPORT 2009-10

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6. V. leeladhar’s speech

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