A Revolution in the Payment and Settlement Systems

Swarnima Jaiswal (Gold Medalist)

Senior Research Fellow,
Banaras Hindu University,Varanasi.
E-mail: swarnimajaiswal@yahoo.co.in
Mobile no: +91 9793097071

Abstract

Payment system is considered as one of the major components of the infrastructure of

any modern country. However, the operational efficiency of a financial system hinges
critically on minimising transactions costs through the institution of a well functioning
payment system. The financial sector in India has undergone a series of reforms initiated
since 1992, with increased emphasis on deregulation, competition, and adoption of
international best practices. The on-going revolution in information technology has
contributed significantly in improving the efficacy of settlement, especially in terms of
transmission of information about funds and thus for enhancing the efficiency of financial
markets thus, helping the banks and financial institutions to play an effective role in
strengthening economic growth.

The major initiatives undertaken by the Reserve Bank of India (RBI), includes the
introduction of National Electronic Fund Transfer (NEFT) system in November 2005 and
the Real Time Gross Settlement (RTGS) system in March 2004 which have resulted in deeper
acceptance and penetration of modern electronic payment systems in the country. Though
cheque is still the dominant mode of payment, its s hare in all payment has come down at the
same time the share of electronic payments in non-cash payments have shown an upward
trend. Though these growth trends of electronic payments has been impressive but the true
the benefits of modern payment and settlement systems are yet to reach all section of the
society and be accepted across the length and breadth of the country. Recent studies have
indicated that the penetration and success of modern electronic payment products and
services are concentrated to a large extent in the Tier –I and Tier - II Cities of India. Taking
this as a background the present study makes an attempt to have an in-depth study on the
payment and settlement system in India.

Keywords

Payment and settlement system, Real Time Gross Settlement (RTGS), National
Electronic Funds Transfer (NEFT)

Introduction

In India, apart from cash, paper based instruments like cheques; drafts are the other
normal means of payment. With the increasing volumes of cheques for clearance, a need was
felt to accelerate the process of payments. This gave rise to Magnetic Ink Character Reader
(MICR) which helped in faster processing of cheques at the large number of clearing houses
in the country. The 90s saw further developments taking place as economic liberalisation
started taking shape. In the early and mid-90s, Automated Clearing Houses services such as
Electronic Clearing Services and Electronic Fund Transfer were introduced by the RBI.
Almost simultaneously, card-based payments like debit card, credit card, etc., were
introduced in India. The implementation of the RTGS by the RBI in March 2004 and NEFT
system in November 2005 further revolutionized the payment and settlement system in the
country by facilitating speedier fund transfers.

Consequent to the above developments, and, in order to facilitate e-commerce and m-

commerce, banks introduced a number of digital payment schemes such as e-wallets, UPI,
IMPS and USSD services. Paying through e-wallets require the presence of an intermediary.
Money can be loaded in the wallet to the debit of one’s account for spending at offline and
online outlets. The Unified Payment Interface UPI is a phone application that permits money
transfer between bank accounts through a smart phone. There is no need of an intermediary
but the mobile phone number has to be registered with banks. It powers multiple bank
accounts into a single mobile app of any bank. The best part is that money is delivered
immediately and is available at all times through 24 hours of the day.

In case of Immediate Payment Service (IMPS) the money is transferred instantly by

giving the account number, password, IFSC number of the beneficiary’s bank branch. It is
also Available 24 x 7 for interbank electronic funds transfer using the mobile phone. For
small transactions up to Rs. 5000 USSD or Unstructured Supplementary Service Data is
possible on all mobile phones. Through text message the money is sent using NUUP or the
National Unified USSD Platform which is a mobile banking service. The service 99* is
available using the USSD service. Aadhaar number and IFSC number of the registering bank
is needed to complete the transaction. Aadhaar number has become useful for bank
transactions as the Aadhaar Enabled Payment System (AEPS) allows access of bank accounts
for deposit, withdrawl and transfer of money. AEPS is primarily for the small accounts
opened all across the country under the financial inclusion programme.

In this journey full of challenges, Reserve Bank of India as the Central Bank showed
remarkable vision and determination to carry forward its programmes as RBI is the sole
authority to supervise the payment and settlement systems in the country.

Trend and Progress in Payment Systems

The Reserve Bank’s continued efforts towards migrating to a less-cash society gained
momentum during the year with the introduction of newer digital modes of payment.
Payment System Indicators- Annual Turnover
Items Volume (million)
2014-15 2015-16 2016-17
Systemically Important Financial Market
Infrastructures (SIFMIs)
 1. RTGS 92.8 98.3 107.8
Total Financial Markets Clearing (2+3+4) 3.0 3.1 3.7
2. CBLO 0.2 0.2 0.2
3. Government Securities Clearing 1.1 1.0 1.5
4. Forex Clearing 1.7 1.9 1.9
Total SIFMIs (1 to 4) 95.8 101.4 111.5
Retail Payments
Total Paper Clearing (5+6+7) 1196.5 1096.4 1206.7
5. CTS 964.9 958.4 1111.9
6. MICR Clearing 22.4 0.0 0.0
7. Non-MICR Clearing 209.2 138.0 94.8
Total Retail Electronic Clearing 1687.4 3141.5 4205.0
(8+9+10+11+12)
8. ECS DR 226.0 224.8 8.8
9. ECS CR 115.3 39.0 10.1
10. NEFT 927.5 1252.9 1622.1
11. Immediate Payment Service (IMPS) 78.4 220.8 506.7
12. National Automated Clearing House 340.2 1404.1 2057.3
(NACH)
Total Card Payments (13+14+15) 1737.7 2707.3 5450.1
13. Credit Cards 615.1 785.7 1087.1
14. Debit Cards 808.1 1173.6 2399.3
15. Prepaid Payment Instruments (PPis) 314.5 748.0 1963.7
Total Retail Payments (5 to 15) 4621.6 6945.2 10861.7
Grand Total (1 to 15) 4717.4 7046.6 10973.2
Source: RBI, Annual Report 2016-17

The payment and settlement systems continued its robust growth during 2016-17, with
volume growing at 55.7 per cent. The share of electronic transactions moved up to 89.0 per
cent in total volume of non-cash payments from 84.4 per cent in the previous year

From amongst electronic modes of payments, Real Time Gross Settlement (RTGS)
handled 108 million transactions in 2016-17, up from 98 million transactions in the previous
year. At end-March 2017, the RTGS facility was available through 198 banks. During 2016-
17, National Electronic Funds Transfer (NEFT) handled 1.6 billion transactions up from
around 1.3 billion transactions in the previous year. At end-March 2017, the NEFT facility
was available through 130,013 branches of 172 banks, in addition to business correspondent
(BC) outlets.

During 2016-17, 1.1 billion transactions and another 2.4 billion transactions were
carried out through credit cards and debit cards, respectively. Prepaid Payment Instruments
(PPIs) recorded around 2.0 billion transactions. Mobile banking service witnessed strong
growth of 151 per cent in volume while the number of registered customers rose to 163
million at end-March 2017 from 105 million at end- March 2016.

Conclusion
 The Indian banking system has undergone a significant transformation over time in
terms of diversity and innovation. The progress has been phenomenal and is difficult to
distinguish from the situation prevailing a few decades earlier. The bank customer today has
a variety of option for making his payments and can choose looking to time, cost, speed and
other vital considerations. To drive this process forward, further capacity building in terms of
both systems and human resources in the industry and the RBI is essential. This can be
achieved through standardisation, interoperability, consolidation, common infrastructure
creation and sharing intertwined with innovations in product and delivery channels. Special
attention is also required to ensure seamless business continuity plans in addition to the need
to minimise and limit cyber crimes and security threats.

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