International Journal of Engineering Technology, Management and Applied Sciences

www.ijetmas.com February 2015, Volume 3 Issue 2, ISSN 2349-4476

Financial Market Infrastructures: A Study on Payment and

Settlement System in Indian Banking Sector
AISHA BADRUDDIN
Assistant Professor
Integral University, Lucknow
Abstract:
This paper intends to understand the various facilities provided by the Reserve Bank to expedite
payment and settlement issues. Domineering to the greater adoption of electronic payments are
speed, efficiency and security, as also creating trust and safety of operations in the minds of the users.
In line with its vision of boosting electronic payments and settlement in the country and achieving a
cash-less society, the Reserve Bank continued its accomplishments in making the payment systems
safer and more secure, gearing its policies towards addressing risks, if any, in the payment systems.
Several initiatives for infrastructure enhancement during the year included introduction of white label
ATMs, card less cash withdrawal facility for unbanked persons, introduction of next generation
RTGS and enhancing the capacity of the NEFT system for larger volumes and efficiency. The trend
of greater reception of electronic payments over paper cheques by the general public received further
boost during the year.
Keywords- MICR, PoS, Card Based Clearing, ECS, EFT, NEFT, RTGS.
Introduction:
Financial Market Infrastructures play a critical role in the financial system and the broader economy.
These infrastructures facilitate the clearing and settlement of monetary and other financial
transactions, such as payments, securities, and derivative contracts (including derivatives contracts
for commodities). The central bank of any country is usually the driving force in the development of
national payment systems. The Reserve Bank of India as the central bank of India has been playing
this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient,
Accessible and Authorized payment systems in the country. The Board for Regulation and
Supervision of Payment and Settlement Systems (BPSS), a sub-committee of the Central Board of
the Reserve Bank of India is the highest policy making body on payment systems in the country. The
BPSS is empowered for authorizing, prescribing policies and setting standards for regulating and
supervising all the payment and settlement systems in the country. The Department of Payment and
Settlement Systems of the Reserve Bank of India serves as the Secretariat to the Board and executes
its directions. In India, the payment and settlement systems are regulated by the Payment and
Settlement Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as
well as the Payment and Settlement System Regulations, 2008 framed thereunder came into effect
from August 12, 2008. In terms of Section 4 of the PSS Act, no person other than the Reserve Bank
of India (RBI) can commence or operate a payment system in India unless authorized by RBI.
Reserve Bank has since authorized payment system operators of pre-paid payment instruments, card
schemes, cross-border in-bound money transfers, Automated Teller Machine (ATM) networks and
centralized clearing arrangements. The payment system initiatives taken by the Reserve Bank of
India have resulted in deeper acceptance and penetration of non-cash payment modes. Cheques,

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however, continue to be the dominant mode in retail payments constituting 54 percent in terms of
volume and 82 percent in terms of value (2011-12) with retail electronic payments lagging behind.
An analysis of the payment system landscape in India reveals that while the growth of electronic
payments including RTGS transactions has been impressive, the benefits of modern electronic
payment systems are yet to reach all sections of the society and be accepted across the length and
breadth of the country. Current experience and evidence indicates that the penetration and success of
modern electronic payment products and services is concentrated to a large extent in the tier-I and
tier-II locations of the country and mostly to those citizens who already have access to the formal
banking channels.
The Regulatory Framework
The RBI, the Indian financial regulatory authority was on overdrive in 2008-2010, as it unleashed a
progressive set of measures, to catalyse the electronic payments landscape in India.
Under the Payment Systems & Settlements (PSS) Act of 2007, two regulations have been made by
the Reserve Bank of India, the Board for Regulation and Supervision of Payment and Settlement
Systems Regulation (BPSS), 2008 and the Payment and Settlement Systems Regulations, 2008. Both
these Regulations came into force along with the PSS Act, 2007 on 12th August 2008. The BPSS
would exercise the powers on behalf of the Reserve Bank, for regulation and supervision of the
payment and settlement systems under the PSS Act, 2007.
The Payment and Settlement Systems Regulations, 2008 covers matters like form of application for
authorization for commencing/ carrying on a payment system and grant of authorization, payment
instructions and determination of standards of payment systems. These in essence permitted third
party non-banking entities to play the role of clearing & settlement in financial networks, with the
permission of the RBI.
RESEARCH OBJECTIVES:
1
To study payment and settlement systems in India
2
To study the core principles of the payment and settlement system
3
To identifying systemically important payment systems and payment system aspects
of securities settlement systems
4
To analyze the trends in payment and settlement system
5
To study various policy initiatives for enhancing efficiency in payment and settlement
system
Research Methodology:
The study is based on secondary data that has been gathered mostly from the website of Reserve
Bank of India, various journals etc.
Review of Payment Systems in India
The Reserve Bank has taken many initiatives towards introducing and upgrading safe and efficient
modes of payment systems in the country to meet the requirements of the public at large. The
dominant features of large geographic spread of the country and the vast network of branches of the
Indian banking system require the logistics of collection and delivery of paper instruments. These
aspects of the banking structure in the country have always been kept in mind while developing the
payment systems.
Paper-based Payments
Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of the
volume of total non-cash transactions in the country. In value terms, the share is presently around
11%. This share has been steadily decreasing over a period of time and electronic mode gained

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popularity due to the concerted efforts of Reserve Bank of India to popularize the electronic payment
products in preference to cash and cheques. Since paper based payments occupy an important place
in the country, Reserve Bank had introduced Magnetic Ink Character Recognition (MICR)
technology for speeding up and bringing in efficiency in processing of cheques.
Later, a separate High Value Clearing was introduced for clearing cheques of value Rupees one lakh
and above. This clearing was available at select large centres in the country (since discontinued).
Recent developments in paper-based instruments include launch of Speed Clearing (for local
clearance of outstation cheques drawn on core-banking enabled branches of banks), introduction of
cheque truncation system (to restrict physical movement of cheques and enable use of images for
payment processing), framing CTS-2010 Standards (for enhancing the security features on cheque
forms) and the like.
While the overall thrust is to reduce the use of paper for transactions, given the fact that it would take
some time to completely move to the electronic mode, the intention is to reduce the movement of
paper both for local and outstation clearance of cheques.
Electronic Payments
The initiatives taken by RBI in the mid-eighties and early-nineties focused on technology-based
solutions for the improvement of the payment and settlement system infrastructure, coupled with the
introduction of new payment products by taking advantage of the technological advancements in
banks. The continued increase in the volume of cheques added pressure on the existing set-up, thus
necessitating a cost-effective alternative system.
1).Electronic Clearing Service (ECS) Credit
The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive
payment requirements (like salary, interest, dividend payments) of corporates and other institutions.
ECS (Credit) facilitates customer accounts to be credited on the specified value date and is presently
available at all major cities in the country. During September 2008, the Bank launched a new service
known as National Electronic Clearing Service (NECS), at National Clearing Cell (NCC), Mumbai.
NECS (Credit) facilitates multiple credits to beneficiary accounts with destination branches across
the country against a single debit of the account of the sponsor bank. The system has a pan-India
characteristic and leverages on Core Banking Solutions (CBS) of member banks, facilitating all CBS
bank branches to participate in the system, irrespective of their location across the country.
2). Regional ECS (RECS)
Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of the NECS is
confined to the bank branches within the jurisdiction of a Regional office of RBI. Under the system,
the sponsor bank will upload the validated data through the Secured Web Server of RBI containing
credit/debit instructions to the customers of CBS enabled bank branches spread across the
Jurisdiction of the Regional office of RBI. The RECS centre will process the data, arrive at the
settlement, generate destination bank wise data/reports and make available the data/reports through
secured web-server to facilitate the destination bank branches to afford credit/debit to the accounts of
beneficiaries by leveraging the CBS technology put in place by the bank. Presently RECS is
available in Ahmedabad, Bengaluru, Chennai and Kolkata
3). Electronic Clearing Service (ECS) Debit
The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting periodic and
repetitive collections of utility companies. ECS (Debit) facilitates consumers / subscribers of utility
companies to make routine and repetitive payments by mandating bank branches to debit their

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accounts and pass on the money to the companies. This tremendously minimizes use of paper
instruments apart from improving process efficiency and customer satisfaction. There is no limit as
to the minimum or maximum amount of payment. This is also available across major cities in the
country.
4). Electronic Funds Transfer (EFT)
This retail funds transfer system introduced in the late 1990s enabled an account holder of a bank to
electronically transfer funds to another account holder with any other participating bank. Available
across 15 major centers in the country, this system is no longer available for use by the general
public, for whose benefit a feature-rich and more efficient system is now in place, which is the
National Electronic Funds Transfer (NEFT) system.
5). National Electronic Funds Transfer (NEFT) System
In November 2005, a more secure system was introduced for facilitating one-to-one funds transfer
requirements of individuals / corporates. Available across a longer time window, the NEFT system
provides for batch settlements at hourly intervals, thus enabling near real-time transfer of funds.
Certain other unique features viz. accepting cash for originating transactions, initiating transfer
requests without any minimum or maximum amount limitations, facilitating one-way transfers to
Nepal, receiving confirmation of the date / time of credit to the account of the beneficiaries, etc., are
available in the system.
6). Real Time Gross Settlement (RTGS) System
RTGS is a funds transfer systems where transfer of money takes place from one bank to another on a
"real time" and on "gross" basis. Settlement in "real time" means payment transaction is not
subjected to any waiting period. "Gross settlement" means the transaction is settled on one to one
basis without bunching or netting with any other transaction. Once processed, payments are final and
irrevocable. This was introduced in in 2004 and settles all inter-bank payments and customer
transactions above ` 2 lakh.
7). Clearing Corporation of India Limited (CCIL)
CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to function as an
industry service organization for clearing and settlement of trades in money market, government
securities and foreign exchange markets. The Clearing Corporation plays the crucial role of a Central
Counter Party (CCP) in the government securities, USD INR forex exchange (both spot and
forward segments) and Collaterised Borrowing and Lending Obligation (CBLO) markets. CCIL
plays the role of a central counterparty whereby, the contract between buyer and seller gets replaced
by two new contracts - between CCIL and each of the two parties. This process is known as
Novation. Through novation, the counterparty credit risk between the buyer and seller is eliminated
with CCIL subsuming all counterparty and credit risks. In order to minimize these risks, that it
exposes itself to, CCIL follows specific risk management practices which are as per international
best practices. In addition to the guaranteed settlement, CCIL also provides non-guaranteed
settlement services for National Financial Switch (Inter bank ATM transactions) and for rupee
derivatives such as Interest Rate Swaps. CCIL is also providing a reporting platform and acts as a
repository for Over the Counter (OTC) products.
Other Payment Systems
1). Pre-paid Payment Systems
Pre-paid instruments are payment instruments that facilitate purchase of goods and services against
the value stored on these instruments. The value stored on such instruments represents the value paid

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for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid payment
instruments can be issued in the form of smart cards, magnetic stripe cards, internet accounts,
internet wallets, mobile accounts, mobile wallets, paper vouchers, etc. Subsequent to the notification
of the PSS Act, policy guidelines for issuance and operation of prepaid instruments in India were
issued in the public interest to regulate the issue of prepaid payment instruments in the country. The
use of pre-paid payment instruments for cross border transactions has not been permitted, except for
the payment instruments approved under Foreign Exchange Management Act, 1999 (FEMA).
2). Mobile Banking System
Mobile phones as a medium for providing banking services have been attaining increased
importance. Reserve Bank brought out a set of operating guidelines on mobile banking for banks in
October 2008, according to which only banks which are licensed and supervised in India and have a
physical presence in India are permitted to offer mobile banking after obtaining necessary permission
from Reserve Bank. The guidelines focus on systems for security and inter-bank transfer
arrangements through Reserve Bank's authorized systems. On the technology front the objective is to
enable the development of inter-operable standards so as to facilitate funds transfer from one account
to any other account in the same or any other bank on a real time basis irrespective of the mobile
network a customer has subscribed to.
3). ATMs / Point of Sale (POS) Terminals / Online Transactions
Presently, there are over 61,000 ATMs in India. Savings Bank customers can withdraw cash from any
bank terminal up to 5 times in a month without being charged for the same. To address the customer
service issues arising out of failed ATM transactions where the customer's account gets debited
without actual disbursal of cash, the Reserve Bank has mandated re-crediting of such failed
transactions within 12 working day and mandated compensation for delays beyond the stipulated
period. Furthermore, a standardized template has been prescribed for displaying at all ATM locations
to facilitate lodging of complaints by customers. There are over five lakh POS terminals in the
country, which enable customers to make payments for purchases of goods and services by means of
credit/debit cards. To facilitate customer convenience the Bank has also permitted cash withdrawal
using debit cards issued by the banks at PoS terminals.
The PoS for accepting card payments also include online payment gateways. This facility is used for
enabling online payments for goods and services. The online payment are enabled through own
payment gateways or third party service providers called intermediaries. In payment transactions
involving intermediaries, these intermediaries act as the initial recipient of payments and distribute
the payment to merchants. In such transactions, the customers are exposed to the uncertainty of
payment as most merchants treat the payments as final on receipt from the intermediaries. In this
regard safeguard the interests of customers and to ensure that the payments made by them using
Electronic/Online Payment modes are duly accounted for by intermediaries receiving such payments,
directions were issued in November 2009. Directions require that the funds received from customers
for such transactions need to be maintained in an internal account of a bank and the intermediary
should not have access to the same.
Further, to reduce the risks arising out of the use of credit/debit cards over internet/IVR (technically
referred to as card not present (CNP) transactions), Reserve Bank mandated that all CNP transactions
should be additionally authenticated based on information not available on the card and an online
alert should be sent to the cardholders for such transactions.
National Payments Corporation of India

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The Reserve Bank encouraged the setting up of National Payments Corporation of India (NPCI) to
act as an umbrella organization for operating various Retail Payment Systems (RPS) in India. NPCI
became functional in early 2009. NPCI has taken over National Financial Switch (NFS) from
Institute for Development and Research in Banking Technology (IDRBT). NPCI is expected to bring
greater efficiency by way of uniformity and standardization in retail payments and expanding and
extending the reach of both existing and innovative payment products for greater customer
convenience.
Core Principles for Systematically important Payment System
1). The system should have a well-founded legal basis under all relevant jurisdictions.
2). The systems rules and procedures should enable participants to have a clear understanding of the
systems impact on each of the financial risks they incur through participation in it.
3). The system should have clearly defined procedures for the management of credit risks and
liquidity risks, which specify the respective responsibilities of the system operator and the
participants and which provide appropriate incentives to manage and contain those risks
4). The system should provide prompt final settlement on the day of value, preferably during the day
and at a minimum at the end of the day
5). A system in which multilateral netting takes place should, at a minimum, be capable of ensuring
the timely completion of daily settlements in the event of an inability to settle by the participant with
the largest single settlement obligation.
6). Assets used for settlement should preferably be a claim on the central bank; where other assets are
used, they should carry little or no credit risk and little or no liquidity risk
7). The system should ensure a high degree of security and operational reliability and should have
contingency arrangements for timely completion of daily processing
8). The system should provide a means of making payments which is practical for its users and
efficient for the economy
9). The system should have objective and publicly disclosed criteria for participation, which permit
fair and open access
10). The systems governance arrangements should be effective, accountable and transparent.
Identifying systemically important payment systems
1). A key step in implementing the Core Principles is to distinguish payment systems which are
systemically important from those which are not. There may be many payment systems in a country
which are important to their users and to the smooth and effective functioning of the economy. The
distinguishing feature of a systemically important payment system, however, is that it is capable of
triggering disruptions or transmitting shocks across the financial system domestically or even
internationally. Most countries have at least one such system.
2). The main factor in assessing the potential for a payment system to trigger or transmit systemic
disruptions is the value of the payments that the system processes, either in aggregate or individually,
relative to the resources of the systems participants and in the context of the financial system more
generally.
3). A further relevant factor in determining whether or not the system is systemically important is the
nature of the payments it handles. A system that is used to settle other payment systems (for example,
if it handles the payments of netted amounts to settle a multilateral net settlement system) or a
system handling payments made in settlement of financial market transactions (for example,

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transactions in the money markets or foreign exchange markets or the cash leg of securities market
transactions) is typically considered to be a systemically important payment system.
4). It is likely that a system is of systemic importance if at least one of the following is true:
1. It is the only payment system in a country, or the principal system in terms of the aggregate
value of payments;
2. It handles mainly payments of high individual value;
3.
It is used for the settlement of financial market transactions or for the settlement of other
payment systems.
5). It is frequently the case that a bank provides payment services to other banks or other payment
intermediaries by effecting payments between the accounts of these entities in its books. These are
typically bilateral arrangements between the bank and the relevant account holder and would not
normally be subject to the Core Principles. With greater consolidation in the financial sector, such
payment services could become increasingly important. In certain cases, these arrangements could
possess some characteristics of a payment system and a decision has to be made on whether such
arrangements are systemically important. Cooperation between bank supervisors and payment
system overseers is needed to identify and analyze these cases and to determine whether the Core
Principles should be applied. Where the Core Principles are applied, it is likely, that the banking
supervisor and the payment system overseer will need to cooperate on an ongoing basis in evaluating
the risk and efficiency aspects of such payment system arrangements. In cases where it is decided not
to apply the Core Principles, they may nevertheless be of some help in evaluating risk and efficiency
and there could be a role for the payment system overseer to assist the bank supervisor.
6).Where a payment system is not systemically important, it can still be appropriate to apply many or
all of the Core Principles. This is particularly likely if the system is widely used and users have no
ready substitute methods of making the same payments.
Payment system aspects of securities settlement systems
1) Securities settlement systems very often provide mechanisms to transfer payments between
participants either by a connection to a separate payment system or by providing payment
facilities within the securities settlement system. In some cases they provide clearing services
for funds which are very similar to netting arrangements and may involve very similar risks
to those of a deferred net settlement payment system. The amounts involved are often large
and such systems may well be systemically important.
2) Most, if not all, of these Core Principles are relevant to payment mechanisms associated with
securities settlement systems. There are also additional and distinct issues connected with the
transfer of securities. Central banks have a clear interest in the safety and efficiency of such
systems, in particular of the payment aspects. In some countries, securities regulators have a
leading responsibility for the oversight of securities settlement systems as a whole.
Accordingly these public authorities need to cooperate to ensure that the securities transfer
and associated payment mechanisms satisfy the public policy objectives of safety and
efficiency.
TRENDS IN PAYMENT SYSTEMS
The efforts made by the Reserve Bank in migrating to electronic payments are reflected in the high
volumes witnessed under various electronic payment systems during the year (Table-1). Alongside
acceptance of electronic payments, the volumes processed under paper- based clearing systems,
relative to other non-cash payment means, continued to show a declining trend. Overall, the payment

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and settlement systems registered a healthy growth in volumes at 23.2 per cent and value at 14.2 per
cent during 2013-14.
Table-1: Payment system indicators
Payment System Indicators Annual Turnover
Item
1

Volume (million)
2011-12 2012-13 2013-14
2
3
4

Value (` billion)
2012-13
6

2011-12
5

2013-14
7

Systemically Important
Financial Market
infrastructures (SIFMIs)
1. RTGS
Total Financial Markets
Clearing (2+3+4)
2. CBLO
3. Government Securities
Clearing
4. Forex Clearing
Total SIFMIs (1-4)
Retail Payments
Total Paper Clearing
(5+6+7)
5. CTS
6. MICR Clearing
7. Non-MICR Clearing
Total Retail Electronic
Clearing (8+9+10+11+12)
8. ECS DR
9. ECS CR
10. EFT/NEFT
11. Immediate Payment
Service (IMPS)
12. National Automated
Clearing House (NACH)
Total Card Payments
(13+14+15)
13. Credit Cards
14. Debit Cards
15. Prepaid Payment
Instruments (PPIs)
Total Retail Payments (5 to
15)
Grand Total (1-15)

55.0

68.5

81.1

539,307.5

676,841.0

734,252.4

1.9

2.3

2.6

406,071.2

501,598.5

621,569.6

0.1

0.2

0.2

111,554.3

120,480.4

175,261.9

0.4

0.7

0.9

72,520.8

119,948.0

161,848.2

1.3
56.9

1.4
70.8

1.5
83.7

221,996.1
945,378.7

261,170.1
1,178,439.5

284,459.5
1,355,822.0

1,341.9

1,313.7

1,254.0

99,012.1

100,181.8

9,3014.8

180.0
934.9
227.0

275.0
823.3
215.3

589.3
439.0
225.7

15,103.7
65,093.2
18,815.1

21,779.5
57,504.0
20,898.3

44,203.1
31,129.8
17,681.8

512.5

694.1

1,108.3

20,575.3

31,881.1

47,856.3

164.7
121.5
226.1

176.5
122.2
394.1

192.9
152.5
661.0

833.6
1,837.8
17,903.5

1,083.1
1,771.3
29,022.4

1,268.0
2,492.2
43,785.5

0.1

1.2

15.4

0.4

4.3

95.8

86.5

214.8

678.1

931.7

1,262.1

1,562.5

2,051.5

2,576.3

320.0
327.5

396.6
469.1

509.1
619.1

966.1
534.3

1229.5
743.4

1539.9
954.1

30.6

66.1

133.9

62.0

78.7

82.4

2,532.4

2,939.5

3,624.4

121,149.9

134,114.4

143,447.4

2,589.3

3,010.2

3,708.0

1,066,528.5

1,312,554.0

1,499,269.4

Note:
1. Real time gross settlement system (RTGS) includes customer and inter-bank transactions only. 2. Settlement of
government securities clearing and forex transactions is through the Clearing Corporation of India Ltd.

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(CCIL).
3. Banks from 27 Magnetic Ink Character Recognition (MICR) Cheque Processing Centres (CPCs) and 67 non-MICR
CPC locations; 20 MICR CPCs and 3 non-MICR CPC locations; and 21 MICR CPCs and 1 non-MICR CPC locations are
participating in CTS-Chennai, Mumbai and New Delhi Grids respectively. Consequent upon migration of total cheque
volume to cheque truncation system (CTS) in various CPC locations, the total number of MICR CPCs in the
country
reduced
from
66
to
19
(as
on
May
21,
2014).
4. The
figures of
cardsare
for transactions atpoint
ofsale
(POS)
terminals only.
5.
The NACH system was started by National Payments Corporation of India (NPCI) (in December 29, 2012), to
facilitate inter-bank, high volume, electronic transactions which are repetitive and periodic in nature.
6. Figures in the columns might not add up to the total due to rounding off of numbers.
7. Not Applicable

Trend showing the increasing use of electronic modes of transactions

The payment and settlement system infrastructure in the country continued to perform without any
major disruptions. Development in the system is evidenced by increasing use of electronic modes of
transaction settlements. Close to 90 percent of the total settlement volumes was done through retail
electronic modes as of August 2014. The share of paper-based clearing also declined marginally over
the last year (Charts 1 and 2).
Chart-1: Distribution of settlement systems (in value)

Source: RBI
Chart-2: Distribution of settlement systems (in volume)

Source: RBI

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Paper clearing
1. The on-going endeavour and efforts to migrate from paper to electronic payments had a
positive impact, leading to a reduction in paper-based transactions in volume as well as in
value terms. During 2013-14, in volume terms paper-based transactions accounted for 34.6
per cent (43.4 per cent during 2012-13) of total non-cash transactions. In terms of value too,
the share of paper-based transactions reduced to 6.3 per cent (7.6 per cent during 2012-13).
2. The cheque clearing system at present mainly comprises: (i) the grid based cheque truncation
system (CTS) at Chennai, Mumbai and New Delhi, (ii) MICR CPCs at 19 large centres, and
(3) express cheque clearing systems (ECCS) at 1,339 smaller centres. Grid-CTS clearing
facilitate clearing of all cheques drawn on bank branches within the grid jurisdiction as local
cheques, thus eliminating the levy of speed clearing charges/outstation cheque collection
charges, etc. As of May 2014, the introduction of grid CTS had enabled migration of the
entire volume of 47 MICR centres to the grid centre, thus leading to their closure. The ECCS
application package is used at centres with low volumes and also enables local level clearing
for participating banks at that centre.
Electronic payments
1. During 2013-14, the RTGS processed around 81 million transactions valued at `734 trillion.
As on April 30, 2014 the number of RTGS enabled bank branches stood at 109,506.
2. As on April 30, 2014, the national electronic funds transfer (NEFT) facility was available at
111,619 branches of 158 banks. During 2013-14, NEFT handled 661 million transactions
valued at around `44 trillion. In March 2014, NEFT processed a record volume of 82.8
million transactions.
3. During 2013-14, the electronic clearing service (ECS) debit-handled 193 million transactions
valued at around `1,268 billion and ECS credit processed 152 million transactions valued at
around `2,493 billion. With the gradual expansion of the regional electronic clearing service
(RECS) operations, the volumes at many ECS centres have completely subsumed to RECS
centres. The number of ECS centres now stands at 34 in addition to the 12 RECS centres in
various centres and the national electronic clearing service (NECS) in Mumbai.
4. During 2013-14, 509 million transactions valued at `1,539 billion were transacted through
credit cards, while 619 million transactions valued at `954 billion were undertaken through
debit cards.
5. During the year, mobile banking services handled 95 million transactions valued at around
`60 billion.
White label ATMs (WLAs)
6. To supplement the efforts of banks in providing banking services to people in unbanked/
under-banked areas, non-bank establishments were permitted to install and operate ATMs
with greater focus on Tier III to Tier VI centres. Out of the 18 applicants, 12 entities were
given in principle approval, of which 6 entities have been granted final authorization to install
ATMs. A total of 1,960 WLAs had been deployed as on April 30, 2014.
Policy Initiatives by Reserve Bank for increasing the efficiency of Payment and Settlement
System
Cheque Clearing Systems: Checks and balances

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1. Over the years, the Reserve Bank first automated all clearing houses for settlement purposes
and then leveraged the core banking solution (CBS) of banks for enabling processing of
outstation cheques locally under speed clearing. Later, CTS and grid-based CTS were
introduced for building further efficiency in cheque clearing. However, even after years, nonCTS 2010 standard cheques continued to be presented at CTS grids posing risks. A system of
separate clearing at less frequent intervals was hence introduced at the 3 grid CTS locations
from January 1, 2014 for noncompliant cheques still in circulation. Banks were advised
against the continued use of post-dated cheques in locations where the ECS facility was
available.
2. As a customer service measure, banks were advised that cheque return charges should be
levied only in cases where the customer is at fault and responsible for such returns, and not
otherwise. An arrangement of uniform holidays was put in place at the 3 grid-CTS locations
for streamlining the procedures and ensuring faster cheque realisations across different states
covered by the grid.
Enhancing efficiency and security of electronic payments
1. The NEFT system was enhanced for handling larger volumes and efficiency. To improve
customer service, banks were advised to adhere to the NEFT procedural guidelines
concerning charges to customers, adherence to return discipline, facilitation of remittance for
walk-in customers and suo moto payment of compensation for delayed credit or return.
2. Banks were advised to facilitate quicker lodging of complaints relating to ATM transactions
and proactively registering mobile numbers/e-mail IDs of customers for sending alerts. As a
fraud control measure, banks were also advised to enable time-out sessions for all
screens/stages of ATM transactions keeping in view the time required for such functions in
the normal course.
3. The facility of e-KYC for opening accounts, available to banks, was also extended to nonbank entities authorised to issue PPIs. PPI guidelines, first issued in April 2009 were
amended and consolidated in March 2014. To address the concerns of operational risks, the
revised guidelines tightened the entry point norms in terms of capital and net worth
requirements for entities seeking authorisation as issuers of PPIs, outlining the permissible
debits and credits to escrow accounts which were put in place to ensure protection of
customer funds.
4. To ensure safety and security of card payments, the Reserve Bank has mandated the migration
to Europay, MasterCard and Visa (EMV) chip and personal identification number (PIN) for
all international cards as also the need for a PIN for all debit card transactions at point of sale
(POS) terminals. While these requirements were to be complied by card issuing banks,
similar requirements were placed on the banks which have installed card acceptance
infrastructure for compliance to payment card industry data security standards (PCI-DSS),
terminal line encryption (TLE) and unique key per terminal (UKPT)/ derived unique key per
terminal (DUKPT) security. Banks were also advised that customer losses accruing on
account of non-adherence were to be borne by the banks responsible for such losses. Over a
period of time, both card-not-present and card present transactions have been strengthened
through the use of the additional factor of authentication (AFA).
5. As on May 31, 2014, 86 banks, including 10 RRBs and 19 UCBs, had been permitted to
launch mobile banking services.

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Clearing Corporation of India Limited (CCIL)

1. The Reserve Bank issued a policy document on Regulation and Supervision of Financial
Market Infrastructure (FMI) describing in detail the criteria for designating a FMI, its
oversight and other related aspects. CCIL has been advised to adopt the principles for
financial market infrastructures (PFMIs) issued jointly by the Committee on Payment and
Settlement Systems (CPSS) and the International Organisation of Securities Commission
(IOSCO). CCIL was declared a qualified central counterparty (QCCP) in the Indian
jurisdiction on January 1, 2014.
2. During the year, CCIL has been granted several permissions/approvals: i) doing away with
physical exchange of confirmation for trades in the currency options, ii) commencement of
interest rate swaps (IRS) guaranteed settlement, iii) in principle approval for introduction of
the payment vs payment (PvP) model in USD/INR settlement, and iv) portfolio compression
in USD-INR forex forward trades for members. CCIL is being monitored for compliance
against PFMIs. PFMI suggests that FMIs may use the assessment methodology to
periodically conduct, full or partial, self-assessments of observance of the principles.
Accordingly, CCIL has been advised to carry out self-assessment against the PFMIsdisclosure framework and assessment methodology document issued by CPSS-IOSCO in
December 2012.
3. As per the on-going monitoring, CCIL was advised to carry out a comprehensive review of
its bye-laws, rules and regulations. CCIL had reviewed its bye-laws and rules and regulations
with respect to forex forwards and IRS segments. The amendments include a new chapter on
bankruptcy in CCIL, bye-laws which cover CCIL default and members right to set-off in
such circumstances.
Conclusion
Now Indian banking system has undergone a significant transformation over time in terms of
assortment and innovation. The developments in information and communication technology resulted
in numerous innovations in the payment system of India. There are a variety of electronic clearing
options available in banking system. But these options are too limited than demand of bank
customers in India. The Authorities should focus more on providing customized payment and
settlement options for rural and urban capacity. The innovation melee continues with a wide array of
breakthrough business models, consumer propositions and technology solutions being implemented
driving adoption of electronic payments. Eko, FINO, ATOM and a host of other players have been
setting and redefining the grass-root level electronic payment principles. The RBI has introduced
Interbank Mobile Payment Service (IMPS) enabling seamless mobile based transfers between bank
account holders. The cornerstone of interoperability has been established with this measure. With
over USD 133 billion payments from bank accounts via ECS & NEFT, electronic fund transfers has
proven to be the silent monster that has established the increasing orientation towards cashless (and
even chequeless) payments in India. With the formal launch of 3G in India a deluge of service
offerings across customer segments is expected to fuel purchases and transactions on the mobile. In
promoting effective regulation, supervision, and oversight, authorities should have sufficient
resources to carry out their regulatory, supervisory, and oversight responsibilities. Sufficient
resources include adequate funding, qualified and experienced personnel, and appropriate ongoing
training. Authorities should ensure that these principles, at a minimum, are applied to all systemically
important payment systems, CSDs, SSSs, CCPs, and TRs. There are several issues

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which need to be addressed to make the electronic payment system infrastructure in India more
efficient and integrated; the crucial ones being building dexterity of payment systems through
standardization, interoperability, and creation of common infrastructure.
References
1. Annual Report, www.rbi.org.in/scripts/paymentsystem.aspx?publication
2. CPSS- Core Principles-January 2001, www.rbi.org.in/scripts/paymentsystem.aspx
3. CPSS-IOSCO Consultative report on Principles for Financial Market Infrastructures March 2011, www.rbi.org.in/scripts/paymentsystem.aspx
4. Financial Stability Report (Including Trend and Progress of Banking in India 2013-14)
December 2014, Issue No. 10, www.rbi.org.in/scripts/paymentsystem.aspx?publication
5. H R Khan: Payment systems in India reflecting on some recent trends and future
challenges, BIS central bankers speeches.
6. Upendra Namburi Electronic Payments in India Looking Back & Surging
Forward: January 2011 .
7. Aastha Gupta , Munish Gupta, Electronic mode of payment A study of Indian banking
system, International Journal of Enterprise Computing and Business Systems, Volume 2
Issue 2 July 2013.
8. Payment and settlement systems and information technology, Annual Report 2009-2010,
www.rbi.org.in/scripts/paymentsystem.aspx?publication
9. Payment and settlement systems and information technology, Annual Report 2013-2014,
www.rbi.org.in/scripts/paymentsystem.aspx?publication
10. Payment Systems in India - Vision 2012-15, www.rbi.org.in/scripts/paymentsystem.aspx
11. Payment Systems in India - Vision 2009-12, www.rbi.org.in/scripts/paymentsystem.aspx?
publication
12. Statistical Tables Relating to Banks in India, www.rbi.org.in/scripts/paymentsystem.aspx?
publication

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