Welcome to Banking Quest

SESSION LEARNING 

• Introduction – Overview of Payment & Settlement system
• Initiatives by RBI- e-Payment & Settlement System
• Electronic Payment Systems
• Various Payment  system
• National Payment corporation of india
• Eco System created by NPCI
• IMPS   &   UPI
• Misc.

 Overview – Payment and Settlement

• A country needs money supply for economic activity to carry out trade and commerce to quench demand and supply of goods and services. 
• The better, more convenient and reliable the payment and settlement of a country or an economy is, the better is the economic efficiency of that country.
• In India, Reserve Bank of India is the regulatory authority and is in charge of driving the development of our National Payment and Settlement System
• The highest policy making body on payment System in our country is the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a sub-committee of RBI and the regulation is done in accordance with the Payment and Settlement Systems Act, 2007 (PSS Act).
• Types of Payment and Settlement Systems in India
• Paper Based Payment Systems-- Cheques, Drafts, etc. 
• Electronic Payment Systems-- Gross Settlement System and Net Settlement Systems.

 Initiatives by RBI- e-Payment & Settlement System

• RBI set up ,in 1996, the Institute for Development & Research in Banking Technology (IDRBT) exclusively focused on banking technology. 
• Main areas of research of the institute was
  • Financial Networks and Applications
  • Electronic Payments and Settlement Systems
  • Security Technologies for the Financial Sector
  • Financial Information Systems and Analytic
• The setting up of the Indian Financial Network (INFINET) by RBI
• launch of the structured financial messaging system (SFMS)
• Mail messaging system (MMS)
• Setting up the National Financial Switch (NFS) and Inter-Bank Payment Gateway
• To develop standards and systems of banking technology at the industry and national levels

 Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)

• It is a sub-committee of RBI and the regulation is done in accordance with the Payment and Settlement Systems Act, 2007 (PSS Act).
• The Act  provides the legal basis for ‘netting’ and ‘settlement finality’.
• The PSS Act, 2007 received the assent of the President on 20th December 2007 and came into force with effect from 12th August 2008.
• The Section 2(1) (i) of the PSS Act 2007 defines that a payment system enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange.
• It is further stated a ‘payment system’ includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations.

 Amendment to PSS Act-2007 

• The Payment and Settlement Act, 2007 was the first dedicated law to regulate and supervise the payment systems in India. It provided for powers to the Reserve Bank of India to constitute a Board to regulate the payments sector and it provided legal basis for basic features of a payment system framework i.e. netting and settlement finality. 
• Growth in FinTech has enabled non-banks to play a significant role in payments. This combined with the Government's agenda to promote growth of digital payments resulted in a comprehensive review of the vision for the payments sector with an objective to promote access and competition in the payments industry. 
• A Committee on Digital Payments constituted by the government in 2016 made a detailed case of independent regulation of payments and its separation from the function of central banking, management of monetary policy and operation of payment systems. 
• Formation of Payment Reporting Board (PRB) with the following objective :-

Consumer protection: (i) Protect the interest of consumers, (ii) ensure safety and soundness of the payment systems, and (iii) create trust and confidence in the payment systems. 

Systemic stability and resilience: Control of systemic risk and systemic efficiency, stability and resilience. 

Competition and innovation: to enable, in the interest of consumers, 

(i) system participants to access payment systems based on objective, ownership neutral and proportionate standards, 

(ii) interoperability among system participants and among payment systems, 

(iii) payments systems and payment services to be developed and operated in a manner that promotes their ease of use, and 

(iv) improvements in the quality, efficiency and economy of payment systems and payment services. 

Types of e-Payment and Settlement Systems in India

Electronic Payment Systems-- Gross Settlement System and Net Settlement Systems. 

• Gross Settlement System-- Real Time Gross Settlement (RTGS) 
• Net Settlement Systems-- 
• National Electronic Fund Transfer (NEFT) 
• National Electronic Clearing Service (NECS Credit) 
• National Electronic Clearing Service (NECS Debit) 
• Credit cards and Debit cards 
• Immediate Payment Service (IMPS) 
• UPI 

 Electronic Payment Systems

• RBI is playing a decisive role in mainstreaming e-payments in India by making it compulsory for the banks to route their high value transactions through Real Time Gross Settlement (RTGS) and also by introducing National Electronic Funds Transfer (NEFT) and National Electronic Clearing Services (NECS), thus encouraging individuals and businesses to switch to electronic methods of payment. E-payments in India have been growing at over 60% for the last few years.

Real Time Gross Settlement (RTGS)

• It is the fastest possible transfer mechanism for payments and settlements through the banking channel.
• Real Time Settlements mean that payment transaction is not subjected to any time delay and is done instantly. Settlement of transaction occurs as soon as they are processed.

Gross Settlement means the transactions are settled on one to one basis

• The money/fund transfer takes place in the books of RBI, and so once processed the payment is final and irrevocable. The charges for RTGS vary from bank to bank.
• Banks participating in the functions of both remitting and receiving must have CBS (core banking solutions) in place to enter into RTGS transactions
•  An Indian Financial System Code (IFSC) is assigned to all Core Banking enabled banks and branches. IFSC is an eleven digit alphanumeric code which is unique to each branch of bank.
• The identity of the bank is indicated by the first four letters.
• Minimum value of transaction should be ₹2,00,000
• It is available round the clock 24*7 and all 365 days in the year.

 National Electronic Fund Transfer (NEFT)

• NEFT facility used to transfer funds from one financial institution to other in India enabling them to transfer funds easily and securely via electronic messages on a one-to-one basis.
• Unlike RTGS which transfers funds on a Gross Settlement basis, NEFT does it on a Net Settlement or Net Transfer basis executed in hourly batches and hence results in a time lag.
• Individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme.
• NEFT system has no minimum or maximum fund transfer limit
• Persons with no banks accounts can also use this facility. Such a person can deposit cash at an NEFT-enabled branch with instructions  to transfer the funds using the NEFT mechanism but maximum funds allowed is Rs. 50,000/-
• To facilitate walk-in customers in transferring of cash to the intended beneficiary, a separate Transaction Code (No. 50) has been allotted in the NEFT system.

 How does the NEFT system operate?

Step-1: An individual / firm / corporate willing to transfer funds through NEFT can use the internet / mobile banking facility offered by his / her bank for initiating online funds transfer request. The remitter has to provide details of beneficiary such as, name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number, etc. for addition of the beneficiary to his / her internet / mobile banking module. Upon successful beneficiary addition, the remitter can initiate online NEFT funds transfer by authorising debit to his / her account. Alternatively, the remitter can also visit his / her bank branch for initiating NEFT funds transfer through branch / off-line mode. The customer has to fill-in the beneficiary details in NEFT application form available at the bank branch and authorise the branch to debit to his / her account to the extent of the amount requested in NEFT application form.

Step-2: The originating bank prepares a message and sends the message to its pooling centre, also called the NEFT Service Centre.

Step-3: The pooling centre forwards the message to the NEFT Clearing Centre, operated by the RBI, to be included for the next available batch.

Step-4: The Clearing Centre sorts the funds transfer transactions beneficiary bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the beneficiary banks (credit). Thereafter, bank-wise remittance messages are forwarded to the beneficiary banks through their pooling centre (NEFT Service Centre).

Step-5: The beneficiary banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.

NPCI- National Payment Corporation of India

• Under the provisions of the Payment and Settlement Systems Act, 2007, National Payments Corporation of India (NPCI) was set up for operating retail payments and settlement systems in India.
• It is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) 
• The ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC.
• In 2016 the shareholding was broad-based to 56 member banks to include more banks representing all sectors.
• the NPCI started its role as a payment system provider by operating the ATM network when IDRBT handed over to it the National Financial Switch (NFS).
• Thereafter, the RBI requisitioned the NPCI to operate the Cheque Truncation System (CTS) on its behalf.

 Eco System created by NPCI

National Electronic Clearing Service (NECS Credit)

• To handle bulk and repetitive payment and settlement requirements such as salary, interest, commissions, dividend payments of corporates and other institutions, RBI introduced the ECS (Credit) scheme in the 1990s. Such payments are done on a timely-basis like a year, half a year, etc. In the ECS (Credit) scheme the customer accounts are credited on the specified value date. Presently this facility is available at all major cities in the country. It is also known as “Credit-push” facility or one-to-many facility. 
• RBI launched a new service in 2008 known as National Electronic Clearing Service (NECS). In the NECS (Credit) scheme the customer accounts are credited on the specified value date against a single debit from the account of the sponsor bank.

 National Electronic Clearing Services (NECS Debit)

• NECS Debit facility is also known as "Debit-pull" facility. This method is used mainly to facilitate payments of small value from entities/individuals to big organizations or companies. RBI introduced this scheme to provide a faster method to facilitate periodic (or routine) and repetitive collections of utility companies, by ‘mandating’ the banks to debit their accounts (debit the payment/bill/investment from the customer’s bank account) and pass on the money to the companies.
• NECS facilitates routine payments by individuals/entities such as telephone bills, electricity bills, card and online payments and payment of insurance premiums.

 Immediate Payment System  (IMPS)

• IMPS is framed under the provisions of Payment and Settlement System Act 2007 and are binding on all members of IMPS.

Objectives of IMPS

• To build a robust and cost effective real-time retail payment service available round-the-clock (also on holidays)
• To provide a channel independent access mechanism
• To build an interoperable fund transfer service involving various stakeholders such as banks, non-banks (PPIs), merchants, and telecom service providers
• To be a catalyst in facilitating financial inclusion process and to provide banking services to even the last mile customer
• To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail payments
• IMPS on the other hand is operated by NPCI (through the ATM switch - NFS). All interbank settlement for IMPS transactions happens on next day. NPCI every day at 2300 hrs creates a file for IMPS transactions and passes to RBI for clearing.
• The settlement happens through the clearing settlement accounts the banks maintain with RBI.

 Unified Payments Interface (UPI)

• Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

How is it unique?

• Immediate money transfer through mobile device round the clock 24*7 and 365 days.
• Single mobile application for accessing different bank accounts.
• Single Click 2 Factor Authentication – Aligned with the Regulatory guidelines, yet provides for a very strong feature of seamless single click payment.
• Virtual address of the customer for Pull & Push provides for incremental security with the customer not required to enter the details such as Card no, Account number; IFSC etc.
• QR Code
• Best answer to Cash on Delivery hassle, running to an ATM or rendering exact amount.
• Merchant Payment with Single Application or In-App Payments.
• Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay) based payments.
• Donations, Collections, Disbursements Scalable.
• Raising Complaint from Mobile App directly.

 RuPay

• RuPay is an Indigenously developed Payment System – designed to meet the expectation and needs of the Indian consumer, banks and merchant eco-system. RuPay supports the issuance of debit, credit and prepaid cards by banks in India and thereby supporting the growth of retail electronic payments in India.
• RuPay is a product of NPCI, the umbrella organisation that powers retail payments in the country.
• RuPay Classic, Platinum & Select variant cards are designed for the masses and affluent customers. RuPay offers excellent privileges and benefits such as International Acceptance, Domestic and International Airport Lounge Access, free personal accidental death and permanent total disability insurance coverage , various merchant offers, different Cashback scheme, Health and Wellness benefits to appeal to the mass and affluent customers.

 Growth of digital payment transactions(Extract from RBI’s Governor speech)

• We have seen retail digital payments in India growing from 162 crore transactions in FY 2012-13 to over 14,726 crore transactions in 2023-24 (till February 2024) i.e., approximately 90-fold increase over 12 years. Today, India accounts for nearly 46% of the world’s digital transactions (as per 2022 data)1. The extraordinary growth in digital payments is also evident in the Reserve Bank's Digital Payment Index, which has witnessed a four-fold rise in the last five years.
• The flagship of our payment systems, the ‘UPI’, has become the most talked about fast payment system not only in India but across the world. It is the biggest contributor to the growth of digital payments in India. The share of UPI in digital payments has reached close to 80 per cent in 2023. At a macro level, the volume of UPI transactions increased from 43 crore in CY-2017 to 11,761 crore in CY-2023. Apart from being a user-friendly interface and facilitating QR code-based payments, the UPI has evolved to include advanced functionalities such as offline payments through near field communication (NFC) technology (UPI Lite X), payments through feature phones (UPI 123Pay), AI based conversational payments (hello! UPI), etc.
• It is also worth noting that progressively it has taken less time for reaching tipping point of next 1000 crore transactions in UPI. While reaching the first 1000 crore UPI P2M transactions, it took 1668 days (~4.56 years), the latest 1000 crore transactions took just 45 days. Similarly, for UPI P2P transactions, while reaching the first 1000 crore UPI P2P transactions took 1329 days (~3.63 years), the latest 1000 crore transactions took 65 days or just over two months2. The recent progress of the UPI has thus been enormous. Currently, UPI is processing close to 42 crore transactions in a day

 Challenges

• Optimum Use of the System
• Bring awareness among people about the use of system
• Huge cost of Maintenance
• Data Security
• Cyber threats

 Cheque Truncation

• Section 6 of NI Act define cheque as “ a bill of exchnage drawn on a specified banker and not expressed to be payable otherwise than on demand.
• This section has been amended in September 2002 to include cheque truncations and electronic cheques within the definition of Cheque.  The amended Section 6 reads as under:-
• “ A cheque is bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a cheque truncation and a cheque in the electronic form.
• A cheque truncation is defined by the section 6(b) of NI Act as “ a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank , whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the  cheque in writing. 

Essential Features :

• It is an electronic image of a paper cheque.
• Only the banks involved and the Clearing House can truncate a cheque.
• The electronic image of the cheque truncation will substitute the physical cheque from the point and time of truncation onwards
• Truncation to be done during the course of a clearing cycle to reduce the time taken for realisation
• The paper cheque , after truncation ,is to be kept in the custody of the bank/ clearing house that truncated the cheque.