1.1 Safety, security, soundness and efficiency of the payment systems assume critical importance from the angle of systemic stability. Smooth functioning of payment systems becomes vital in the light of inter-linkages they have with other financial systems. As indicated in the Report on 'interdependencies of payment and settlement systems' published by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) in June 2008, smooth functioning of an individual system often depends on smooth functioning of other related systems. The Reserve Bank of India (the Bank) shall continue its initiatives for ensuring smooth operations and proper conduct of the payment systems. It is of prime importance thus, to be assured that the payment and settlement systems in the country are duly authorised and operating within the framework of guidelines applicable to them. The Bank shall also continue to discharge its oversight, regulatory and developmental responsibilities, apart from raising efficiency standards and improving performance benchmarks.
1.2 The Approach to be followed on aspects relating to oversight, safety and efficiency and the various initiatives proposed to be operationalised in the various payment system components and products in the near-to-short-term are detailed in this Vision Document. The Vision Document would guide the payments system-related activities of the Bank and concisely convey the intended direction to realise the Mission Statement components.
1.3 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 -
1.4 The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), the apex body for regulation and supervision of payment systems, is the authority designated with the responsibility of regulating and overseeing smooth functioning of the payment systems in the country. The vision would be achieved under the overall guidance, direction and supervision of the BPSS.
II Payments System Initiatives
2.1 Several initiatives taken by the Bank for migration of cash payments to the non-cash mode notwithstanding, use of cash is still substantial. The endeavour to migrate cash modes of payment to the non-cash mode, be it paper or electronic, will continue. There have been consistent efforts to move away from paper-based payments to the safer and more efficient electronic modes of payments.
2.2 Outreach of existing payment system products to cover more geographical areas and more segments of the populace in the country shall continue to be focused upon.
2.3 The Bank continues to play an important role in introducing customer service initiatives. Towards this end, the recent steps taken in various payment system segments include – card payments (increasing card security), ATM payments (increasing accessibility to the public, bringing transparency and reasonableness in charges), rationalising charges for electronic payments (NEFT / RTGS) and collection of outstation cheques, mobile payments (issuance of 'Mobile Banking transactions in India - Operative Guidelines for Banks'), pre-paid payment instruments (guidelines on ‘Issuance and Operation of Pre-paid Payment Instruments in India (Reserve Bank) Directions, 2009'), etc.
2.4 Competition, encouraging alternate methods of accomplishing the payment requirement and facilitating new initiatives of payment system providers to bring in more efficiency in the existing / new payment systems remain the thrust areas.
III Payments System Oversight
3.1 The guiding principles while pursuing the oversight goal will continue to be objectivity, simplicity and transparency. Streamlining operating instructions, prescribing uniform practices, laying down minimum benchmarks, insisting on adequate redundancies and requiring effective business continuity plans will be vigorously pursued. Stress will be on monitoring implementation of guidelines in letter and spirit.
3.2 Notification of the Payment and Settlement Systems Act, 2007 (the Act) and its becoming effective from August 12, 2008 prohibits any entity from commencing or continuing to operate a payment system without the approval of the Bank. The Bank may accord approval to the payment system, based on the need for the proposed activity, the services proposed to be undertaken / offered and the efficiency it will bring to functioning of the payments system in the country. The time frame prescribed for the purpose under the Act will be adhered to. As contemplated under Chapter III of the Act all the existing payment systems will be covered under the authorisation / approval / oversight process by the end of 2009. The Bank, while authorising payment systems, would advise the criteria and prescribe the terms and conditions under which the said systems shall operate.
3.3 It is imperative that payment systems are operated in a safe and efficient manner as well as in the best interests of the public. The Bank shall endeavour to –
3.4 These measures are expected to facilitate an orderly growth and functioning of the payment systems thereby instilling confidence among the various stakeholders.
IV Risk Mitigation
4.1 With increase in reach, size and significance of payment systems the Bank is committed to assuring their safe and efficient functioning by identifying various risks, addressing risk-reduction by putting in place risk-mitigation measures and mandating appropriate risk-management practices.
4.2 The risks in payment systems viz. concentration risk, counter-party risk, credit risk, legal risk, liquidity risk, operational risk, regulatory risk, settlement risk and systemic risk will continue to be addressed by the Bank.
4.3 Towards this end, emphasis will be on advocating –
4.4 With the move towards consolidation of infrastructure and integration of various payment systems, isolating and mitigating operational risk assumes importance. Risk-containment is the plan and as part of this exercise, exacerbation and transmission to other systems will be analysed and prevented both in Bank-operated and others-operated systems. The participants in such systems will also be expected to institutionalise similar practices.
V Other Initiatives
5.1 The Bank shall continue its initiatives towards information dissemination, policy and product outreach, co-ordination with other regulators / international / regional bodies, both within the country (SEBI, IRDA, etc.) and abroad (central banks, CPSS, SAARC Payments Council, etc.).
5.2 The Bank will contribute to international oversight and co-operation initiatives as a member of the CPSS, the SAARC Payments Council and such other similar bodies. The Bank shall also encourage and support partnership programs with neighbouring countries and regional institutions for reforms in payment systems in the region.
5.3 The Bank shall publish the Red Book on Payment Systems for India in collaboration with CPSS-BIS.
5.4 The First Report on Oversight of Payment Systems in India was released during the year 2007. The Second Report on Oversight of Payment Systems in India will be brought out.
5.5 A Review of Categorisation of Systemically Important Payment Systems (SIPS) and System-Wide Important Payment Systems (SWIPS) was carried out during 2002. A Review of SIPS and categorisation of SIPS was also carried out by the Committee on Financial Sector Assessment as part of the Financial Sector Assessment Program during 2008-09. It shall be the endeavour to repeat this exercise and bring out a Review of Large-Value Payment Systems in the country as well.
5.6 The various initiatives undertaken would have to be reviewed periodically to ascertain their impact on smooth functioning, taking corrective measures, if required, etc. For the purpose, the following studies are planned to be undertaken –
5.7 As part of the Information System Policy framework, the pre-requisites of a policy for preservation and storage of data / information generated and maintained both in respect of the paper and electronic clearing modes is being finalised in consultation with the Bank's Legal Department. This is expected to ensure uniform practices at various clearing locations in terms of preservation of records and availability thereof.
VI Action Plan
6.1 With the above agenda in mind, the following action points have been targeted to be achieved in the next one-to-three years’ time. The Bank’s response would be proactive and to dovetail its initiatives depending on co-operation and support from various stakeholders, expectations of the system, capabilities and preparedness of participants, and developments from time to time.
6.2 Authorisation of payment systems
6.2.1 Notification of the Payment and Settlement Systems Act, 2007 empowers the Bank to regulate and oversee all payment systems. The existing and proposed payment systems will need to obtain authorisation from the Bank to continue / commence operations. The central bank is expected to lay down operational and technical standards for the functioning of these systems, empowered to issue directions, call for information / returns, revoke authorisation and impose penalties / initiate prosecution proceedings for violations of the Act, the Regulations, the directions issued by it and the terms and conditions of authorisation.
6.2.2 For the purpose the Bank shall –
6.3 Smooth functioning of existing payment systems
6.3.1 Endeavour will be to ensure that the systems authorised to operate function in a smooth and non-disruptive manner. This would be achieved by –
6.3.2 Banks need to indicate in their Cheque Collection Policies (CCPs) the timeframe for collection of local and outstation cheques, apart from other aspects advised to them from time to time. The CCPs need to be widely publicised and also published in the respective banks’ websites. The CCPs framed by banks will be made comprehensive in terms of scope, coverage, transparency and dissemination. It will be ensured that banks strictly operate within the meaning and intent of the CCPs especially in regard to timeframe for collection, grievance redressal mechanism and penalties for non-conformity.
6.3.3 In addition to the timeframe specified for collection of US-Dollar Denominated Instruments, guidelines will be framed and advised for collection of foreign-currency denominated cheques payable in UK and / or locations that have significant volumes.
6.3.4 Charges levied for offering various payment products will be constantly reviewed and appropriate interventions will be considered if the charge-structure is found to be non-transparent or unreasonable.
6.3.5 Settlement Finality Directive to provide finality of settlement for transactions initiated in the retail payment systems will be put in place. The existing unwinding mechanism that provides for partial unwinding (only the dues of the defaulting institutions are unwound and removed from settlement but not the dues to the defaulting institution) will also be suitably modified to reflect present day expectations (in terms of complete unwinding of both the dues of and dues to the defaulting institution).
6.3.6 As mentioned earlier, one of the focus areas would be to ensure optimal operation of clearing entities. Recognising the role played by clearing and settlement facilitating entities such as the CCIL, the Bank would continue to closely monitor and oversee the operations of such entities. Insofar as the activities of CCIL are concerned, the operations have grown manifold and the organisation has been responding well to the changing requirements. Given the criticality of CCIL in the financial stability of the country, it would be necessary to review the shareholding pattern and the management structure to further strengthen efficiency levels so as to result in better confidence among users.
6.4 Infrastructure building and improvement
6.4.1 The roadmap for National Payments Corporation of India (NPCI) will be finalised. NPCI has been set-up as an umbrella organisation by the banking community to take over the retail payment system activities in the country. Operations of NPCI will be permitted after due authorisation and activities will be closely monitored.
6.4.2 Back-up arrangements by way of identifying alternate banks to take over processing and settlement operations in the event of non-availability of the main bank would ensure availability of clearing infrastructure during strikes / disruptions. Back-up arrangements by way of first / second alternate banks both for processing and settlement of clearing transactions will be operated in all major Clearing Houses in the country. Such arrangements will be put in place at the top 100 Clearing Houses in the country in terms of volumes handled.
6.4.3 Putting in place alternate settlement arrangements in the event of non-availability of RBI as a settlement bank will also be explored.
6.4.4 Single Window Facility will be extended to all member banks that are part of Clearing Houses managed by major banks. This will enable member banks to view balances maintained by them with these banks at different Clearing Houses and also initiate funds transfer requests from / to their own accounts.
6.4.5 Secured Web Site (SWS) facility will be extended to cover all MICR-CPCs. The SWS facility will be used by CPCs / member banks to upload / download clearing data / reports. Hard copies of clearing reports by the CPCs will be provided only in exceptional and need-based circumstances.
6.5 Promoting electronic modes of payment
6.5.1 All large-value and time-critical payments will be processed only through the electronic mode.
6.5.2 All bank branches will be enabled with IFSC and MICR codes. The intention is to leave the user with the choice of product for retail and small-value transactions viz. use MICR for NECS and IFSC for NEFT.
6.5.3 Reach of electronic products like RTGS, NEFT and NECS will be extended to cover all the branches of banks, including Regional Rural Banks.
6.5.4 Operating hours of RTGS will be reviewed and considered based on market / user expectations and stakeholder feedback.
6.5.5 Number of settlements in NEFT will be reviewed and further increased / rationalised depending on analysis of volumes, user requirements and efficiency perspectives.
6.5.6 Efforts would be made to provide positive acknowledgement to the remitter confirming credit to the beneficiary’s account for transactions initiated in NEFT will be introduced. This would give comfort to the remitter and enhance his usage.
6.5.7 The Bank will facilitate origination and receipt of Government transactions through RTGS and NEFT for RBI-based payments and receipts.
6.5.8 Number of centres offering ECS (Credit & Debit variants) at Local level (viz. Local ECS) will be reviewed and closed down / merged, if felt necessary. Local ECS (Credit) at Mumbai has been merged with NECS (Credit). The need for introduction of Local ECS at newer centres will be reviewed and endeavour will be not to operationalise Local ECS but to expand the reach of NECS to include the branches covered by Local ECS. Once this is achieved, Local ECS will be subsumed by NECS at more and more centres and Local ECS will be discontinued. NECS coverage will extend to all core-banking enabled branches in the country.
6.5.9 Centralised ECS (CenECS) presently offered at Mumbai and covering 15 RBI locations will be discontinued.
6.5.10 Scope for introducing Regional ECS (RECS) at more centres will be explored. RECS (Credit) (presently experimented at Bangalore) provides increased reach by extending the jurisdiction of Local ECS at the State Capital (Bangalore) to the entire core-banking enabled branches in the State (Karnataka). RECS crystallises the activities of National Clearing Cells (NCCs) at Regional Offices of the Bank and once coverage includes to major branches covered by Local ECS centres in a State, there would be scope for discontinuing Local ECS at such other locations within the State.
6.5.11 Introduction of RECS (Debit) would be actively explored and implemented at a few locations in the country. NECS (Debit) operationalisation will also be separately or parallely pursued.
6.5.12 Electronic modes of payments have the benefits of low cost, quicker reach, better audit trails, and brings in efficiency to the entire gamut of payment systems. Payments for various schemes sponsored by the Government will be pursued to be put either through the banking channel or otherwise. All credits arising out of sponsored and welfare schemes of the Central and State Governments shall be facilitated through Electronic Benefit Transfer schemes.
6.5.13 Further to the initiatives taken to operationalise Indo-Nepal Remittance Facility Scheme (for one-way migrant remittances from India to Nepal), operationalisation of electronic products like NEFT and ECS / NECS in Bhutan will be taken up. In addition, the request to extend National Financial Switch (NFS) to cover banks operating in Bhutan will also be actively pursued and implemented if found feasible. Such regional payment initiatives bring in a harmonised approach and facilitate cross-border expansion of activities in a seamless manner at a later date.
6.5.14 The Centralised Funds Management System (CFMS) as it presently exists, facilitates centralised balance viewing of and funds transfer between own accounts of a member bank maintained with the Bank at different locations. It will be examined if CFMS can be enabled to facilitate funds transfer between member banks as well.
6.6 Reducing risks in paper-based clearing
6.6.1 Over a period of time, efficiency has been brought into the paper mode of clearing by way of introduction of MICR processing, computerised settlement, truncating the movement of physical cheques, and the like. Operations across all Clearing Houses in the country will be fully computerised. Magnetic Media Based Clearing System (MMBCS) software will be used to computerise processing and settlement operations at all Clearing Houses in the country. All new Clearing Houses will function only on MMBCS mode.
6.6.2 Operationalising MICR-Cheque Processing Centres (MICR-CPCs) will be considered at all locations that are viable and have a daily volume of 10,000 instruments or more. Such CPCs could be made part of the grid-based CTS. Cheques processed by MICR-CPCs will cover over 95% of volume and value of cheques processed in the country.
6.6.3 Given the various risks associated with paper based clearing especially for large-value transactions, and the advantages available in the electronic products like NEFT / RTGS, conduct of High Value Clearing will be discontinued at all locations in the country.
6.6.4 Speed Clearing to clear outstation cheques at the centre of presentment will be extended to cover 100 major centres in the country.
6.6.5 The Bank run Inter-City Clearing will be discontinued at all locations.
6.6.6 Cheque Truncation System (CTS) will be rolled out at Chennai. National roll-out of CTS will be considered once this project is operationalised.
6.6.7 The prospect of bringing various Clearing Houses in a region (covering adjacent states) using a Grid-based approach is being examined. Grid-based cheque clearing system to cover nearby MICR-CPCs and Clearing Houses under the Chennai-grid (covering southern states) will be implemented. The New Delhi-grid will also be operationalised by extending the jurisdiction of New Delhi Bankers’ Clearing House to cover nearby cities / states. Extending the concept of grid-based clearing to cover other regions in the country will be reviewed based on experience gained from the operationalisation and functioning Chennai and New Delhi grids.
6.6.8 Cheque standardisation will be endeavoured which would build more security features to cheques and thus reduce incidence of frauds. Standardisation will also facilitate OCR capture of information contained in the cheques, thereby enabling straight-through-processing and least manual intervention. Cheques with enhanced security features when presented through CTS will provide the level of comfort expected by presenting banks and drawee banks alike.
6.6.9 All cheques in the country, including the cheques used by the Government departments will be completely migrated to the MICR mode. Non-MICR clearing presently operational in a few locations in the country (on a once-per-week basis or otherwise) will be discontinued.
6.6.10 The clearing infrastructure in place at various locations have the advantages of faster clearing cycle, low cost, uniform practices, better dispute resolution and are functioning since long. Bilateral arrangements function outside the clearing infrastructure and do not contribute to the efficiency of the system in all situations. Therefore, all the Bilateral Clearing arrangements between banks would be reviewed and allowed to continue only where necessary.
6.7 New frontiers
6.7.1 There has been an increase in the various new payment systems initiatives / products. Introduction, usage and acceptability of the new on-site and off-site delivery channels viz. Core Banking Solutions (Branch Banking), Computers (Net Banking), Cards (Pre-paid Payment Instruments), Mobiles (Mobile Banking), Automated Teller Machines, Points-Of-Sale Terminals, Hand-held Devices, Interactive Voice Response Modes and the like will be carefully monitored, nurtured and actively pursued. Some of these initiatives have been very popular in terms of usage and the volumes handled by them have seen significant growth in recent years.
6.7.2 Effectiveness and Reach of Business Correspondents (BCs) and various modalities including eligibility criteria, area of operations, appointment of sub-agents, etc., will be periodically reviewed and streamlined, if necessary, in the interest of increased outreach and expansion of banking services to the rural populace.
6.7.3 Review of the policy on ATMs in terms of increasing the number, criteria for setting up on-site and off-site ATMs, levy of charges, safety of transactions on ATMs, activities permitted to be carried out through ATMs, security features for ensuring the privacy and safety of transactions, resolution of grievances, complaint handling, accessibility of other-bank ATMs, inter-ATM networks, etc., will be closely watched and appropriate measures will be put in place to protect usage and prevent mis-use.
7. New Projects / Major Initiatives
7.1 Major projects intended to be pursued would include -