PAYMENT AND SETTLEMENT SYSTEMS

Payment and settlement systems play an important role in improving overall economic efficiency. They consist of all the diverse arrangements that we use to systematically transfer money-currency, paper instruments such as cheques, and various electronic channels.

Overview

The central bank of any country is usually the driving force in the development of national payment systems. The Reserve Bank of India (RBI) as the central bank of India has been playing this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country.
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 (PSS Regulations) framed thereunder came into effect from August 12, 2008. In terms of Section 4 of the PSS Act, no person other than RBI can commence or operate a payment system in India unless authorised by RBI.
The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a sub-committee of the Central Board of RBI is the highest policy making body on payment systems in RBI. The BPSS is empowered for authorising, 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 (DPSS) of RBI serves as the Secretariat to the BPSS and executes its directions.
The Reserve Bank has since authorised various types of payment system operators, viz. financial market infrastructure (enabling securities, triparty repos, forex trades, Rupee / forex derivatives settlements, etc.), retail payments organisation (operating ATM switch, fast payment systems, cheque clearing, automated clearing, Aadhaar-based payments, toll collections, etc.), card payment networks, cross-border inbound money transfer entities, Automated Teller Machine (ATM) networks, white label ATM operators, Prepaid Payment Instrument (PPI) issuers, instant money transfer service provider, Trade Receivables Discounting System (TReDS) operators, Bharat Bill Payment Central Unit (BBPCU), Bharat Bill Payment Operating Units (BBPOUs), etc.
The list of Payment System Operators (PSOs) authorised by RBI to set-up and operate a payment system in India under the PSS Act is available here.

Digital Payments

The initiatives taken by the Reserve Bank 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. Electronic Clearing Service (Credit) and Electronic Clearing Service (Debit), run by Reserve Bank, have been replaced with National Automated Clearing House run by National Payments Corporation of India (NPCI). Reserve Bank migrated its old Electronic Funds Transfer (EFT) system with the modern and feature-rich National Electronic Funds Transfer (NEFT) system.
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 half-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. From December 2019, it is available 24x7 throughout the year with half-hourly settlements.
Prepaid Payment Instruments (PPIs)
PPIs are payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. PPIs may be loaded / reloaded by, cash, debit to a bank account, credit and debit cards, and other PPIs. The electronic loading / reloading of PPIs shall be through these payment instruments issued only by regulated entities in India and shall be in INR only. The PPIs may be issued as cards, wallets, and any such electronic or digital form / instrument which can be used to access the PPI and to use the amount therein. In line with the Payment Systems Vision – 2021, interoperability was made mandatory for full-KYC PPIs and for all acceptance infrastructure.
National Automated Clearing House (NACH)
NACH is a centralised Electronic Clearing System (ECS) system operated by NPCI. NACH was formed to consolidate multiple Electronic Clearing Service systems running across the country into one centralised system. It operates both NACH Credit and NACH Debit payment systems. NACH credit, like ECS credit, is used for making one-to-many credit transfers towards payment of dividends, interest, salary, pension, distribution of subsidies, etc. NACH Debit operates to collect payments from many accounts to one destination account e.g. collection of various utility payments pertaining to telephone, electricity, water and gas charges etc. It also facilitates in collecting periodic instalments towards loans, investments in mutual funds, insurance premium etc.
The destination banks and accounts are identified based on account number, IFSC or MICR codes. NACH works on the strength of Mandates given by customers for allowing debit to the account at a specified frequency. Apart from paper mandates, paperless mandates can also be created electronically. The system also identifies destination account based on Aadhaar number, through APBS leg of NACH.
In order to further enhance customer convenience and to leverage the 24x7 availability of RTGS, NACH was made available on all days of the week from August 1, 2021.
Point of Sale (POS) Terminals / Online Transactions using credit/debit/prepaid cards issued by Card Payment Networks
Five Card Payment Networks, including India's own Rupay run by NPCI, have been authorised by Reserve Bank.
There are over fifty 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 payments are enabled through Payment Aggregators or Payment Gateways. For more details, please see section on them under Other Payment Systems/Services.
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. From December 2020, it is available 24x7, making India one of the few countries in the world to operate its RTGS system round the clock.

Paper-based / Cash Payments

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). Following implementation of CBS in banks, Speed Clearing was launched (for local clearance of outstation cheques drawn on core-banking enabled branches of banks).
CTS-2010 Standards were framed in February 2010 (for enhancing the security features on cheque forms). The CTS-2010 Standards, specifying the security features towards standardization of cheques, were issued vide circular dated February 22, 2010 and subsequently in December 2011 all banks were advised to issue only 'CTS 2010' standard cheques across the country by September 30, 2012. Mandatory Features include Paper & Watermark (at manufacturing stage), VOID pantograph & bank's logo with UV ink (at printing stage), Field placements of a cheque, mandating colours and clutter-free background, prohibiting alterations / corrections on cheques and pre-printed account number. Apart from these, banks are allowed to include suitable desirable features as long as they do not compromise on the mandatory security features.
Cheque Truncation System
Cheque truncation (CTS) system was introduced (to restrict physical movement of cheques and enable use of images for payment processing). All sixty-six MICR centres were subsumed in CTS grid systems and MICR clearing was discontinued w.e.f July 2014. Initially, the threshold limit for CTS migration at 50000 instruments per month was set. Subsequently in February 2017 all ROs were instructed to attempt migration of centres having cheque volume of 30,000 and above to CTS. In July 2018 the threshold limit was revised to 10,000, subject to putting in place Paper-to-follow (P2F) arrangement. As on September 2020, all ECCS centres have been migrated to CTS. CTS was expanded to ensure pan-India coverage to include all bank branches in the country. Positive Pay system for Cheque Truncation has been implemented from January 1, 2021 for increased security of high value cheques
Cash Payments – Automated Teller Machines
As on April 2022, there are over 2,17,000 banks-owned ATMs and around 32,000 white label ATMs in India. Customers are eligible for 5 free transactions in a month from their own bank ATM. They are also eligible for free transactions in other banks ATMs viz., 3 transactions in metros and 5 in non-metros. 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 five working days and mandated compensation for delays beyond the stipulated period. Furthermore, a standardised template has been prescribed for displaying at all ATM locations to facilitate lodging of complaints by customers.
Apart from National Financial Switch run by NPCI, some banks and a private enterprise have been authorised to operate ATM Networks.
White Label ATMs (WLAs)
Non-bank entities incorporated in India under the Companies Act 1956 / 2013, are permitted to set up, own and operate Automated Teller Machines (ATMs) in India after authorisation by RBI. Non-bank entities that intend setting up, owning and operating ATMs, are called "White Label ATM Operators" (WLAO) and such ATMs are called "White Label ATMs" (WLAs). They provide the banking services to the customers of banks in India, based on the cards (debit / credit / prepaid) issued by banks. The WLAO's role is confined to acquisition of transactions of all banks' customers and hence they need to establish technical connectivity with the existing authorised shared ATM Network Operators / Card Payment Network Operators. The WLAO's were permitted to participate in RTGS directly from July 2021.
Cash Withdrawal using point-of-sale terminals
Customers can also use point-of-sale terminals for cash withdrawal within prescribed limits.

Other Payment Systems / Services

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 organisation 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 Triparty Repo 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 minimise 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 rupee derivatives such as Interest Rate Swaps.
CCIL is also providing a reporting platform and acts as a trade repository (CCIL-TR) for Over the Counter (OTC) products. Legal Entity Identifier India Ltd., is a wholly owned subsidiary of CCIL, acting as a Local Operating Unit for issuing Legal Entity Identifiers (LEI) in India.
Both CCIL and CCIL-TR are recognised as financial market infrastructures. CCIL is granted the status of a Qualified Central Counterparty (QCCP) and is subjected, on an on-going basis, to rules and regulations that are consistent with the Principles for Financial Market Infrastructures (PFMIs) issued by the Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO).
Mobile Banking Services
Mobile phones, as a medium for extending banking services, have attained greater significance because of their ubiquitous nature. Banks which are licensed, supervised and having physical presence in India, are permitted to offer mobile banking services (through SMS, USSD or mobile banking application) after obtaining necessary permission from Reserve Bank of India and are to be made available to bank customers irrespective of the mobile network. ‘Mobile Banking transaction’ means undertaking banking transactions using mobile phones by bank customers that involve accessing / credit / debit to their accounts and / or, debit / credit cards issued as per the extant RBI guidelines.
Bharat Bill Payment System
Bharat Bill Payment System (BBPS) is an integrated bill payment system that offers interoperable and accessible bill payment services with a single brand image, providing convenience of 'anytime anywhere' bill payment to customers. BBPS facilitates collection of repetitive (monthly, bi-monthly, quarterly etc.) payments for everyday utility services provided by utility service providers in categories like electricity, telecom, DTH, gas, water bills, etc. and also other repetitive payments like insurance premium, mutual funds, school fees, institution fees, credit cards, fastag recharge, local taxes, housing society payments, etc., at one single window. BBPS transaction can be initiated through multiple payment channels like, internet banking, mobile banking, PoS (Point of Sale terminal), mobile wallets, kiosk, ATM, bank branch, agents and business correspondents. BBPS facilitates various payment modes viz, cards (credit, debit and prepaid), NEFT, UPI, wallets, Aadhaar based payments and cash. Mobile prepaid recharges was permitted as a biller category to facilitate the customers with more options to recharge.
The participants in the BBPS include authorised entities, such as, the Bharat Bill Payment Central Unit (BBPCU), the Bharat Bill Payment Operating Units (BBPOUs) as well as their agents, payment gateways, banks, billers and service providers, and other entities, including authorised prepaid payment instrument issuers, as required under the BBPS. National Payments Corporation of India (NPCI) is the only entity authorised by RBI as BBPCU and it sets necessary operational, technical and business standards for the entire system and its participants, and also undertakes clearing and settlement activities. BBPOUs are RBI authorised operational units working in adherence to the standards set by the BBPCU.
Trade Receivables Discounting System
Trade Receivables Discounting System (TReDS) is a scheme for setting up and operating institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers. TReDS facilitate the discounting of both invoices as well as bills of exchange. Further, as the underlying entities are the same (MSMEs and corporate and other buyers, including Government Departments and PSUs), the TReDS deals with both, receivables factoring as well as reverse factoring, so that higher transaction volumes can come into the system and facilitate better pricing. The transactions processed under TReDS are ‘without recourse’ to the MSMEs.
Payment Aggregators/Gateways
Payment Aggregators (PAs) are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. PAs facilitate merchants to connect with acquirers. In the process, they receive payments from customers, pool and transfer them on to the merchants after a time period. Non-bank entities which want to offer services as Payment Aggregators need to apply for authorisation from the RBI under the PSS Act.
Payment Gateways are entities that provide technology infrastructure to route and facilitate processing of an online payment transaction without any involvement in handling of funds. Payment Gateways shall be considered as ‘technology providers’ or ‘outsourcing partners’ of banks or non-banks, as the case may be.
Framework for small value payments in Offline mode
An offline payment means a transaction which does not require internet or telecom connectivity to take effect. Transactions up to Rs.200 were allowed to be undertaken by Reserve Bank in offline mode. Lack of internet connectivity or low speed of internet, especially in remote areas, is a major impediment in adoption of digital payments. Against this backdrop, providing an option of off-line payments through cards, wallets and mobile devices is expected to further the adoption of digital payments.
Digital Payment options for feature phone users (UPI 123Pay)
UPI 123PAY is an instant payment system for feature phone users who can use Unified Payments Interface (UPI) payment service in a safe and secure manner. The users will be able to undertake a host of transactions based on four technology alternatives including- IVR (interactive voice response) number, missed call-based approach, through functionality implemented by Original Equipment Manufacturer (OEM) in feature phones and proximity sound-based technology. This will bring non-smartphone users under the digital payment system and is expected to benefit more than 40 crore feature phone users in the country and enable them to undertake digital payments in a secure and convenient manner.
24*7 Helpline for digital payments (DigiSaathi)
DigiSaathi is an automated 24x7 response system that helps customers in addressing their queries related to debit and credit cards, UPI, NEFT, RTGS, IMPS, PPI wallets, ATM, and mobile and net banking, among others. DigiSaathi is available to customers via website & chatbot facility at www.digisaathi.info, through toll-free calls - 14431 & 1800 891 3333 and on WhatsApp by messaging on +91 892 891 3333
Others
Apart from the above, there are payment systems like Cross border Money Transfer - in-bound only, Instant Money Transfer, operated by various authorised payment system operators (PSOs). Reserve Bank has authorised National Payments Corporation of India (NPCI) to function as a Retail Payments Organisation and it operates payment systems like, National Financial Switch (NFS), Immediate Payment System (IMPS), Aadhaar Enabled Payments System (AEPS), Unified Payments Interface (UPI) and National Electronic Toll Collection (NETC).

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

Payment System Vision in India

Oversight Framework

Legal Framework

Oversight of Payment and Settlement Systems

Oversight of the payment and settlement systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change. By overseeing payment and settlement systems, central banks help to maintain systemic stability and reduce systemic risk, and to maintain public confidence in payment and settlement systems. The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems Regulations, 2008 framed thereunder, provide the necessary statutory backing to the Reserve Bank of India for undertaking the Oversight function over the payment and settlement systems in the country.

Governor’s message on Digital Payments

1	Shri Shaktikanta Das	Governor	Chairperson
2	Shri T. Rabi Sankar	Deputy Governor	Vice-Chairperson
3	Dr. M. D. Patra	Deputy Governor	Member
4	Shri M. Rajeshwar Rao	Deputy Governor	Member
5	Shri Swaminathan J	Deputy Governor	Member
6	Prof. Sachin Chaturvedi	Central Board Member	Member
7	Dr. Ravindra H. Dholakia	Central Board Member	Member