In recent years, alternate money transmission avenues, especially the development of electronic money schemes, have been gaining currency. While electronic money has the potential to take over from cash for making small-value payments, making such transactions are becoming easier and cheaper for both consumers and merchants. This raises policy issues for central banks in its role as the guardian of the payment network and implementer of the monetary policy. The emergence of peer-to-peer money transmission mechanisms poses a challenge to current role of banks as gatekeepers to traditional payment systems. Robust payment systems, therefore, are a key requirement in maintaining and promoting financial stability with technology playing both a facilitating and disruptive role in them.
Reserve Bank’s initiatives for electronic payments and banking
As part of its public policy objective of promoting a safe, secure, sound and efficient payment system, the Reserve Bank has taken several initiatives to develop and promote electronic payments infrastructure. Towards this end, the RBI introduced the following:
- Electronic Clearing Service (ECS).
- Electronic Funds Transfer (EFT) system.
- Real Time Gross Settlement (RTGS) system.
- National Electronic Funds Transfer (NEFT).
- Cheque Truncation System (CTS).
1. Electronic Clearing Service (ECS)
With a view to upgrading our payment system to the international standards, the Reserve Bank took the initiative and set up Electronic Clearing Service in India, in the mid 1990s, which is the counterpart of the automated clearing house (ACH) system in certain other countries. It has two variants ;
ECS – Credit Clearing and ECS – Debit Clearing.
While the Credit Clearing operates on the principle of ‘single debit-multiple credits’ and is used for making payment of salary, pension, dividend and interest, etc. The Debit Clearing functions on the principle of ‘single credit-multiple debits’ and is used for collecting payments by utility service providers like electricity, telephone bills as well by banks for receiving principal / interest repayments for housing and personal loans from the borrowers.
At present, about 18 million transactions flow through the ECS system every month. This facility is currently available at 70 centers in the country.
b. Real Time Gross Settlement System
The payment system in the country largely follows the deferred net settlement regime, under which the net amount is settled between the banks, on a deferred basis. Such a dispensation entails an element of settlement risk. Hence, as a step towards risk mitigation in the large value payment systems, the RTGS was operationalised by the RBI in March 2004, which enables settlement of transactions in real time, on a gross basis. Almost all the inter-bank transactions in the country and many time-critical customer transactions are now settled through this system.
RTGS is fully secured electronic funds transfer system where banks and customers can receive payments on real time basis. The outreach of RTGS transactions has also grown geographically. Out of about 75,000 bank branches in the country, more than 48,300 bank branches now accept requests for remittance through RTGS system for customer transactions as well as inter-bank transactions.
A minimum threshold of rupees one lakh has been prescribed for customer transactions to ensure that RTGS system is used only for large value transactions and retail transactions take an alternate channel of electronic funds transfer. The daily average of transactions is over 34,000 by volume and over Rs.2 lakh crore by value.
The RBI also provides collateralised Intra-Day-Liquidity (IDL) support to the member banks for the RTGS operations.
c. National Electronic Fund Transfer:
The NEFT was launched by the RBI in November 2005 as a more secure, nation-wide retail electronic payment system to facilitate funds transfer by the bank customers, between the networked bank branches in the country. It has, however, been observed that the public sector banks are not the most active users of this product and the majority of NEFT outward transactions are originated by a few new-generation private sector banks and foreign banks.
For instance, in June 2008, while these banks, as a segment, accounted for a little over 43 per cent each of the aggregate volume of outward and inward NEFT transactions, the share of public sector banks in total outward NEFT transactions was rather low at a little over 12 per cent, of which half the volume was the contribution of the State Bank of India.
The RBI has been pursuing the matter with the PSBs for increasing their participation in the NEFT system in terms of the number of NEFT-enabled branches and the number of NEFT transactions originated by them. I would like to urge upon the bankers present here to initiate appropriate measures to stimulate greater usage of this payment medium and thereby, improve their share in this regard.
In order to popularise the e-payments in the country, the RBI, on its part, has waived the service charges to be levied on the member banks, till March 31, 2009, in respect of the RTGS and NEFT transactions. The RBI also provides, free of charge, intra-day liquidity to the banks for the RTGS transactions. The service charges to be levied by banks from their customers for RTGS & NEFT have, however, been deregulated and left to discretion of the individual bank. While some of the banks have rationalized their service charges and a few have made it even cost-free to the customers, there are also certain banks that have fixed multiples slabs or unreasonably high service charges, at times linked to the amount of the transaction, for providing these services to their customers — even though the RBI provides these services to the banks free of charge.
d. Cheque Truncation System (CTS)
The latest electronic payment product introduced by the RBI is the Cheque Truncation System, which was launched, on a pilot basis, in the National Capital Region of New Delhi on February 1, 2008, with the participation of 10 banks. At present all the banks are participating in the system through 53 direct member banks.
The main objective of the CTS is to improve the efficiency and substantially reduce the cheque processing time in the system. The traditional clearing system requiring the physical presentation of cheques in the clearing house for payment and settlement, inevitably entails consequential inefficiencies in terms of clearing time and infrastructure required.
In contrast, the main advantage of cheque truncation is that it eliminates the physical presentation of the cheque to the clearing house; instead, the electronic image of the cheque would be sent to the clearing house. The CTS would enable the realisation of cheques on the same day, and provide a more cost-effective mode of settlement than manual and MICR clearing. Smaller banks, which may find it unviable to set up the infrastructure, could utilise the services of service bureaus set up for this purpose by a few larger banks.
Once the CTS become fully operational, the system would be the largest in the world and would leapfrog the country from the paper-based instruments to a fully electronic mode of payment and settlement. Necessary amendments have been made to the Negotiable Instruments Act, 1881, which provides legal recognition to the electronic image of the truncated cheque. These amendments provide a legal basis for the cheque truncation system. .
e. National Electronic Clearing Service (NECS)
The National ECS is a product being developed by the RBI to enable centralised processing of the ECS transactions, in contrast to the existing ECS system that has decentralised operations at 70 locations, spread all over the country. Under the National ECS, the processing of all the ECS transactions would be centralised at the National Clearing Cell at Nariman Point, Mumbai and sponsor banks would need to only upload the relative files to a web server, with online data validation facility.
Destination banks would receive their inward clearing data / file at a central location, through the web server. The National ECS would leverage the Core Banking platform of the commercial banks, to enable around 50,000 core-banking-enabled branches of the various banks, to avail of this service. The system would facilitate end-to-end seamless posting of the NECS transactions in a straight-through-processing (STP) environment. This would help the users and member banks to send, receive and process the data files at one centralised place, thereby improving the efficiency of the payment system.
f. Negotiated Dealing System
The system which became operational during Feb 2002 facilitates the submission of bids/applications for auctions/floatation of govt. securities through pooled terminal facility located at Regional Offices of Public Debt Offices across the country and through member terminals. The system can be used for daily Repo and Reverse Repo auctions under Liquidity Adjustment Facility.