The government of India introduced the Payment and Settlement Systems Act, 2007, to enable the regulation and supervision of payment systems in India. The act empowers the Reserve Bank of India (RBI) to fulfil these tasks, enact appropriate policies and provide a sustainable legal basis for multilateral netting and settlement finality.
Board and its duties
Accordingly, the RBI has established a board for the regulation and supervision of payment and settlement systems. The RBI also framed the Payment and Settlement Systems Regulations, 2008, to guide the board’s enforcement of the provisions of the act.
The board is responsible for granting authorization to various payment system providers in accordance with the act; regulating mobile payments; implementing rules for the issuance and operation of prepaid payment instruments; rationalizing charges for electronic payment products and outstation cheque collection; facilitating the migration of large-value payments from traditional paper instruments to more secure electronic modes; and promoting the use of satellite communication to aid the provision of banking services in remote places.
Currently, the act and regulations stipulate that no body other than the RBI shall commence or operate a payment system, except in accordance with an authorization issued by the RBI (unless the act specifically exempts it from this requirement).
No need to get it on paper
India has recently witnessed a strong and increasing trend towards electronic fund transfers and “plastic money” transactions, which are faster and more secure than transactions using conventional paper money instruments.
The RBI has made consistent efforts to encourage the use of electronic transaction modes and pre-paid credit instruments. For example, on 8 October 2008 it issued its Mobile Banking Transactions in India – Operative Guidelines for Banks. The RBI has also recently published a draft policy, Payment Systems in India – Vision 2009-2012.
Among the significant new projects being considered by the RBI under the draft policy is the setting up of a national payment card system, supported by a point of sale (PoS) switch network.
A clear need for change
Presently, there is no price setter in India that provides a payment and settlement platform to Indian banks. This means that Indian banks have no alternative to working with international settlement agencies in order to settle the domestic and international transactions of their customers.
Domestic transactions account for approximately 90% of the total transactions handled by Indian banks, yet they all need to be channelled through a switch network operated by international agencies, outside the country. As a result, Indian banks incur extensive costs, even for domestic transactions.
New domestic price system
The RBI’s proposal to set up a domestic card system in India, if implemented, would clearly be of significant assistance to Indian banks. It would enable them to avoid the high fees levied by international agencies, and obviate the need for domestic transactions to be routed through international payment systems.
In its details, the proposal reflects practices successfully adopted by other countries that have set up similar domestic price-settling systems in their jurisdictions.
These systems include China’s Union Pay; the Singapore Network for Electronic Transfer; and Gulf Payments, which regulates payments in member countries in the Middle East (Kuwait, Bahrain, Oman, Qatar, the UAE and Saudi Arabia).
Progress and diversity
There is little doubt that the various new payment systems that have been introduced in India are contributing to nothing less than a transformation in payment and settlement practices in the country.
These systems include the systemically important payment system (SIPS); the real time gross settlement (RTGS) retail payment system; foreign exchange and government securities clearing utilizing electronic clearing instruments; electronic fund transfer (EFT) and card-based payments within the retail payment system.
The establishment and increasing use of such systems for the management of electronic commercial transactions is a positive sign of ongoing improvements in the Indian financial and regulatory regime.
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