Payment and settlement systems in India

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Payment and settlement systems are used for financial transactions in India. Covered by the Payment and Settlement Systems Act of 2007 (PSS Act), legislated in December 2007, they are regulated by the Reserve Bank of India (RBI) and the Board for Regulation and Supervision of Payment and Settlement Systems. [1]

Contents

India has multiple payments and settlement systems, both gross and net settlement systems. For gross settlement India has a real-time gross settlement (RTGS) system called by the same name. Its net settlement systems include the Electronic Clearing Services (ECS Credit), Electronic Clearing Services (ECS Debit), credit cards, debit cards, the National Electronic Fund Transfer (NEFT) system, Immediate Payment Service, and Unified Payments Interface (UPI).

According to a survey by Celent, the use of e-payments instead of paper-based transactions increased considerably between 2004 and 2008 due to technological developments and increasing consumer awareness and comfort with internet and mobile transactions. [2]

The RBI is encouraging alternative methods of payments to make the financial payment and settlement process in India more secure and efficient. It has made RTGS compulsory for high-value transactions. It introduced NEFT and NECS (National Electronic Clearing Services) to encourage individuals and businesses to switch from paper to electronic transactions.

Growing availability of Internet connected services and the issuance of 1.3 billion biometric ID numbers in the region has made it easier for Indian customers to open bank accounts and use electronic payment systems. As of 2023 there are 907.4 million internet users in India (64% of the population), a 35% increase since 2018. [3] 63% payments still being made in cash. E-payments have been heavily promoted in India showing consumers the various ways they can make these payments Including ATMs, the Internet, mobile phones and drop boxes.

Due to RBI efforts and the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), now over 75% of all transaction volume is electronic, including both large-value and retail payments. Out of this 75%, 98% come from the RTGS (large-value payments) whereas a meager 2% come from retail payments. This means consumers have not yet accepted this as a regular means of paying their bills and still prefer conventional methods. Retail payments if made via electronic modes are done by ECS (debit and credit), EFT and card payments. [2] The Reserve Bank on Monday asked banks to put in place additional arrangements for export and import transactions in Indian rupees in view of increasing interest of the global trading community in the domestic currency. Before putting in place this mechanism, banks will require prior approval from the Foreign Exchange Department of the Reserve Bank of India (RBI), the central bank said in a circular. [4]

Real-time gross settlement

The acronym 'RTGS' stands for Real-time gross settlement. The Reserve Bank of India (India's Central Bank) maintains this payment network. Real-time gross settlement is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is regarded as final and irrevocable.

Fees for RTGS vary from bank to bank. RBI has prescribed upper limit for the fees that can be charged by all banks both for NEFT and RTGS. Both the remitting and receiving parties must have core banking in place to engage into RTGS transactions. Core Banking enabled banks and branches are assigned an Indian Financial System Code (IFSC) for RTGS and NEFT purposes. This is an eleven digit alphanumeric code and unique to each bank branch. The first four letters indicate the identity of the bank and remaining seven numerals indicate a single branch. This code is provided on the cheque books, which is required for transactions along with recipient's account number.

RTGS is a large value funds transfer system (with a minimum transaction value of ₹ 200,000 (US$2,400)) where financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system achieves final settlement of interbank funds transfers on a continuous, transaction-by-transaction basis throughout the processing day. Customers can access the RTGS facility between 09:00 to 16:30 (Interbank transactions up to 18:30) on weekdays and 09:00 to 14:00 (Interbank transactions up to 15:00) on Saturdays. However, the timings may vary depending on the bank branch. Time-varying charges were introduced by the RBI effective from 1 October 2011. The primary purpose of RTGS is to facilitate transactions that require immediate completion.

Banks could use balances maintained under the cash reserve ratio (CRR) and the intra-day liquidity (IDL) to be supplied by the central bank, for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three times their net owned fund (NOF).

The IDL will be charged at ₹25 per transaction entered into by the bank on the RTGS platform. The marketable securities and treasury bills will have to be placed as collateral with a margin of five per cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day.

Since 26 August 2019, the RTGS service window for customers' transactions is available from 07:00 to 18:00 from Monday to Saturday (except the second and fourth Saturday of each month). No transactions are settled on Sundays and bank holidays. [5] The service is scheduled to become available 24 hours a day starting in December 2020. [6]

The RBI announced on 11 June 2019 that 'all charges for payments via RTGS and National Electronic Funds Transfer (NEFT) collected from banks would be waived from 1 July 2019, and asked banks to pass on the benefits to customers.' [7]

RTGS Timings

RTGS Timings
Open for Business07:00
Initial Cut-off (Customer Transaction)18:00
Final Cut-off (Inter Bank Transaction)19:45
Intra-day liquidity (IDL) Reversal19:45 to 20:00
End of the Day20:00 [8]

Service Charge for RTGS

Inward transactions: No charge to be levied.

Outward transactions:

No time varying charges are applicable for RTGS transactions settled up to 1300 hrs.

On 6 June 2019

To push digital transactions RBI has removed charges for payments via NEFT and RTGS and asked banks to pass on the benefits to customers. This means that payments via NEFT and RTGS would become either free or charges would be drastically reduced. [9] [10]

24x7 Availability of Real Time Gross Settlement (RTGS) System

In a major development, Reserve Bank of India (RBI) Governor Shaktikanta Das has confirmed that RTGS facility is now operational 24×7. [11]

National Electronic Funds Transfer (NEFT)

Started in November 2005, [1] the National Electronic Fund Transfer (NEFT) system is a nationwide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country. It is done via electronic messages. Even though it is not on real time basis like RTGS (Real Time Gross Settlement), half hourly batches are run in order to speed up the transactions. [12] [13]

For being part of the NEFT funds transfer network, a bank branch has to be NEFT-enabled. NEFT has gained popularity due to it saving on time and the ease with which the transactions can be concluded. As at 31 January 2011, 74,680 branches or offices of 101 banks in the country (out of around 82,400 bank branches) were NEFT-enabled. Steps are being taken to further widen the coverage both in terms of banks and branches offices. As on 30 December 2017 total number of NEFT enabled branches was increased to 139682 of 188 banks. [14]

Indo-Nepal Remittance Facility Scheme

Indo-Nepal Remittance Facility is a cross-border remittance scheme to transfer funds from India to Nepal, enabled under the NEFT Scheme. The scheme was launched to provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit money back to their families in Nepal. A remitter can transfer funds up to ₹50,000 (maximum permissible amount) from any of the NEFT-enabled branches in India. The beneficiary would receive funds in Nepalese Rupees.

Immediate Payment Service (IMPS)

Immediate Payment Service (IMPS) is an initiative of National Payments Corporation of India (NPCI). It is a service through which money can be transferred immediately from one account to the other account, within the same bank or accounts across other banks. Upon registration, both the individuals are issued an MMID (Mobile Money Identifier) Code from their respective banks. This is a 7-digit numeric code. To initiate the transaction, the sender in his mobile banking application need to enter the registered mobile number of the receiver, MMID of the receiver and amount to be transferred. Upon successful transaction, the money gets credited in the account of the receiver instantly. This facility is available 24/7 and can be used through mobile banking application. Some banks have also started providing this service through internet banking profile of their customers. Though most banks offer this facility free of cost to encourage paperless payment system, ICICI bank and Axis bank charge for it as per their respective NEFT charges.

Money through this service can be transferred directly also by using the receiver's bank account number and IFS code. In such case, neither the receiver of the money need to be registered for mobile banking service of his bank, nor does he need MMID code. IMPS facility differs from NEFT and RTGS as there is no time limit to carry out the transaction. This facility can be availed 24/7 and on all public and bank holidays including RBI holidays.

Unified Payments Interface

Unified Payments Interface (UPI) is an instant real-time payment system developed by National Payments Corporation of India facilitating inter-bank transactions. The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform. The Unified Payment Interface (UPI) can be thought of like an email ID for your money. It will be a unique identifier that your bank uses to transfer money and make payments using the IMPS (Immediate Payments Service). IMPS is faster than NEFT and lets you transfer money immediately and unlike NEFT, it works 24/7. This means that the online payments will become much easier without requiring a digital wallet or credit or debit card.

Bharat Bill Payment System

Bharat Bill Payment System (BBPS) is an integrated bill payment system in India offering interoperable and accessible bill payment service to customers through a network of agents, enabling multiple payment modes, and providing instant confirmation of payment. [15] This is still[ when? ] in the implementation stage. Guidelines for implementation of this system were issued on 28 November 2014.

Comparison

The key difference between RTGS and NEFT is that while RTGS is on gross settlement basis, NEFT is on net settlement basis. Besides, RTGS facilitates real-time ("push") transfer, while NEFT involves regular settlements and is operating 24/7/365 since December 2019. Customers can access the RTGS facility between 09:00 to 16:30 on weekdays and 09:00 to 13:30 on Saturday. RTGS is available 24/7/365 from 00:30 on 14 December 2020. Round the clock availability of RTGS will provide extended flexibility to businesses for effecting payments.

RTGS facility is available in over 113,000 branches across India, while NEFT is available in little over 115,000 branches of a 100 banks.

Related Research Articles

<span class="mw-page-title-main">Reserve Bank of India</span> Central Bank of India

The Reserve Bank of India, abbreviated as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. Owned by the Ministry of Finance, Government of India, it is responsible for the control, issue and maintaining supply of the Indian rupee. It also manages the country's main payment systems and works to promote its economic development. Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised division of RBI through which it prints and mints Indian currency notes (INR) in two of its currency printing presses located in Mysore and Salboni. The RBI, along with the Indian Banks' Association, established the National Payments Corporation of India to promote and regulate the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialized division for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.

<span class="mw-page-title-main">Transaction account</span> Bank holding that clients can access on demand

A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share account at credit unions, is a deposit account or bank account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms, they are considered as cash.

Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real-time" and on a "gross" basis to avoid settlement risk. Settlement in "real time" means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. "Gross settlement" means the transaction is settled on a one-to-one basis, without bundling or netting with any other transaction. "Settlement" means that once processed, payments are final and irrevocable.

<span class="mw-page-title-main">Wire transfer</span> Method of electronic funds transfer

Wire transfer, bank transfer, or credit transfer, is a method of electronic funds transfer from one person or entity to another. A wire transfer can be made from one bank account to another bank account, or through a transfer of cash at a cash office.

<span class="mw-page-title-main">Giro (banking)</span> Payment transfer from one bank account to another bank account and initiated by the payer

A giro transfer, often shortened to giro, is a payment transfer between current bank accounts and initiated by the payer, not the payee. The debit card has a similar model. Giros are primarily used in Europe; although electronic payment systems exist in the United States, it is not possible to perform third-party transfers with them. In the European Union, the Single Euro Payments Area (SEPA) allows electronic giro or debit card payments in euros to be executed to any euro bank account in the area.

The Australian financial system consists of the arrangements covering the borrowing and lending of funds and the transfer of ownership of financial claims in Australia, comprising:

A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, payment instruments such as payment cards, people, rules, procedures, standards, and technologies that make its exchange possible. A payment system is an operational network which links bank accounts and provides for monetary exchange using bank deposits. Some payment systems also include credit mechanisms, which are essentially a different aspect of payment.

<span class="mw-page-title-main">Fedwire</span> Real-time gross settlement by Federal Reserve Banks

Fedwire is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that allows financial institutions to electronically transfer funds between its more than 9,289 participants. Transfers can only be initiated by the sending bank once they receive the proper wiring instructions for the receiving bank. These instructions include: the receiving bank's routing number, account number, recipient’s name and dollar amount being transferred. This information is submitted to the Federal Reserve via the Fedwire system. Once the instructions are received and processed, the Fed will debit the funds from the sending bank's reserve account and credit the receiving bank's account. Wire transfers sent via Fedwire are completed the same business day, with many being completed instantly.

<span class="mw-page-title-main">Electronic funds transfer</span> Electronic transfer of money from one bank account to another

Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of bank staff. Funds transfers are the primary mechanism used by the business community for fast and reliable transfer of funds between two parties. The funds transfer process generally consists of a series of electronic messages sent between financial institutions directing each to make the debit and credit accounting entries necessary to complete the transaction. A funds transfer can generally be described as a series of payment instruction messages, beginning with the originator's instructions, and including a series of further instructions between the participating institutions, with the purpose of making payment to the beneficiary.

<span class="mw-page-title-main">Mobile banking</span> Service provided by a bank

Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. Unlike the related internet banking it uses software, usually called an app, provided by the financial institution for the purpose. Mobile banking is usually available on a 24-hour basis. Some financial institutions have restrictions on which accounts may be accessed through mobile banking, as well as a limit on the amount that can be transacted. Mobile banking is dependent on the availability of an internet or data connection to the mobile device.

<span class="mw-page-title-main">National Financial Switch</span> Bank network in India

National Financial Switch (NFS) is the largest network of shared automated teller machines (ATMs) in India. It was designed, developed and deployed by the Institute for Development and Research in Banking Technology (IDRBT) in 2004, with the goal of inter-connecting the ATMs in the country and facilitating convenience banking. It is run by the National Payments Corporation of India (NPCI). As on 31st January’ 22, there were 1,203 members that includes 111 Direct, 1,045 Sub members, 43 RRBs and 4 WLAOs using NFS network connected to more than 2.55 Lac ATM (including cash deposit machines/recyclers).

National Electronic Funds Transfer (NEFT) is an electronic funds transfer system maintained by the Reserve Bank of India (RBI). Started in November 2005, the setup was established and maintained by Institute for Development and Research in Banking Technology. NEFT enables bank customers in India to transfer funds between any two NEFT-enabled bank accounts on a one-to-one basis. It is done via electronic messages.

The Clearing House Automated Transfer System, or CHATS, is a real-time gross settlement (RTGS) system for the transfer of funds in Hong Kong. It is operated by Hong Kong Interbank Clearing Limited (HKICL), a limited-liability private company jointly owned by the Hong Kong Monetary Authority (HKMA) and the Hong Kong Association of Banks. Transactions in four currency denominations may be settled using CHATS: Hong Kong dollar, renminbi, euro, and US dollar. In 2005, the value of Hong Kong dollar CHATS transactions averaged HK$467 billion per day, which amounted to a third of Hong Kong's annual Gross Domestic Product (GDP); the total value of transactions that year was 84 times the GDP of Hong Kong. CHATS has been referred by authors at the Bank for International Settlements to as "the poster child of multicurrency offshore systems".

<span class="mw-page-title-main">Bank</span> Financial institution which accepts deposits

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.

The Indian Financial System Code is an alphanumeric code that facilitates electronic funds transfer in India. A code uniquely identifies each bank branch participating in the three main Payment and settlement systems in India: the National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and Immediate Payment Service (IMPS) systems.

National Payments Corporation of India (NPCI) is an Indian public sector company that operates retail payments and settlement systems in India. The organization is an initiative of the Reserve Bank of India (RBI) and the Indian Banks' Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust payment and settlement infrastructure in India.

<span class="mw-page-title-main">Immediate Payment Service</span> Electronic funds transfer system in India

Immediate Payment Service (IMPS) is an instant payment inter-bank electronic funds transfer system in India. IMPS offers an inter-bank electronic fund transfer service through mobile phones. The service is available 24/7 throughout the year including bank holidays. National Electronic Funds Transfer (NEFT) was also made available 24/7 from December 2019. Real-time gross settlement (RTGS) was also made available 24/7 from 14 December 2020.

Mobile payments is a mode of payment using mobile phones. Instead of using methods like cash, cheque, and credit card, a customer can use a mobile phone to transfer money or to pay for goods and services. A customer can transfer money or pay for goods and services by sending an SMS, using a Java application over GPRS, a WAP service, over IVR or other mobile communication technologies. In India, this service is bank-led. Customers wishing to avail themselves of this service will have to register with banks which provide this service. Currently, this service is being offered by several major banks and is expected to grow further. Mobile Payment Forum of India (MPFI) is the umbrella organisation which is responsible for deploying mobile payments in India.

<span class="mw-page-title-main">Unified Payments Interface</span> Indian instant payment system

Unified Payments Interface (UPI) is an Indian instant payment system as well as protocol developed by the National Payments Corporation of India (NPCI) in 2016. The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. It is used on mobile devices to instantly transfer funds between two bank accounts. The mobile number of the device is required to be registered with the bank. The UPI ID of the recipient can be used to transfer money. It runs as an open source application programming interface (API) on top of the Immediate Payment Service (IMPS), and is regulated by the Reserve Bank of India (RBI). Indian Banks started making their UPI-enabled apps available on Google Play on 25 August 2016.

<span class="mw-page-title-main">Automated clearing house</span> Type of electronic network for financial transactions

An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ACH system is designed to process batches of payments containing numerous transactions, and it charges fees low enough to encourage its use for low-value payments.

References

  1. 1 2 "Overview of Payment Systems in India". Reserve Bank of India. Archived from the original on 20 January 2015. Retrieved 24 January 2015.
  2. 1 2 "Payments in India Going the e-Way". Celent. 2008-10-07. Archived from the original on 2014-07-12. Retrieved 2014-07-12.
  3. ↑ "Cisco Annual Internet Report Highlights Tool - India" (PDF).
  4. ↑ "RBI OKs international trade settlement in Indian rupees, to make INR more tradable globally". Financialexpress. Archived from the original on 2022-07-12. Retrieved 2022-07-13.
  5. ↑ "RTGS system to open at 7 AM from August 26 as RBI extends operating hours". Business Standard India. Press Trust of India. 21 August 2019. Archived from the original on 21 August 2019. Retrieved 22 August 2019.
  6. ↑ "RBI keeps benchmark interest rates unchanged, sees GDP contracting by 9.5% in FY2020-21". The Hindu . 9 October 2020. Archived from the original on 2020-10-09. Retrieved 2020-10-09.
  7. ↑ "Fund transfers via RTGS, NEFT to cost less from July 1 - Times of India". The Times of India. 11 June 2019. Archived from the original on 12 June 2019. Retrieved 11 June 2019.
  8. ↑ Staff Writer (22 August 2019). "RTGS money transfer timing changes from August 26: 5 things to know". Mint. Archived from the original on 22 August 2019. Retrieved 22 August 2019.
  9. ↑ "RBI removes NEFT, RTGS payment charges to push digital transactions". The Economic Times. 2019-06-06. Archived from the original on 2019-06-09. Retrieved 2019-06-06.
  10. ↑ "Digital push: Transfers via RTGS/NEFT made free". @businessline. 6 June 2019. Archived from the original on 2019-06-07. Retrieved 2019-06-06.
  11. ↑ "Reserve Bank of India - Notifications". www.rbi.org.in. Archived from the original on 2021-01-24. Retrieved 2021-04-02.
  12. ↑ "FAQ- NEFT System". Reserve Bank of India. Archived from the original on 7 August 2016. Retrieved 24 January 2015.
  13. ↑ "National Electronic Funds Transfer System - Procedural Guidelines". Reserve Bank of India. Archived from the original on 17 January 2015. Retrieved 24 January 2015.
  14. ↑ "Reserve Bank of India - Database". Archived from the original on 2018-03-08. Retrieved 2018-04-28.
  15. ↑ "Implementation of Bharat Bill Payment System (BBPS) - Guidelines". Reserve Bank of India. 28 November 2014. Archived from the original on 6 December 2014. Retrieved 29 November 2014.
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