RBI’s Lightweight Payment and Settlements System

What’s in today’s article?

• Why in news?
• Payment and settlements system in India
• Components of Payment and Settlement Systems
• News Summary: RBI’s lightweight payment and settlements system
• Need for such a lightweight payments system
• Benefits of such a lightweight payments system

 

Why in news?

• The Reserve Bank of India (RBI) has conceptualised a lightweight payment and settlements system, which it is calling a “bunker” equivalent of digital payments.
• The central bank has not offered a timeline for the launch of this payments system yet.

 

Payment and settlements system in India

• About
  • Payment and settlement systems refer to the infrastructure and processes that enable the transfer of funds and the settlement of financial transactions between individuals, businesses, and financial institutions.
  • An efficient payment system promotes market efficiency and reduces the cost of exchanging goods and services. 
  • By the same token, its failure can result in loss of confidence in the financial system and in the very use of money.
  • India's payment and settlement system has witnessed remarkable growth, driven by technological advancements, government initiatives, and changing consumer preferences.
• Regulatory framework
  • The Reserve Bank of India (RBI) regulates and oversees the payment and settlement systems in the country.
    • The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired by the Governor, RBI, spearheads this responsibility.
  • In 2005, RBI created Department of Payment and Settlement Systems (DPSS) to focus exclusively on payment and settlement systems.
  • Subsequently, the government enacted the Payment and Settlement Systems Act, 2007 (PSS Act).

 

Components of Payment and Settlement Systems

• Paper-based Payments
  • Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of the volume of total non-cash transactions in the country.
• Electronic Clearing Service (ECS) Credit
  • Later in 2008, RBI launched a new service known as National Electronic Clearing Service (NECS).
• National Electronic Funds Transfer (NEFT) System (launched in 2005)
  • Available across a longer time window, the NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time transfer of funds.
• Real Time Gross Settlement (RTGS) System (introduced in in 2004)
  • RTGS is a funds transfer systems where transfer of money takes place from one bank to another on a real time (no waiting time) and on gross basis.
• Clearing Corporation of India Limited (CCIL)
  • CCIL was set up in April 2001 by banks, financial institutions and primary dealers.
  • It was established to function as an industry service organisation for clearing and settlement of trades in money market, government securities and foreign exchange markets.
• Immediate Payment Service (IMPS) – Launched in 2010 
  • IMPS is an interbank electronic funds transfer system that enables instant money transfers 24/7.
• Other Payment Systems
  • Pre-paid Payment Systems
  • Mobile Banking System
  • ATMs / Point of Sale (POS) Terminals / Online Transactions
  • Unified Payments Interface (UPI): UPI is a real-time payment system developed by the National Payments Corporation of India (NPCI).
  • Mobile Wallets: Mobile wallets, such as Paytm, PhonePe, and Google Pay, have become increasingly popular in India.
  • Aadhaar Enabled Payment System (AEPS): AEPS is a biometric-based payment system that leverages the UIDAI Aadhaar database.

 

News Summary: RBI’s lightweight payment and settlements system

• In a proactive move to address potential disruptions caused by catastrophic events or volatile situations, the RBI has unveiled a new initiative: the Lightweight Payment and Settlement System (LPSS).
• This new system can be operated from anywhere by a bare minimum staff in exigencies such as natural calamities or war.
• The infrastructure for this system will be independent of the technologies that underlie the existing systems of payments such as UPI, NEFT, and RTGS.

 

Need for such a lightweight payments system

• According to the RBI, existing conventional payments systems such as RTGS, NEFT, and UPI are designed to handle large volumes of transactions while ensuring sustained availability.
• As a result, they are dependent on complex wired networks backed by advanced IT infrastructure.
• However, catastrophic events like natural calamities and war have the potential to render these payment systems temporarily unavailable by disrupting the underlying information and communication infrastructure.
• Therefore, it is prudent to be prepared to face such extreme and volatile situations.

 

Benefits of such a lightweight payments system

• Could ensure near zero downtime of the payment and settlement system
  • In its Annual Report for 2022-23, RBI says that the lightweight and portable payment system is expected to operate on minimalistic hardware and software, and would be made active only on a need basis.
  • Hence, such a lightweight and portable payment system could ensure near zero downtime of the payment and settlement system in the country.
• Can keep the liquidity pipeline of the economy alive
  • It has potential to keep the liquidity pipeline of the economy alive and intact.
  • It can do so by facilitating uninterrupted functioning of essential payment services like bulk payments, interbank payments and provision of cash to participant institutions.
• Can ensure stability of the economy
  • The system is expected to process transactions that are critical to ensure the stability of the economy, including government and market related transactions.
• Can enhance public confidence in digital payments
  • Having such a resilient system is also likely to act as a bunker equivalent in payment systems.
  • Hence, it can enhance public confidence in digital payments and financial market infrastructure even during extreme conditions.

 

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Q1) What is Immediate Payment Service (IMPS)?

Immediate Payment Service (IMPS) is an electronic funds transfer system in India that enables instant, real-time interbank transactions. Launched by the National Payments Corporation of India (NPCI) in 2010, IMPS allows individuals, businesses, and institutions to transfer money quickly and securely between participating banks using mobile phones, internet banking, or ATM services.

 

Q2) What is RTGS?

RTGS stands for Real-Time Gross Settlement. It is a funds transfer system that allows for instantaneous and individual electronic transactions between banks within a country. RTGS enables the real-time transfer of large-value payments and ensures the immediate settlement of these transactions.

 

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Source: Alternative to UPI, NEFT, RTGS: What is RBI’s planned ‘lightweight’ payments system for emergencies? | RBI | Vikaspedia | Outlook