Payment Systems: RTGS, NEFT, IMPS and UPI

In one line

A payment system moves money between accounts at different banks, and it works only because every bank has an account with the Reserve Bank across which the obligations settle.

In the wording a student can write in an exam: payment and settlement systems in India are regulated by the Reserve Bank under the Payment and Settlement Systems Act, 2007, which makes the Board for Regulation and Supervision of Payment and Settlement Systems the designated authority and requires authorisation for the commencement or operation of a payment system; the principal systems are Real Time Gross Settlement, National Electronic Funds Transfer, Immediate Payment Service and the Unified Payments Interface, the last three operated by the National Payments Corporation of India.

Why settlement needs the central bank

Chapter 230 identified the function and this chapter is where it does its work. Every scheduled bank keeps an account with the Reserve Bank, in which it maintains the cash reserve section 42 requires. Those accounts are what make interbank settlement possible.

Consider what a transfer between two banks actually is. Sunita banks with Godavari Bank; Ravi banks with Krishna Bank. When Sunita pays Ravi, Godavari must owe less and Krishna must owe more, and something must move between the two banks.

Without a common banker they would have to settle in cash, or hold accounts with each other, which would require every bank to hold an account with every other bank and to bear the credit risk of each.

With a common banker the whole problem collapses into a book entry. The Reserve Bank debits Godavari's account and credits Krishna's, and the settlement is final because the Reserve Bank cannot fail. That is why the central bank is the settlement institution in every system in the world, and it is the answer to the examination question of why payment systems are a central banking function.

The statute

The Payment and Settlement Systems Act, 2007 was enacted because the systems had grown up without a legal framework, so netting arrangements and settlement finality rested on contract and were vulnerable in an insolvency.

Section 3 constitutes the Board for Regulation and Supervision of Payment and Settlement Systems, a committee of the Central Board of the Reserve Bank, as the designated authority for regulating and supervising payment systems.

Section 4: authorisation. No person other than the Reserve Bank shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank. So operating a payment system without authorisation is unlawful, which is the provision under which every payment operator in India is licensed.

The Act also gives the Reserve Bank power to determine standards, to call for returns and information, to enter and inspect, to issue directions, and to impose penalties.