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Indian Payment and Settlement Systems

Responsible Innovation and Regulation

IDRBT Banking Technology Excellence Awards 2011-12

Hyderabad

August 3, 2012

Dr. Duvvuri SubbaraoGovernor

Reserve Bank of India 1

Financial Innovation in the Context of the Crisis

• The crisis has triggered a number of questions about financial innovation

• The big lesson is that both innovators and regulators will have to more ‘responsible’

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Payment and Settlement Systems

Why have I chose to speak about responsible innovation and regulation in payment and

settlement systems?

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RBI as a Responsible Regulator

RBI values financial innovations that

• improve the efficiency of financial intermediation

• do not erode financial stability

• do not compromise customer interest

• further financial inclusion

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RBI as a Responsible Regulator

• PSS Act, 2007, designates Reserve Bank as the statutory regulator of the payment and settlement systems

• Even as the regulator, RBI continues to take the lead in facilitating innovation

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Topics I will Cover

• RBI’s role in modernizing payment systems

• RBI’s approach to responsible regulation

• RBI’s role as facilitator of innovation

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RBIs Role in Modernising Payment Systems

• Introduction of MICR technology in the mid 80s

• Introduction of Speed Clearing for outstation cheques in 2008

• Cheque Truncation System (CTS) in Delhi in 2008

• Grid-based CTS in Chennai in 2011

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Paper Based Clearing

RBIs Role in Modernising Payment Systems

Retail electronic payment systems:

- ECS for bulk retail payment transactions

- EFT for one-to-one payments

Today

- ECS has transformed into NECS

- EFT has transformed into NEFT8

Electronic Payment Systems

RBIs Role in Modernising Payment Systems

• RTGS was introduced in 2004 as a large value payment system

• Huge expansion in turnover since then, both in value and volume terms

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Real Time Gross Settlement (RTGS)

RBI’s Approach to Responsible Regulation

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Think Global, Act Local

RBI’s Approach to Responsible Regulation

• Non-banks allowed to enter the retail payment space

• Now, non-bank also allowed to set up "White Label ATMs"

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Leveraging on Non-Banks

RBI’s Approach to Responsible Regulation

• Security of online card transactions

• Implementing CTS2010 standards

• Immobilizing cash retraction facility in ATMs

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Promoting Safety and Security of Payment Instruments

RBI’s Approach to Responsible Regulation

• Disputed amounts in failed ATM transactions should be credited within seven days

• Introduction of differential MDR to encourage debit card transactions

• Helping migrant population - domestic person-to-person fund transfers

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Customer Centric Regulation

RBI as a Facilitator of Innovation in Payment Systems

• Remarkable growth in new payment products and access channels

• Regulatory initiatives in the area of pre-paid instruments

• Operating guidelines on mobile banking

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Introduction of New Payment Products

RBI as a Facilitator of Innovation in Payment Systems

• Transfer of benefits by Government to beneficiaries through Aadhar enabled electronic payment systems.

• This will reduce cost, time and leakages.

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Aadhaar Initiative in Payment Systems

RBI as a Facilitator of Innovation in Payment Systems

• Around the world, two models:

- bank-led model

- non-bank led model

• India has opted for the bank-led model

• Why?16

Mobile Financial Services

RBI as a Facilitator of Innovation in Payment Systems

• Express preference for central clearing arrangement for large value interbank transactions wherever feasible

• CCIL set up in 2001 to act as a central counterparty (CCP)

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Focus on Central Clearing

RBI as a Facilitator of Innovation in Payment Systems

RBI promoted

• The Clearing Corporation of India (CCIL)

• Institute for Development and Research in Banking Technology (IDRBT)

• National Payments Corporation of India (NPCI)

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Institution Building

Taking Stock

• Large value payment systems have shifted to electronic mode.

• Retail payment systems are still largely paper centric.

• Why this lag?

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Where do we stand?

Why are Retail Payment Systems Still Paper Centric?

• Slow pace of infrastructure building

• Limited product innovation

• Lack of initiative by banks

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Conclusion

• ‘Adopt’ world’s best practices

• ‘Adapt’ them to the Indian environment

• Vision Document (2012-15) by RBI

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Conclusion

Innovators - ‘Push the envelope’

Regulators - Make sure the envelope

is sturdy and strong

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Responsible Innovation and Regulation