Reserve Bank of India

Institute for Development & Research in Banking Technology

Bank for International Settlements

International Seminar on Payment and Settlement Systems, October 18-20, 2006

Inaugural Address by Shri. N. R. Narayana Murthy, Chairman and Chief Mentor, Infosys Technologies Limited First words
I am honored by this invitation to speak here at the International Payment Systems Workshop. I thank the organizers for inviting me. Today, I would like to discuss the current scenario of the Payment Systems in India, and how these systems should evolve in order to benefit the country and its financial infrastructure.

Payment Systems
Efficient and effective payment and settlement systems are critical for the financial performance of the institutions and are strategic to the stability of the financial systems. According to a study by Boston Consulting Group (BCG), payments business in banks represent more than 40% of their total revenues and 33% of their profits. Payments offer banks significant opportunities to increase transaction volumes and fee income.

Payment Systems in India

India has several payment systems, ranging from paper-based systems to the most sophisticated electronic fund transfer systems that offer realtime settlement. These payment systems are managed by multiple entities and are regulated by the Reserve Bank of India (RBI). Based upon the application they could be classified into Systemically Important Payment Systems (SIPS) and Retail Payment Systems (RPS). RBIs thrust on technology in payment systems have resulted in visible improvements in the settlement processes, especially in the SIPS, where over 70% of the transactions are handled electronically.

Real Time Gross Settlement (RTGS), a SIPS, accounted for 23% of the total settlements in 2004-05, is emerging as the largest among the payment systems. Retail Payment Systems (RPS) include cheque clearing systems, electronic clearing systems and the card-based systems. Cheque clearing accounts for over 95% of the retail payment, and more than 70% of cheque clearing is based on Magnetic Ink Character Recognition (MICR) technology. Increased acceptance of electronic payment systems resulted in the growth of retail electronic clearings by 168% in 2004-05.

Board for Regulation and Supervision of Payment and Settlement Systems

BPSS was constituted in March 2005, to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for the existing and future systems. To assist BPSS, RBI constituted a Department of Payment and Settlement Services (DPSS). BPSS had made several important decisions, for example, finalizing the payment and settlement systems bill, which provides a legal basis for the payment and settlement systems.

Recommendations of BPSS
Following BPSS recommendation that the RTGS system in India is benchmarked with the best in the world, a study was conducted on several RTGS systems across multiple parameters. The suggestions of the study should be incorporated in the improving the existing systems. Retail payments are used by the masses and should provide secure, safe and faster mean of remittance to their customers. These systems should ensure proper customer redressal arrangements. BPSS felt the need for improving the reach of electronic retail payment systems and creating complaint redressal mechanisms. BPSS recommended that such payment mechanisms are widely publicized. systems and redressal

Imperative for India

Proliferation of modern payment systems have far reaching economic and social implications for India where significant population have so far been excluded from the benefits of the financial systems. Payment systems help in the financial inclusion and improve the quality of their lives. Implementing such systems increase transparency, lower transaction costs, improve operational efficiency of trade and commerce and provide support to the globalization of the economy.

Payment Systems Benefits for India

Payment systems improve financial transparency, by bringing cash into the banking system, which would otherwise have been kept out of the system. Banks can then effectively deploy additional cash flow, thus stimulating business growth and consumption. This is especially significant in the Indian context, where, as per NCAER estimates, more than 90% of the consumer spending is handled by cash basis money which never enters the payment systems. In fact, according to a study by the McKinsey, India ranks No.4 in the world, in terms of currency in circulation. Indias currency in circulation is 11.8% of GDP against the OECD average of 6.3%. This could be attributed to the fact that more than half of Indias economic output is produced by small-scale agriculture and some 44 million household businesses. Mckinsey estimates that improving the payment systems in India, by fully moving to electronic systems, could result in an annual savings of close to $6.3 billion.

Retail Payment Systems

India, has made visible progress in the high value payment systems, However, retail payment systems in India need to be improved. Existing retail payment systems should move to more advanced, efficient and reliable systems comparable to global standards. In order to widen the reach of these systems, participating institutions should develop appropriate applications and user friendly websites with simple interfaces and local content. Among the retail payment systems, electronic clearing accounted for less than 1.5% of total value of transactions in 2004-05. The efficiency of Retail Payment Systems could be improved by increasing the usage of electronic payment systems, increasing the reach of clearing systems like Magnetic Ink Character Recognition (MICR) or Magnetic Media Based clearing System (MMBCS), and rolling out the cheque truncation system.

Efficient cheque clearing systems

Greater efficiency and reliability in cheque clearing systems could be brought in eliminating the non-MICR cheques and roll out of the Cheque Truncation System (CTS). RBI intends to eliminate non-MICR cheques by March 2007. accounted for over 25% of the cheques transacted in 2004-05. These

The CTS which replaces the paper-based cheque clearing process with imaging technology is slated to commence as a pilot by the end of this year. It must be rolled out with a wider geographic reach.

Need for wider reach

According to RBI, there are an estimated 48,000 Public Sector Bank branches in India, of which over 63% are situated in the semi-urban and rural areas. Though over 70% of the bank branches have attained 100% computerization, Real Time Gross Settlement (RTGS) is available only in 23,500 branches, while the National Electronic Funds Transfer (NEFT) covers fewer than 5,000 Braches.

Creating world class payment systems

We need to ensure that payment systems are benchmarked with the best in the world, in terms of the structure, processes and operations. While substantial strides have been made in the Systemically Important Payment Systems (SIPS) by the establishment of the Clearing Corporation of India and the RTGS system, the Retail Payment Systems (RPS) are still dominated by paper based cheque clearing processes. The RPS is handle by multiple voluntary organizations and not a single entity. RBI recognized this need and is setting up National Payment Corporation of India (NPCI). This is a progressive step towards bringing uniformity in the payment systems, and would result in significant efficiency enhancements. The processes of NPCI should be benchmarked with the best in the world.

Increasing use of payment systems

The increased use of payment systems in the retail segment can be achieved by widening their reach and developing practical commercial

applications that would directly benefit the users. To widen the reach and awareness, integration of the semi-urban and rural areas into the electronic clearing system is required. Participating institutions like banks have a significant role to play.

Creating applications
Simple and user friendly websites, with local language contents, faster downloadable pages and optimal screens have to be developed through which users would perform their transactions facilitated by secure payment systems. Areas that could benefit from modern and global payment systems, include government purchase and procurement, pension distribution, credit delivery to small businesses, bill payments, ticket booking, remittances etc.

How payment systems could benefit

The success of Indian Railway Catering and Tourism Corporation Limited (IRCTC) gives a glimpse of the potential of online payments in India. ITCTC launched its online ticket booking facility in August 2002, making the passenger reservation system available online to the customers. While in August 2002, close to about 3,300 tickets were issued online, today, about 750,000 tickets are issued online every month.

Importance of business continuity

In addition, payment systems should have a strong disaster control system to provide the required resiliency and business continuity. Such a system should be designed to mitigate the operational issues and take into consideration the behavior of the market participants (banks), and their relative sizes. Resiliency of a large bank is critical in terms of its share of the payment flow and in terms of being pivotal in maintaining the coordination.

Feds study on wide-scale disruptions

A recent paper by the Federal Reserve Bank of New York examined the large-scale disruptions of US financial markets following the 9/11 attacks and examined the key forces that act during such disruptions. On 9/11, due to the damage to communication systems, payment coordination got impaired, and the mismatch of incoming and outgoing payments cascaded into a massive liquidity crisis.

Disaster Control Systems

The fed stepped in to provide liquidity and ensured increased coordination among the participants to synchronize payment activities, helping banks to overcome the crisis and mitigated wide-scale disruption. The paper notes that the important forces that act during such disruptions are operational problems and changes in the participants behavior. These must be managed and addressed by effective disaster control systems.

Finally
Payment systems are the backbone of the financial infrastructure of the nation, enhance globalization and act as tools of economic empowerment by financial inclusion. There is a need to create payment systems that are efficient, reliable, affordable and of global standards. Various recommendations of BPSS have to be looked into and implemented so that we have safe, secure payment systems with appropriate risk mitigation measures.

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