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.

What’s in today’s article?

• Payment and settlements system in India
• News Summary

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.