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Overview
One of the important pre-requisites of a sound banking system is the
availability of an efficient payment system. The payment system
forms the backbone of the financial system as it facilitates the
intermediation function and enhances the allocative efficiency. With
the rapid pace of development in the financial markets all over the
world and the process of globalization, cross-border transactions have
increased manifold. Besides the pace of innovations coupled with the
advancements in computing and communications technology have
revolutionised the financial markets and led to the blurring of
distinctions between banks and non-banks. In fact, the process of
consolidation and convergence which are at present sweeping the
global financial markets has even posed questions about the future of
banks as they were known in the traditional sense of acting as
financial intermediaries. Although, it is evident that despite these
rapid changes banks will continue to remain special from the point of
financial systems, the main reason for such belief arises from the fact
that banks form the basis of the payment system in any economy.
Payment system is a set of instruments, institutions and operating
system through which purchasing power is transferred from one in
exchange to another i.e., it enables transfer of money. Transfer in
payment system is enabled through settlement media in several
forms, such as cash, cheques, bank drafts, money orders, debit and
credit cards, electronic transfer, ATMs etc. In terms of quantity,
payment system is of two types: small value transfer system as in a
retail payment system and large value transfer system or wholesale
payment system. This paper focuses mainly on wholesale payment
system.
Considering the tremendous growth in volume and value of
transactions both in national and international financial markets and
competition among banks, the pressure on payment system has
increased.
This pressure can be taken care of when the payment system is
reliable, safe, swift and cost effective. Other than, reliability and cost
effectiveness, safety and soundness is a major issue concerning
payment system.
Generally, payment system is exposed to three types of financial
risks viz., liquidity risk, credit risk and systemic risk.
