Payment system in the Indian context
The phenomenal of banking in the country in the post-nationalisation
era has brought in the use of wide variety of media in settlement of
financial transactions. Currency continues to be an important means
of payment, although this has been supplemented in an increasing
measure by cheques, drafts, payment orders etc. Considering that the
dominant feature of Indian banking is branch-centered, the retail
payment system has seen rapid growth. The total number of clearing
houses are 860 of which 840 are managed by the State Bank of India
and its associates, 14 by the Reserve Bank of India and the rest by
nationalised bank. The cheque volumes cleared through these
clearing houses has steadily increased and more particularly in the
post liberalisation era. Keeping with this trend the payment process
has also been upgraded by bringing in computerisation. The
introduction of MICR cheques followed by the more recent
establishment of Electronic Clearing Service (ECS) for high value
transactions (limited to Rs 1 Lakh per instrument), Electronic Fund
Transfers (EFT) at four metropolitan centres, the ATM facilities under
the shared payment network system (SPNS) are cases in point.
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In respect of wholesale payment system, two paper based clearing
settlements are undertaken. To cover the inter-bank transactions
which are by nature large in value, inter-bank clearing has been
introduced. This covers call money transactions, Rupee payment of
foreign currency transactions , Bank to bank transfers for funding
upcountry requirements and inward remittances. Secondly, high value
clearing is organised where instruments with a face value of Rs. 1
lakh and above are cleared. At the end of 1997 the total value of
instruments presented in this clearing was Rs 949,502 crore.
The Indian payment system in totality is net period settlement
system. Considering that the cost involved are high and since risk
factor in terms of principal risk/credit risk for the central bank is high,
setting up of an RTGS system has been proposed. This is also
expected to meet the requirements for an efficient and reliable
payment system in the light of globalisation and the integration of
Indian economy. Further, considering the diversified membership
pattern of the payment system which includes urban co-operative
banks, private banks etc. the chances of systemic risk can not be
underestimated.
The proposed RTGS system in India (as shown in diagram) will
consist of an apex level server having connectivity with servers of
member banks. These bank level servers could be connected to their
branches through VSAT network.
Envisaged introduction of RTGS in India raises several issues
concerning its smooth, stable and reliable working. These issues
broadly relate to liquidity, queuing system and technology.
Under the RTGS management of intraday liquidity is critical. This in
turn will depend upon extent of reserve requirements and the RBI
current account structure and the linkages between these. For
instance the question arises whether any shortfall in the RTGS
account could be met out of the required reserves. In India level of
required reserves is calculated as an average balance over a
fortnight. If the RTGS account and the required reserve are unified,
reserve requirements may not act as a binding constraint for intraday
liquidity management. Banks can deviate temporarily from target
reserve in order to make unexpected payments. However, as the
end of the fortnight approaches (reporting Friday) reserve
requirements are likely to have an impact because the scope to
correct one day's shortfall by a subsequent day's surplus is
correspondingly reduced.
Another way to provide covering funds for transfers is extension of
RBI credit or overdrafts to Banks which may be against collateral
securities. As in India, Statutory Liquidity Reserves are largely
maintained in government of India securities or other approved
securities, this would not pose any problem for individual banks.
A Second way to provide credit is through uncollateralised overdrafts,
but imposing interest charges for the same. Under this system, RBI
will have to bear the credit risk, but is partially compensated by levy
on overdraft. In fact this levy is used to discourage availment of
overdrafts. However, in case of banks in financial distress, or during
a liquidity crisis, such levy may not act as disincentive.
