Electronic Payment System in India - Security and Payment, E-Commerce | E-Commerce - B Com PDF Download

ELECTRONIC PAYMENT SYSTEM IN INDIA

The primary goal of any national payment system is to enable the circulation of money in its economy. It is recognized world wide that an efficient and secure payment system is an enabler of economic activity. It provides the conduit essential for effecting payments and transmission of monetary policy. Payment systems have encountered many challenges and are constantly adapting to the rapidly changing payments landscape. More recently, the proliferation of electronic payment mechanisms, the increase in the number of players in the financial arena and the payment crises in quite a few countries and regions in the 1990s have focused attention on public policy issues related to the organisation and operation of payment systems. Three main areas of public policy have guided payments system development and reform: protecting the rights of users of payment systems, enhancing efficiency and competition, and ensuring a safe, secure and sound payments system.

Electronic commerce and finance are growing rapidly. New payments mechanisms designed to aid electronic commerce have become routine. Predictions abound about the capabilities of the information and communication technology to bring forth important tools for conducting electronic commerce and payments. We are in the midst of a wave of innovation and change.

In a dynamic economy, markets need to play a key role in guiding the development of infrastructure, including mechanisms like payments systems. This means that innovation and competition will be central to the future development of the payments system - as they are in other areas of the economy. Strategic planning and investments by market participants will be shaped by views about the future. Public policy should assist them in shaping their views by pronouncing its vision and intentions clearly and well in advance so that the market participants can face the challenges and take advantage of opportunities. This Vision helps in charting out a course to purposeful and orderly 
change.

For such policy pronouncements, a country can opt for a strategic approach, where the state of the payment system is established, its weaknesses and strengths determined and a way forward charted, giving due regard to the country’s environment and the strategic direction of the payment technologies and practices. This approach enables one to have  a holistic vision of the entire payment system, and leads to the development of a Strategic Implementation Plan that is well structured, appropriately phased, properly sequenced  and convergent in perspective.

India adopted this approach in the year 2001 when it came out with its “Payment Systems – Vision Document” with four major components. These are Safety, Security, Soundness and Efficiency. Called the ‘Triple-S + E’ principle in short, each of the principles, which have a synergistic inter-relationship, would specifically address the following:

• Safety will relate to addressing risk, so as to make the systems risk free or with minimal risk
• Security will address the issues relating to confidence, with specific reference to the users of these systems
• Soundness will be aimed at ensuring that the systems are built on strong edifices and that they stand the test of time
• Efficiency will represent the measures aimed at efficiencies in terms of costs so  as to provide optimal and cost effective solutions.

Current Status There are diverse payment systems functioning in the country, ranging from the paper based systems where the instruments are physically exchanged and settlements worked out manually to the most sophisticated electronic fund transfer system which are fully secured and settle transactions on a gross, real time basis. They cater to both low value retail payments and large value payments relating to the settlement of inter-bank money market, Government securities and forex transactions.

The retail payment systems in the country comprise both paper based as well as  electronic based systems. They typically handle transactions which are low in value, but very large in number, relating to individuals firms and corporates. These transactions relate mainly to settlement of obligations arising from purchase of goods and services. In India there are about 1050 cheques clearing houses. These clearing houses clear and settle transactions relating to various types of paper based instruments like cheques, drafts, payment orders, interest / dividend warrants, etc. In 40 of these clearing houses, cheque processing centres (CPCs) using MICR technology have been set up. At 14 more clearing houses, MICR cheque processing systems are proposed to be set up. The clearing houses at 16 places including the 4 metros are managed by the Reserve Bank which also functions as the settlement banker at these places. In other places the clearing houses are managed by the State Bank of India and certain other public sector banks and the settlement bank functions are also performed by the respective banks. The  clearing houses are voluntary bodies set up by the participating banks and post offices and they function in an autonomous manner. The Reserve Bank has issued the Uniform Regulations and Rules for Bankers’ Clearing Houses (URRBCH) which have been adopted by all the clearing houses. These regulations and rules relate to the criteria for membership / sub-membership, withdrawal / removal / suspension from membership and the procedures for conducting of clearing as well as settlement of claims between 
members.

There are various types of electronic clearing systems functioning in the retail payments area in the country. Electronic Clearing System (ECS), both for Credit and Debit operations, functions from 46 places (15 managed by Reserve Bank and the rest by the State Bank of India and one by State Bank of Indore). The ECS is the Indian version of the Automated Clearing Houses (ACH) for catering to bulk payments. The Electronic Funds Transfer (EFT) System is operated by the Reserve Bank at 15 places. This is typically for individual / single payments. These systems are governed by their own respective rules. A variant of the EFT, called the Special Electronic Funds Transfer (SEFT) System is also operated by the Reserve Bank to provide nation-wide coverage for EFT. All these electronic fund transfer systems settle on deferred net settlement basis.

There are a few large value payment systems functioning in the country. These are the Inter-Bank Cheques Clearing Systems (the Inter-bank Clearing), the High Value Cheques Clearing System (the High Value Clearing), the Government Securities Clearing System (the G-Sec Clearing), the Foreign Exchange Clearing System (the Forex Clearing) and the Real Time Gross Settlement (RTGS) System. All these systems except the High Value Clearings are electronic based systems. These mostly relate to inter-bank / interfinancial institutional transactions except the High Value Clearing where high value customer cheques are cleared. The Inter-bank Clearing functions in 7 places and the High Value Clearing in 15 places - both are managed by the Reserve Bank. The  G-Sec Clearing and the Forex Clearing are managed by the Clearing Corporation of India Limited (CCIL). The RTGS System is operated by the Reserve Bank. All these are deemed to be Systemically Important Payment Systems (SIPS) and therefore the Reserve Bank has, in line with the international best practices in this regard, moved them (except the Inter-bank Clearings at places other than Mumbai and the High Value Clearings) to either secure and guaranteed systems or the RTGS System.