National payment system architecture
- 2. Payment System - Definition • The mechanism, the rules, institutions, people, markets, and agreements that make the exchange of payments possible • The institutional and infrastructure arrangements in a financial system for initiating and transferring monetary claims in the form of commercial bank and central bank liabilities
- 3. Consider These Transactions • Buying vegetables with the local vendor • Receiving / sending money from / to parents • Making payment for a vehicle • Sending registration fee for a national level examination • Making railway reservation through internet • A businessman sending money to branch office for local payments • Receiving periodic interest on bonds
- 4. Modes of Payment • Paper based – Cash – Cheque – Demand draft – Postal order – Money order • Plastic card based – Credit card – Debit card • Electronic instructions – Electronic fund transfer – Electronic clearing service – Real time gross settlement (RTGS) for large value transactions – Using internet banking facility
- 5. Elements of Payment System • Payment instruments • Infrastructure for transacting, clearing and transferring funds • Financial institutions • Market arrangements such as conventions, regulations and contracts • Governance and laws, standards, rules and procedures
- 6. National Payment System Payer PayeeMonetary Claim Central Bank Money Commercial Bank Money Cash Deposits Payment Instruments Payment Infrastructure - Transaction Systems - Clearing Systems - Settlement Systems Institutional Framework -Market arrangements -Stakeholder consultation -Legal framework -Oversight and other public policies
- 7. Transaction Infrastructure • Provides services to create, validate and transmit payment instructions by: • Authenticating the identity of the parties involved in the transaction, sometimes using encryption technologies • Verifying the payer’s ability to pay • Validating the payment instrument against system standards • Authorising the transfer of funds between the payee’s and the payer’s financial institutions • Recording and processing payment information • Communicating the information between the institutions
- 8. Clearing Infrastructure • Provides services to transmit, reconcile and in some cases confirm payment instructions between financial institutions and calculate interbank settlement positions by: • Sorting and matching payment instructions between institutions • Collecting, processing and aggregating payment data for each institution • Storing payment data reports and transmitting them to each institution; and • Calculating gross or net settlement positions (payables or receivables) for each institution
- 9. Settlement Infrastructure • Provides interbank funds transfer services by: • Collecting and checking the integrity of settlement claims • Verifying the availability of funds for settlement in the participating institutions’ accounts at the settlement bank • Settling the claims through funds transfers on these accounts at the settlement bank; and • Recording settlement and communicating it to the participating institutions
- 11. MICR Cheque Cheque Number City (3), Bank (3), Branch (3) Branch Code Account No. Instrument Type CANCELLED CANCELLED 124578800 Amount (Encoded by Presenting bank)
- 12. What is a Clearing House? • An association of banks that facilitates payments of cheques between different bank branches within a city / place • A central meeting place for bankers to exchange the cheques drawn on one another and claim funds for the same • One bank is appointed as in-charge of the clearing operations
- 13. Life Cycle of a Cheque Transaction Payer Payee Issues cheque (1) Deposits cheque with bank (2) Debit advice (5) Bank A (Paying Bank) PAYMENT SYSTEM Bank B (Collecting Bank) Clearing house - processing Settlement institution Debit A Credit B Receives cheque through or at Clearing house (4) Debit advice Interbank settlement Credit advice Presents cheque through or at Clearing house (3) Debit B Credit A Return item Return exchange
- 14. Clearing House Presenting Bank Service Branch Presenting Bank Service Branch Presenting Bank Service Branch Drawee Bank Service Branch Drawee Bank Service Branch Drawee Bank Service Branch
- 15. Timeframe for Cheque Clearance • Same city (local cheque) – 2-3 days (end-to-end) • High Value Clearing (Rs. 1 lakh +) – on the same day • Coverage of High Value Clearing is very limited • Outstation cheques – 3 to 10 days • All the banks to publicise their cheque collection policy • For delay beyond the normal period, the banks are required to compensate the customer
- 16. Charges for Using Cheque • Local cheques – no charges are levied • Outstation cheques – collection charges depend on the amount of the cheque and the place • Charges decided by the Indian Banks’ Association or the banks themselves • Banks are also required to publicise the schedule of service charges
- 17. Payment System Management Mission and Vision
- 18. Mission Statement The establishment of safe, secure, sound and efficient payment and settlement systems for the country Triple S + E
- 19. Mission Statement • Safety – to make the systems risk free or with minimal risk • Security – will address issues relating to confidence • Soundness – ensuring that the systems are built on strong edifices and that they stand the test of time • Efficiency – Measures aimed at efficiencies in terms of cost so as to provide optimal and cost effective solutions
- 20. Payment Systems Vision • New institutional structure for retail PS • National settlement system • Sound legal base • Continuation of risk mitigation efforts • Efficiency enhancements • Rural sector facilitation • Customer facilitation and protection
- 21. Achievements during 2001-04 • Extension of MICR – 40 centres • NDS / SSS – 2002 • RTGS operationalisation (2004) • Establishment of CCIL as CCP for g-sec & Forex • Implementation of CFMS, SFMS • Increasing scope of ECS, EFT, etc • National financial switch (NFS) • Initiating steps for cheque truncation
- 22. Current Initiatives and Status • Expansion of MICR Technology – Standards of Operational Efficiency for MICR Cheque Processing System – Presently at 48 (53 CPCs) centres – 6 more centres • Expansion of MMBCS to Non-MICR CPCs – 35 centres with more than 30 bank / branches • Extending the coverage of ECS to all IFSC Branches • Cheque Truncation – Pilot at the National Capital Region is in progress
- 23. Reforms in Payment Systems • Infrastructure Building – INFINET – SFMS – NEFT – PKI – Payment Gateway – National Financial Switch (NFS) – National Settlement System (NSS)
- 24. Efficiency Enhancements • Implementation of cheque truncation • New clearing houses, expansion of geographical jurisdiction • MICRisation of every cheque • All PSS services to be made available at the national level – National ECS announced • Introduction of innovative products – e-purse, etc • Back-up arrangement • DR set up / testing at banks
- 25. Risks Arising in Payment Systems • Credit risk a party within the system unable to meet its financial obligations • Liquidity risk a party within the system will have insufficient funds to meet financial obligations • Legal risk legal uncertainties will cause or exacerbate credit or liquidity risks • Operational risk operational factors such as technical malfunctions or operational mistakes • Systemic risk widespread liquidity or credit problems could threaten the stability of the system or of financial markets
- 26. Continuation of Risk Mitigation Efforts • Systemic risk – Interbank transaction - migration to RTGS (already achieved) – High value – guarantee fund (is being examined) • Liquidity risks – Implementing the NSS (expected to start at four metros from march 2006) • Operational and legal risk – PKI-based digital signatures – Credit transfer to be encouraged – High availability of systems
- 27. Rural Sector Facilitation • Availability and coverage – ATMs • Deployment of multi-application smart card • Reach of electronic mode of funds transfer – through variant modes • Collaboration with post office • ATM –based Kisan cards
- 30. Latest Technology in Cheque Clearing
- 31. Problems With Physical Clearing • Processing of paper based cheques constitutes an important segment of the payment • Settlement of cheques is arrived on the basis of the physical presentation of paper based cheques • Need to transport the paper based cheques and the time involved in their processing at various intermediary levels • Physical limitation on processing speeds and capacities • Outstation cheques typically take longer realization periods (over a fortnight) • If the cheque is returned unpaid, it has to re-trace the entire path back to the presenting branch
- 32. Cheque Truncation • The process in which the physical movement of cheque – Within a bank, – Between banks or – Between banks and the clearing house • Is curtailed or eliminated, • Replaced in whole or in part, by electronic records of their content (with or without the images) • For further processing and transmission
- 33. Process of CTS • Cheques are truncated at the presenting bank itself – At the branch or at the service branch or outsourced • Electronic image based cheque truncation to provide opportunities for signature verification • Preservation period of paper instruments should be one year • Preservation period of the electronic image of the cheque should be eight years
- 34. Recommendations for CTS • Centralized agency per clearing location to act as an image warehousing facility • Grey scale technology which helps capture finer features on cheques and also have relatively lesser storage and network bandwidth requirements • There should be no amount based cut-off for truncation and all cheques should irrespective of value • Truncation to be introduced for all banks and all clearings from a cut-off date for all participants at that centre
- 36. ECS – Debit • Faster method of effecting periodic and repetitive payments by 'direct debit' to customers' accounts • Minimizing paper transactions and increasing customer satisfaction • A large number of debits and one credit • Collection of electricity bills, telephone bills, loan installments, insurance premia, club fees, etc
- 37. Present System for Bills Payment • Customers/subscribers are required to go to the collection centers • Stand in long queues for payment of bills • Time and money spent by the customer • High transaction cost for many small value transactions
- 38. ECS Debit Process • Initially collect mandates from their customers for collection of amounts due by direct debit to customers’ accounts with banks • User company prepares transaction data on electronic media and submits the encrypted data to the local clearing house, through its sponsor bank • Local clearing house processes the same and arrives at the inter-bank settlement as also generates bank-wise/branch-wise reports
- 39. ECS Debit Process • Clearing house debits the destination banks’ accounts with clearing house and simultaneously makes a consolidated credit to the sponsor bank’s account • Furnishes the bank-wise and branch-wise reports to the service branches of destination banks • Service branches forward the branch-wise reports to the respective branches for debiting the accounts of customers with the indicated amounts
- 40. Benefits of ECS Debit • Faster collection of bills by the companies and better cash management by them • Eliminates the need to go to the collection centers/banks by the customers and no need to stand in long ‘Q’s for payment • Automatic debiting to the accounts once the mandates are given by the customers, to that effect cuts down the procedural delay • Available in about 65 cities presently • Saving on costly cheque paper and MICR printing • Manual processing of cheques and cash is also reduced
- 41. Users of ECS Debit • Utility service providers • MTNL, telephone/mobile companies • State electricity boards • Banks for collection of credit cards dues • LIC • Housing finance companies
- 42. Bulk Payment Situation • It requires an expensive administrative machinery for printing, dispatch and reconciliation • Bunching of a large number of instruments in clearing results in operational bottlenecks and pressures on the cheque processing system • Chances of loss of instruments in transit and their fraudulent encashment • The customer has also to keep track of the receipt/non- receipt of the instrument and take efforts in depositing the instrument to the bank on receipt of the same • Banks find processing of such a large volume of instruments not only error prone and monotonous, but also a strain on the cheque clearing system
- 43. ECS Credit Process • User which has to make payments prepares the payment data on a magnetic media and submit the same to its bank • Sponsor bank would present the payment data to the local clearing house • Clearing house will process the data and work out an inter- bank funds settlement • Clearing house will furnish to the service branches branch- wise credit reports indicating the beneficiary details • Concerned branches will credit the beneficiaries’ accounts on the appointed date
- 44. Benefit a Corporate Body • Savings in administrative cost presently being incurred for printing of paper instruments in MICR format and dispatching them by registered post • Loss of instruments in transit or fraudulent encashment thereof totally eliminated • Reconciliation of transactions is made automatic. By the time the ECS cycle is completed, the user institution gets an electronic data file from its bank with the date of payment and banker’s confirmation thereon • Cash management becomes easier as arrangement for funds is required to be made only on the specified date • Ensuring better customer/investor service • Centralised data submission for 15 centres
- 45. Benefit the Customer • Payment on the due date • Effortless receipt - no need for visiting the bank for depositing the dividend/interest warrant • Loss of instrument in transit or fraudulent encashment thereof and consequent correspondence with the company are completely eliminated
- 46. Payer Beneficiary Payment instruction Bank A Debit Payer’s account Bank B Credit beneficiary’s account Credit advice V a l i d a t i o n Check available funds / collateral / credit Debit A Credit B Clearing / Processing Systematically important payment system Financial Risk Controls (caps, limits) Confirmed payment Settlement Payment message Life cycle of a payment (credit transfer)
- 47. National Electronic Funds Transfer (NEFT) • Electronic funds transfer system • Introduced by Reserve Bank of India • To transfer funds electronically • From one customer account of a participant bank branch • To another customer account of any other participant bank branch • Funds can be transferred from one bank to another bank
- 48. Geographical Coverage • Available all over India • Uses the concept of centralised accounting system • Bank's account gets operated at one centre, viz, Mumbai only • Individual branches participating in NEFT could be located anywhere across the country • The beneficiary gets the credit on the same Day or the next Day • Six settlements in a day
- 49. NEFT Process – 1 • The remitter fills in the NEFT Application form giving the particulars of the beneficiary • Authorises the branch to remit the specified amount to the beneficiary by raising a debit to the remitter's account • This can also be done by using net banking services offered by some of the banks • The remitting branch prepares a Structured Financial Messaging Solution (SFMS) message and sends it to its Service Centre for NEFT
- 50. NEFT Process – 2 • The Service Centre forwards the same to the local RBI (National Clearing Cell, Mumbai) to be included for the next available settlement • The clearing centre sorts the transactions bank- wise and prepares accounting entries of net debit or credit for passing on to the banks participating in the system • Bank-wise remittance messages are transmitted to banks (to service branch)
- 51. NEFT Process – 3 • The receiving banks process the remittance messages received from RBI • Messages are forwarded to respective branches • Credit is given to the beneficiaries' accounts
- 52. Infrastructure required for NEFT • Branches are to be computerised • Connected to the central server and to service branch • Each participating bank has to identify a branch as the link point for transmitting all outward messages and receiving all inward messages • This branch is called Service Centre • SFMS infrasturcture to be installed at all the branches
- 53. Benefits of NEFT • Banks can now provide inter-bank TT service • Reconciliation is automatic • Banks can make use of the NEFT infrastructure for introducing new payment/cash management products to their customers • The number of outstation cheques issued by customers and consequent service load on banks may decline considerably over a period of time • Customers can remit money quickly to the intended beneficiary