Draft Report of the High Level Group on Services Sector

Payment systems

A safe, secure and efficient nationwide payment system is an important prerequisite for the smooth functioning of a financial system, as well as for providing the base infrastructure necessary for financial inclusion. There is a need to increase the number of clearing houses and more importantly, convert the existing non-MICR clearing houses to MICR clearing houses. MICR code should be made mandatory for each bank branch in India, with the code being allocated centrally to avoid duplication. This would facilitate cheque clearing.

Clearing house automation is being sought to be achieved through the cheque truncation project. Rather than focus on improvement of processing of paper-based payment, the emphasis should be on moving payments to electronic modes directly.
Electronic Clearing System (ECS) should be made available out of more locations, than it is currently available. Further, there is a need for a centralized application for management of ECS. National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) should be expanded by substantially increasing the number of bank branches that are able to process inward transactions and initiate outward transactions. Customers should be encouraged to use these through an education process as well as by rationalizing charges. An option of pull-based RTGS transaction should be developed where a bank can pull money from another bank on the basis of certain pre-approved arrangements. Further, rationalization of these three payment systems into two systems – one each for large and small value payments – should be considered.
Looking ahead, card-based solutions are likely to emerge as the key mechanism for delivering financial services to the unbanked. There is therefore a need to create a national payments system with participation by all banks, reduce transaction costs and substantially increase the deployment for POS terminals and their utilization for both high and small value payments. Mobile phone may be used as a device to transfer funds and make payments from a bank account using appropriate authentication protocols.