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. Financial sector participants would find it difficult to expand into under-served areas in the absence of appropriate payment processing infrastructure. More than 80% of India’s financial transactions are processed in physical cash. Cash as means of payment has a large cost in terms of handling, transaction processing, holding and risk of loss. The following recommendations may be considered to improve the efficiency of the payments system:
Improving efficiency of cheque clearing: At present there are only 1,075 clearing houses across India and of these, only about 65 are MICR enabled. 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.
Reviewing cheque truncation project: Clearing house automation is being sought to be achieved through the cheque truncation project. This project has taken inordinate time in rollout in even one centre, and should be reviewed as it involves expensive hardware installation. Rather than focus on improvement of processing of paper-based payment, the emphasis should be on moving payments to electronic modes directly.
Revamp and promotion of Electronic Clearing System (ECS), National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS): ECS should be made available out of more locations, compared to the 64 locations where it is currently available. Further, there is a need for a centralized application for management of ECS, where the merchant originates a client request, and the paying bank confirms the same based on the mandate they have received. The bank should have option of allowing access to this centralized application at each centre, rather than only national access. NEFT and 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.
Use of card-based payments on a national payments platform: There is high penetration of credit and debit cards among banking clients today. This has led to increased usage of ATMs as well as point-of-sale (POS) terminals. 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.
Enabling mobile payments: India has achieved good mobile penetration both geographically and in terms of socio-economic classes. Enabling mobile payments would facilitate cheaper payment processing, wide geographic coverage, online payments with straight through processing and financial inclusion. The mobile phone can be used as a device to transfer funds and make payments from a bank account using appropriate authentication protocols. 16
