India's
Payment system
overview

MACROECONOMIC DATA AND KEY FIGURES

Overview

The Reserve Bank of India (RBI) is the most important and influential player in the development and regulation of payment systems in India. The RBI’s Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) is the highest policymaking body for payment systems. The BPSS sets standards and regulates all payment and settlement systems in India. The RBI operates the RTGS system and the NEFT system for low-value electronic funds transfers. In 2008, the RBI together with the Indian Banks’ Association (IBA) set up the National Payments Corporation of India (NPCI) in an effort to consolidate and integrate the operation and development of various retail payment systems in India. NPCI is authorized by the RBI to operate various retail payment systems and the country’s card and ATM switch. Among the systems NPCI operates are the National Automated Clearing House (NACH) for low-value bulk credit and debit transactions, as well as the Immediate Payment Service (IMPS) for real-time payments.

India’s size and large rural population has been a focus of much payment system policy. Financial inclusion is a major goal of the Indian government and the RBI in particular, which has pushed for an increase in electronic payments in a country where almost 2/3 of non-cash payments come from paper-based instruments. The RBI has recognized the need for financial services to reach Indians without easy access to a bank branch. One of the key goals behind the development of the Immediate Payment Service (IMPS) was to provide Indian’s rural communities access to a 24/7 real-time service and with the hope of bringing banking services to India’s large unbanked population.

Macroeconomic data

Population (millions) 1,324.1
Population growth (2015–16) 1.2%
GDP (billions of USD, 2016) 2,464.9
Real GDP growth (2015–16) 7.1%
Bank account penetration 53.1%
Bank concentration ratio (CR5) 38.4%

Volume data

Volume (millions) Value (USD billions)
2015 2016 2015 2016
CT 1,219.3 1,496.6 1,159.3 1,521.2
RT CT 179.9 389.5 19.9 44.5
DD 249.2 41.7 27.7 4.1
Cards 1,803.7 2,856.3 56.3 78.4
ATM 7,742.1 8,587.8 366.0 350.1
High value 97.3 103.2 11,912.4 13,485.9
Cheques nav nav nav nav
Exchange rate (INR to USD) 0.0150 0.0143

 

System Names

High value LV Bulk LV RT
System Name RTGS NEFT/NACH  IMPS
Rule maker  Reserve Bank of India   Reserve Bank of India  Reserve Bank of India
Rule maker entity structure Central bank Central bank Central bank
Infrastructure Reserve Bank of
India
 Reserve Bank of
India
National Payments Corporation of India (NPCI)
Infrastructure entity structure  Central bank  Central Bank Industry association
Number of direct participants  177 nav 86
Number of indirect participants  nav nav approx 1,700

 

Volume trends (2011–16)

Payment trends

CTs RT CT DDs Credit cards Debit cards Cheques RTGS
 Year  2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016
Transactions per capita 0.9 1.1 0.1 0.3 0.2 0.03 0.6 0.7 0.8 1.4 nav nav 0.1 0.1
Growth rate (%) 21.2 21.3 227.7 114.0 13.0 -83.5 24.9 31.1 40.4 74.2 nav nav 7.0 4.9
Average transaction value (USD) 950.8 1,016.4 110.7 114.2 111.3 97.4 46.0 43.4 20.9 19.1 nav nav 122,469.5 130,718.9
Growth rate (%) 4.2 6.9 -2.6 3.1 -6.7 -12.5 0.8 -5.6 -14.2 -8.8 nav nav -6.4 6.7

 

© Lipis Advisors 2016

 

 

HIGH-VALUE SYSTEM

Volume trends

Settlement and posting details

System name RTGS
Rule maker name Reserve Bank of India
Number of direct participants 177
Number of indirect participants nav
Method nav
Settlement frequency nav
Order of operations Settle>Output>Post
Central bank settlement system RBI RTGS
Settlement system hours 09:00-16:30, Monday to Friday; 09:00-14:00 Saturday
Posting speed nav
Data standard ISO 20022
Remittance data nav
Warehousing future-dated payments nav

System operational details

 The Reserve Bank of India (RBI) operates the RTGS system for high-value payments (any payment above 2 lakh, or INR 200,000). The RTGS system also settles interbank payment obligations for Indian retail payment systems, including NEFT, NACH, and IMPS. The posting speed of high-value payments processed via RTGS is typically in real time, and must occur within 30 minutes of a bank receiving a funds transfer message. The RTGS system is open from 09:00 – 16:30 (M-F) and from 09:00 – 14:00 (Sat) for the exchange of high-value payments. Pricing to sending parties for initiating an RTGS payment ranges from INR 30 (45 US cents) to INR 55 (82 US cents) per transaction depending on the amount being sent. There is no charge levied on beneficiaries for receiving a high-value payment via RTGS.

In October 2013, India completed an overhaul of the RTGS system as part of the Next Generation RTGS (NG-RTGS) project. According to the RBI, the new RTGS system is the first RTGS system in the world to use ISO 20022 for payments messaging. It also includes other new features such as the ability to connect via an API.

 

Access methods

Direct access to RTGS is open to all registered banks considered “financially sound” (meeting access criteria that proscribe certain capital requirements). There are currently 175 direct participants in RTGS, with over 128,000 bank branches where customers can initiate an RTGS payment. Indirect participants must access the RTGS system via a direct participant bank.

Participants connect to the RTGS system via the Indian Financial Network (INFINET). Participant institutions can use INFINET via three channels: a proprietary SFMS member interface, a web-API, or a payment origination module.

exceptions handling

 Any high-value transactions that cannot be credited to the beneficiary (wrong account number, account frozen, etc.) must be returned to the sender within 1 hour of being received by the beneficiary bank or before the close of RTGS operation hours.

 

© Lipis Advisors 2016

 

LV BULK SYSTEM

Volume trends

Settlement and posting features

System name NEFT/NACH
Rule maker name Reserve Bank of  India
Number of direct participants nav
Number of indirect participants nav
Method Multilateral net
Settlement frequency NEFT 12 times daily, Monday to Friday; NACH 12 once daily
Order of operations Settle>Output>Post
(NEFT & NACH)
Central bank settlement system RBI RTGS
Settlement system hours 09:00-16:30, Monday to Friday; 09:00-14:00 Saturday
Posting speed  NEFT: within 2 hours of posting; NACH: same day
Data standard NEFT: SWIFT-based;
NACH: ISO 20022
Remittance data nav
Warehousing future-dated payments nav

System operational details

India features two separate systems for bulk electronic payments: the National Automated Clearing House (NACH) operated by NPCI and the National Electronic Funds Transfer (NEFT) system operated by the RBI. The RBI used to operate the National Electronic Clearing Service (NECS), but has moved the operation of this system to NPCI, which operates it as NACH.

NEFT enables individuals and businesses to send or receive same-day electronic credit transfers. Sending a NEFT payment must be initiated at a bank branch, and there are currently 181 participating banks with over 33,000 NEFT-enabled bank branches. NEFT transactions are settled in multilateral net batches every hour (12x from 08:00-19:00 M-F, 6x from 08:00-13:00 on Saturdays), with posting mandated within 2 hours of settlement. Once a NEFT payment is received by the beneficiary, the originating bank sends a confirmation to the sender. NEFT payments are free to receive, and pricing to the sending party is regulated by the RBI. Charges to end users sending NEFT payments range from INR 2.50 (3.7 US cents) to INR 25 (37 US cents) depending on the amount being sent.

NACH is a low-value bulk system for electronic credits and debits operated by NPCI. NACH is the successor system to the National Electronic Clearing Service (NECS), which was operated by the RBI until being consolidated under NACH in late 2012. In addition to bulk credit transfers and direct debits, NACH also includes the Aadhaar Payment Bridge System (APB) to enable the transfer of government subsidies and benefits to individuals using their Aadhaar number.

Both NACH credits and debits settle once daily in the RBI RTGS system. Credit transfers settle at 12:30 (M-F) and 11:30 (Sat), while direct debits settle at 14:00 (M-F) and 13:00 (Sat). Posting for NACH transactions is same-day. The NACH system uses ISO 20022 for payments messaging.

Value-added services

There is no evidence of any value-added services in the NEFT system.

NPCI maintains a direct debit mandate management system for NACH, as well as the Centralised Mandate Validation Service (CMVS). The CMVS ensures that all debit transactions are “good to debit” to avoid erroneous or fraudulent direct debits from being sent or received by NACH participants.

Access methods

Access to NEFT is available to registered banks only. Direct participants must be members of the RTGS system, and can provide access to NEFT for indirect participants.

Indirect participants in NACH can send and receive files directly to the NACH infrastructure, but must settle via a sponsoring direct participant. NACH also features a Direct Corporate Access (DCA) module that allows corporates to directly send and receive NACH credits, with settlement taking place via a sponsoring direct participant.

Exceptions handling

 All NEFT transactions are final and irrevocable upon settlement. A payment message can be revoked prior to settlement, but any request for revocation that occurs after settlement is non-binding and done on a voluntary basis.

NACH transactions are final and irrevocable upon settlement. NPCI helps avoid erroneous direct debit messages via the Centralised Mandate Validation Service (CMVS), which is tasked with ensuring that all debit messages are validated (e.g. correct bank account number) and that the account to be debited has sufficient funds to complete the transaction. NPCI has set up a Panel for Resolution of Disputes (PRD) featuring representatives from 4 member banks and a chairman from NPCI to examine any unresolved settlement disputes between NACH participants. Disputes that are forwarded to the PRD must be settled within 15 days.

Processing timeline: NEFT

Processing timeline: NACH

 

© Lipis Advisors 2016

 

 

REAL-TIME SYSTEM DETAILS

Volume trends

Settlement and posting features

System name IMPS
Rule maker name Reserve Bank of India
Number of direct participants 86
Number of indirect participants approx. 1,700
System transaction value limit nav
Method Multilateral net
Settlement frequency 3 times daily
Order of operations Output>Post>Settle
Central bank settlement system RBI RTGS
Settlement system hours 09:00-16:30, Monday to Friday; 09:00-15:00, Saturday
Posting speed Continuous
Data standard ISO 8583
Remittance data nav
Warehousing future-dated payments Yes

System operational details

The Immediate Payments Service (IMPS) is a 24/7 real-time funds transfer system operated by the National Payments Corporation of India (NPCI). It was initially developed as a mobile remittance system, but end users today can also initiate payments online, at a bank branch, or at an ATM in addition to with their mobile phones. IMPS had 7 participant banks when it launched in November 2010, and today it has almost 140 banks as well as 21 prepaid payments instrument issuers (PPIs) utilizing the system. Customers must register for a Mobile Money Identifier (a 7-digit number that links to a bank account number) with their bank if they wish to initiate an IMPS payment with their mobile phone. Sending an IMPS payment via the Internet, a bank branch, or an ATM can be done without pre-registration.

Individual IMPS transactions have a value limit of INR 2 million (about USD 29,500). IMPS transactions sent via SMS/USSD have a value limit of INR 5,000 (about USD 73) due to lower encryption standards with these methods. There is no system-wide fee for end users sending or receiving IMPS transactions. Some banks charge their customers for IMPS transactions, with the average charge between INR 5-10 (7.4-14.8 US cents).

IMPS transactions are posted in real time, with settlement occurred three times a day at 09:00, 13:00, and 18:00 (Monday-Friday) and twice on Saturday at 09:00 and 15:00. Each participant institution’s net position is automatically recalculated after sending or receiving an IMPS payment. All participant must have enough liquidity to fund an outgoing transaction, which means that IMPS transactions are in effect entirely pre-funded. According to the IMPS Procedural Guidelines published in July 2014, NPCI is working on a Settlement Guarantee Mechanism for IMPS transactions.

Customers can use IMPS to initiate P2P or C2B payments. Merchant payments can be either customer-initiated (push) or merchant-initiated (pull). In order to initiate an IMPS direct debit (pull) payment, a merchant provides the option on their website or app and the customer then enters their mobile number, MMID, and a one-time password to allow the payment to be initiated by the merchant. At present, 43 banks participate in IMPS merchant payments.

Access Methods

 IMPS is open to all registered banks in India as well as to any non-bank that has been approved as a payments instrument issuer (PPI) by the RBI. Direct membership is only open to banks, as they have direct access to the RTGS system. Both banks and non-banks can become indirect members (“sub-members”), with access to the system via a direct member bank. Settlement for sub-members is done on the books of a direct member bank.

Exceptions handling

 In the case of error in an IMPS payment message (e.g. incorrect beneficiary details), the message is immediately rejected by either NPCI or the beneficiary bank. When this occurs, the payment request is reversed and the funds are returned to the sending bank. If a payment cannot be reconciled or is reported as an error by an end user, participants are tasked with settling the dispute on their own, with NPCI providing transaction logs to facilitate the process.

Products and services

IMPS real-time payments can be initiated in person (at a bank branch or ATM), online, or with a mobile phone. Users can send or receive IMPS payments using various identification numbers such as a Mobile Money Identifier (MMID, a 7-digit code that links to a customer’s mobile phone number), IFS code (an 11-digit number found in a user’s cheque book), or an Aadhaar number (a 12-digit government-issued ID aimed at rural populations and the unbanked). IMPS also enables C2B merchant payments via both push and pull messages at the point of sale.

In addition to these payment services, NPCI also offers the Query Service on Aadhaar Mapper service for IMPS payments. The Query Service enables users to easily link their Aadhaar number with their bank account to enable IMPS payments using the Aadhaar ID as a proxy for the bank account number.

Processing timeline: IMPS

© Lipis Advisors 2016

Insider's Perspective

INSIDER'S PERSPECTIVE

Current and future developments

Indian payment systems have undergone consistent modernization in recent years. The consolidation of retail payment systems under NPCI and the development of IMPS have increased the reach of electronic payment systems in India and expanded choice in payment services for both consumers and businesses. The RBI’s Vision 2012-2015 statement specifically mentions the promotion of electronic payment systems in order to decrease the use of cash. The Vision statement also mentions the interoperability of payment systems, expanding access, and ensuring compliance with international standards. The adoption of ISO 20022 for RTGS and retail payments is a stated goal of the RBI. The NACH system operated by NPCI uses ISO 20022 for payment messages, and the banking community has worked together to develop ISO 20022 standards for the Next Generation RTGS (NG-RTGS) project. The NG-RTGS system launched in October 2013 to become the first RTGS system to use ISO 20022 messages. The new RTGS system also has additional features such as the ability to connect to the network via a web API.

The Indian government has made financial inclusion a priority, particularly among its huge rural population. In order to boost financial inclusion (as well as provide access to other services such as mobile phone connections and government benefits), the government developed the Aadhaar number, which is a 12 digit identification number that contains demographic and biometric information in order to provide proof of identity and residence that is issued by the Unique Identification Authority of India (UIDAI). In the payments space, Aadhaar numbers can be used to withdrawal or deposit cash, perform a balance enquiry, and to transfer funds. NPCI also operates the Aadhaar Payment Bridge System (APB) as part of NACH. The APB enables the disbursement of government benefits to individuals with a registered Aadhaar number.

 

Regulatory and commercial environment

The RBI and NPCI are the main drivers of change in Indian payment systems. The RBI works with Indian banks through the NPCI to develop innovative products aimed at offering more choice to Indian consumers, reduced processing costs for banks and clearing houses, and raising social benefits such as financial inclusion. The regulatory framework for payment systems in India is provided by the Payment and Settlement Systems Act, 2007, which authorizes the RBI to oversee and regulate payment systems, and establishes settlement finality and netting procedures.

 

© Lipis Advisors 2016

GLOSSARY

Access glossary here.