Annual Report

8.1 The Reserve Bank of India has, in recent years, assigned high priority to reform of payment systems in order to enhance the reliability, speed and timeliness of payment transactions, the finality of settlement and operational efficiency of markets. In the process the risks of default are sought to be reduced.

8.2 The reforms included consolidation of the existing payment systems, development and upgradation of technologies relating to modes of payment and funds transfer, designing of multiple deferred/discrete net settlement system and a real time gross settlement (RTGS) system. The RTGS system would ultimately, link various payment and settlement arrangements into an integrated system which will function in an on-line real time environment. Issues relating to the appropriate legal framework, regulation and oversight of the payment and settlement system and the implications for the future conduct of monetary policy are now on the agenda of payment system reforms.

8.3 The acceleration in the pace of computerisation in the banking industry in recent years has facilitated the orderly development of modern payment and settlement systems in a secure manner. The thrust was placed on commercially important centres which account for 65 per cent of banking business in terms of value. At present, there are about 6,103 fully computerised branches among public sector banks across the country. The switchover from cash based transactions to paper based transactions is gathering momentum with the banking business on the rise. The value of transactions put through cheque clearances as a proportion to GDP is estimated to have reached over 402 per cent in 1999-2000 as against 352 per cent in 1998-99. The rise in cheque clearances was partly reflective of the operation of MICR clearing of cheques at more centres than the traditional four metropolitan centres. MICR clearing has been operational in 12 cities in 1999-2000 as against 10 cities in the previous year. The daily average value of cheques processed in clearing operations in the four metropolitan cities has gone up to Rs.19,679 crore reflecting in part the installation of modern S/390 systems, and the rising trend in daily turnovers in the principal segments of the financial markets, namely the call money market, the gilt market and the equity market (Table 8.1). The electronic clearing services (ECS) (credit) are offered at 15 of the offices of the Reserve Bank across the country with debit services available at the six major centres. At the end of 1999-2000, there were 26 ECS debit users and 171 ECS credit users. The number of ECS transactions has gone up from 4.3 million valued at Rs.67.37 crore for credits and from 5.2 lakh transactions valued at Rs.181.77 crore for debits in 1998-99 to 6.9 million valued at Rs.934.45 crore for credits and to 8.4 lakh transactions valued at Rs.301.87 crore for debits in 1999-2000. Retail electronic funds transfer (EFT) on a T+1 basis has been in operation in all the metropolitan cities. The Reserve Bank EFT scheme was extended in 1999-2000 to encompass 12 other scheduled commercial banks besides the 27 public sector banks. Average monthly transactions under EFT has increased from 100 valued at Rs.5 lakh in 1998-99 to 600 valued at Rs.9 crore in 1999-2000.

8.4 The National Payments Council (NPC), was formed in May 1999 as an apex body to co-ordinate reforms in payment and settlement and for laying down policy directions in this area. The NPC endorsed the recommendations made in July 1999 by the Committee on Technology Upgradation in the Banking Sector (Chairman: Dr. A. Vasudevan) which constitute an agenda for future reforms in the technological environment for banking in India. The NPC placed emphasis on a time bound implementation of the RTGS and constituted five permanent task forces on; (i) monetary policy and related issues; (ii) oversight of payment and settlement systems; (iii) legal issues; (iv) technology related issues and (v) issues relating to systems and procedures, to assist the Council in its work on policy initiatives and guidelines for strengthening payment and settlement systems.

8.5 The recommendations of the Working Group (Chairman: Dr. A. Vasudevan), set up in September 1999 to study various recommendations for SMART Card based Payment System Standards with a view to achieving international best practices, were accepted by the Reserve Bank in January 2000 and the standards recommended by the Working Group were forwarded to the Bureau of Indian Standards to be adopted as national standards (Box VIII.1).

8.6 The state-of-the-art, Year 2000 compliant IBM S/390 mainframe systems with imaging capability were operationalised at the National Clearing Cells in four metropolitan cities in July-October 1999 to replace the existing MICR cheque processing system. In non-MICR centres, magnetic media base clearing was introduced during 1999-2000. The software for providing the facility of two way inter-city clearing and regional grid processing were provided during the year to six commercial banks which manage MICR cheque processing at six centres for swift and more efficient clearing of inter-city cheques.

8.7 The setting up of the INdian FInancial NETwork (INFINET), a Wide Area based satellite communication and terrestrial lines network using VSAT technology in June 1999, was a landmark in the area of communication technology in so far as the Indian financial system is concerned. The INFINET is the fore runner of an efficient telecommunication backbone for the banking and financial sector. It is a Closed User Group network for the banking sector. At present it covers public sector banks. It is intended to extend the membership in phases to other banks and other eligible entities. The hub and the network management system are located at the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad, which is fully funded by the Reserve Bank. The INFINET was operationalised with one-eighth transponder capacity initially. The transponder capacity was raised to one in July 2000. Currently, the INFINET connects 439 VSATs but plans are underway to extend network connectivity to 5000 VSATs in the long-run, now that transponder capacity has been augmented.

8.8 The INFINET User Group set up several sub-groups for design and standardisation of message formats, inter-bank applications and structured messaging backbone. The working group on Design of Message Formats submitted its report in October 1999, recommending message formats for applications such as customer payments and cheques, financial institution transfers, cash management and customer status, and common group and system messages, which would be implemented in the first stage. The working group's recommendations for message formats for government transactions, currency chest transfers, and some segments of government securities transactions have been taken up in the second stage (Box VIII.2).

8.9 The Sub-group on Inter-Bank Applications was constituted in January 1999 to identify, in order of priority, applications which can be put on the INFINET and which require clearing and settlement operations (Box VIII.3). Sub-groups have also been constituted for standardising different information technology components like networking products and system software and to optimise use of communication resources.

8.10 Setting up an RTGS environment has become the focal point of payment system reforms in India as in the rest of the world. Access to major financial centres and cross border payment system hinges on the availability of a full-fledged domestic RTGS. Apart from providing real time fund settlement environment, RTGS is critical to an effective risk control strategy for preventing domino effects of individual defaults.

8.11 Preparing the financial system for RTGS has been on the top of the Reserve Bank's agenda for payment and settlement system reforms. The working group on Operational and Technology Issues constituted by the Indian Banks Association in 1998 had made several recommendations relating to server location and placement, architecture at banks, interface with banks' internal software, identification of centres for inter-connectivity, communication networks, queue management, settlement timings, message formats and data security. The requisite infrastructure is being put in place in the form of communication backbone, design of message formats based on SWIFT standards and provision of intra-day liquidity on collateralised basis against approved government securities on Repo basis. Other steps taken to improve the infrastructure for RTGS include the development of the Payment System Generic Architecture Model for both domestic and cross-border payments. The Model envisages networking of computerised bank branches, with their controlling offices, central treasury cells and Head Office with the proviso for introducing standardisation of operating systems and networking platforms within the bank and a bank-level standardised gateway to INFINET. A consultant has been appointed to assist in the implementation of the RTGS. System requirement specifications would take into account the international best practices and the specific requirements of Indian banking.

8.12 As a precursor to the full-fledged RTGS system, the Reserve Bank is in the process of implementing a Centralised Funds Management System (CFMS). The CFMS envisages creation of an intermediate service facility to the funds and treasury managers of commercial banks to obtain the consolidated and account-wise, centre-wise position of their balances with 17 regional offices of the Reserve Bank's Deposit Accounts Departments, in the first phase. This would be followed by funds transfer in the second phase to aid banks in optimal use of available funds.

8.13 The CFMS consists of: (i) a Centralised Funds Enquiry System (CFES) based on the current and other accounts maintained with the Reserve Bank and (ii) a Centralised Funds Transfer System (CFTS) to enable movement of funds across various offices where the Deposit Accounts Departments are situated.

8.14 Proactive initiatives were undertaken to ensure Year 2000 compliance in the banking and financial system. Compliance of systems to the Year 2000 transition was 100 per cent in the Reserve Bank. Contingency plans were drawn up covering switching over to Magnetic Media Based Input Clearing System, which can work both in a LAN environment and on a stand-alone PC for ensuring uninterrupted clearing services on the roll-over date. Other measures included stocking adequate amounts of cash in all the offices of the Reserve Bank as well as at over four thousand currency chests across the country. The Reserve Bank actively helped the commercial and co-operative banks and other financial institutions in the smooth rollover to Year 2000. In the banking and financial system, tests results were documented and made available for verification to inspection teams. In addition, contingency plans were drawn up for operationalisation in the event of systems failure. Furthermore, hard copies of all important books of accounts and treasury operations as on December 31, 1999 were made to ease the temporary switchover to manual processing in the event of need. With extensive preparations, the millennium date change occurred smoothly.

8.15 One of the important conditions for reforming payment system along with the advances in technology relates to the legal infrastructure. One important legislation that has already been passed in this context is the Information Technology Act, 2000, by the Parliament. As a part of the IT Act, there would be an amendment to Section 58 (2) of the Reserve Bank of India Act, 1934, whereby funds transfers through electronic means between banks or between banks and other financial institutions, the manner of such fund transfers and the rights and obligations of the participants under EFT would be subject to the regulation of the Reserve Bank.

8.16 The Monetary and Credit Policy Statement announced in April 2000 set out the major tasks for 2000-01 as :