This document summarizes an article from the International Journal of Management that analyzes paper-free payment systems in India from 2003-2004 to 2012-2013. It finds that electronic payments have grown significantly in both volume and value compared to paper-based payments like cheques during this period. Electronic payments saw huge growth rates in some years, like 342% from 2007-2008. While paper-based payments declined slightly at times, electronic modes like NEFT, debit cards, credit cards, and ECS consistently increased by double-digit percentages annually. The growth of electronic payments bodes well for the economy and corporate sector in moving towards a less-cash society in India.

1. International Journal of Management (IJM), ISSN OF 6502(Print), ISSN 0976 - 6510(Online),
INTERNATIONAL JOURNAL 0976 – MANAGEMENT (IJM)
Volume 5, Issue 1, January (2014), © IAEME
ISSN 0976-6502 (Print)
ISSN 0976-6510 (Online)
Volume 5, Issue 1, January (2014), pp. 80-87
© IAEME: www.iaeme.com/ijm.asp
Journal Impact Factor (2013): 6.9071 (Calculated by GISI)
www.jifactor.com
IJM
©IAEME
PAPER- FREE PAYMENT SYSTEMS IN INDIA-AN ANALYTICAL STUDY
Dr. SUBRAMANIAN.S
Professor, National Institute of Management Studies, Chennai, India
ABSTRACT
The primary goal of any national payment system is to ensure smooth circulation of money. It
is recognized worldwide that an efficient and secure payment system triggers of economic activity.
Efficiency in payment systems in general and electronic payment systems in particular, benefits both
customer and country’s economic growth. There are diverse payment systems functioning in the
country, ranging from the paper based systems where the instruments are physically exchanged and
settlements worked out manually to the most sophisticated electronic fund transfer systems which are
fully secured and transactions settled on a gross, real time basis. The retail payment systems in the
country comprise of both paper based as well as electronic based systems. The proportions of
electronic transactions, both in terms of volume and value, have increased sharply. It is indeed
heartening to note that electronic payment in India has seen a huge growth and this augurs well for
the corporate sector and the economy.
The main purpose of the study is to analyze and evaluate whether electronic payment systems
have been proving to be effective in India during the period of study. Furthermore, this study also
reveals that all electronic modes of payments have attained a vast growth compared to the physical
paper- based payments like cheques or drafts etc,. The study is based on secondary sources of
information collected from various sources and the data is used from the periods of financial year
(FY) 2003-04 to 2012-13.
Key Words: Core Banking Solution, Cheque Truncation System, Card payments, Paper clearing,
E- payment system.
1. INTRODUCTION
The Reserve bank of India (RBI) proactively encourages electronic payment systems for
ushering in a less-cash society in India and to ensure payment and settlement systems in the country
are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international
standards as states the mission statement of India
2012-15. Regulation will channelize innovation
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2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 1, January (2014), © IAEME
and competition to meet these demands consistent with international standards and best practices.
The overall regulatory policy stance is oriented towards promoting a paper less cash society. This
“green” initiative has increased emphasis on the use of electronic payment products and services that
can be accessed anywhere and anytime by all at affordable prices.
2. SIGNIFICANCE OF THE STUDY
Cash is the preferred mode of payment for those sections of society not having access to
formal payment systems. Electronic payments, even with an associated fee, can be less expensive
compared to the available alternatives. The use of electronic payment instruments allows the
unbanked to start building a transaction history, which can be a step towards initiating them towards
financial inclusion. There is a huge potential of migrating government transactions (payments and
receipts) to electronic mode. It is estimated that Government subsidies alone constitute more than Rs.
2.93 trillion and if these payments are effected electronically, it may translate to 4.13 billion
electronic transactions in a year (rbi.org.in, vision12-15). The e-commerce and m-commerce
platforms are poised for a big stride in coming years. Similarly, electronic bill payments and
settlements involving insurance, utility bills, taxes, school fees, etc. present a huge opportunity. The
country needs to move away from cash-based towards a cash free (electronic) payment system. This
will help reduce currency management cost, track transactions, check tax avoidance / fraud etc.,
enhance financial inclusion and integrate the parallel economy with main stream.
According to World Bank Development report 2013, electronic payments can save over one
per cent of India's gross domestic product (GDP). The "Cash may still be “king” at times, but
compared with electronic payments, cash payments are inefficient," According to the multi-lateral
agency, the rising use of payment by electronic medium can help to save 1.6 per cent of India’s
GDP. "Cash can carry significant handling and transportation costs, and run the risks of theft, loss,
and counterfeiting." This means that if we take the size of India's GDP which stood at Rs 100, 20,620
crore in 2012-13, India could save Rs 1,60,330 crore thanks to electronic payments( RBI annual
report). This study makes an attempt to evaluate and analyze and find out whether the electronic
payments or paper based payments are growing fast to enable the financial institutions or banks
adopt a right business strategy of achieving our vision 2012-15 is the significance of the study.
3. REVIEW OF LITERATURE
A review has been primarily to identify appropriate methodologies and
a subset of the articles/reports which has been reviewed. Reviews of some of them are given below:
Aparna Iyer (2013) in her article safety and security are the new challenges as banks go
electronic even in the hinder land. As banks go more Hi-Tech, the regulator has to necessarily stay a
step ahead. Ashish Das, and Rakhi Agarwal (2010), this technical report conclude that Cash as a
mode of payment is an expensive proposition for the Government. The country needs to move away
from cash-based towards a cashless (electronic) payment system. Linda Eagle (2010) in her report,
as more bank customers begin to use electronic banking solutions, hackers and money launderers are
becoming more creative in their fraud tactics. Sumanjeet (2009) in his study concluding remarks
first is that despite the existence of variety of e-commerce payment systems, credit cards are the most
dominant payment system.
Raja et al., (2008) in their study the success of electronic commerce depends upon effective
electronic payment systems. This paper also discusses the evolution and the growth of electronic
technologies, which can provide more advanced technical supports for electronic payment systems.
Banknet India (2008) in their report that the findings of the “bank customer survey on payment
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3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 1, January (2014), © IAEME
systems.” Interestingly, many customers have been unable to use internet banking due to the non
availability of site or connectivity problems. As far as mobile banking is concerned, its popularity is
limited mainly due to the charges for sending SMS's are not justified.
Balakrishnan(2007) in his article published the adoption of new age electronic payments
systems and use of new practices in inventory and production management help the companies
achieve long-term reduction in working capital management requirement. Denny (2000) observes
that the security of Internet access to client account is the biggest challenge facing banks. Furst et al.
(1998) in their U.S. based study found out a significant shift by consumers and businesses to
electronic payments. The gains from technological advancements in banking and payments are likely
to be substantial both from the point of view of individual financial institutions and economy.
Crocin (1998) observes that the implementation of SET, the standard for secure electronic
transactions on the Internet and its widespread adoption including security measures like encryption,
digital authentication, and verification of on-line identity increase consumer confidence.
4. METHODOLOGY
The study covers the secondary sources of information’s collected through reference from
books, IBA journal, RBI Bulletin, Published Articles and related banks Websites. The study covers
during the financial year (FY) ending 31st March 2003-04 to 20012-13. The tool for analyses is
percentage.
5. ANALYSIS AND DISCUSSIONS
As a result of the technological development, the proportions of electronic payments both in
terms of volume and value have increased sharply than paper based payments system. The following
tables and figures show different payment systems.
TABLE 1: GROWTH VALUE OF ELECTRONICS AND PAPER PAYMENTS
(Rs. in Billion)
2003-04
EFT/
NEFT
171.25
2004-05
546.01
201.80
29.21
2005-06
612.88
323.24
129.86
**FY
ECS (Credit)
ECS (Debit)
102.28
22.54
+Credit
cards
176.63
48.74
***Paper
Clearing
115,959.60
256.86
53.61
104,588.95
1,087.50
338.86
58.97
113,291.34
1,463.83
++Debit cards
*EP (Total)
521.43
2006-07
774.46
832.73
254.40
413.61
81.72
120,424.26
2,356.93
2007-08
1403.26
7822.22
489.37
579.85
125.21
133,960.66
10,419.92
2008-09
2009-10
2,519.56
4,095.07
974.87
1,176.13
669.76
695.24
653.56
618.24
185.47
264.18
124,691.35
104,099.42
5,003.22
6,848.86
2010-11
2011-12
9,391.49
17,903.50
1,816.86
1,837.84
736.46
833.55
755.16
966.13
386.91
534.32
101,341.28
99,012.14
13,086.87
22,075.33
2012-13
29,022.42
1,771.28
1,083.10
1229.51
743.36
99,982.25
33,849.57
GROWTH
(%)
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
81.19
79.55
62.54
129.34
90.64
62.10
839.35
-87.54
20.64
54.48
01.15
03.62
92.36
36.86
03.80
05.93
13.18
29.94
40.19
12.71
-05.40
22.15
27.94
27.26
53.22
48.13
42.44
46.46
38.10
39.12
11.24
-06.92
-16.51
-02.65
-02.30
0.98
342.10
-51.98
36.89
91.08
68.68
53.34
Source: Compiled from RBI Bulletin, Money and Banking - up to December 2013.
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Volume 5, Issue 1, January (2014), © IAEME
*EPs-Electronic Payments, ECS-Electronic Clearing Service, NEFT- National Electronic Fund
Transfer.
**FY- 12 months commencing from 1st April to 31 March every year.
***Paper Clearing i.e Cheque &draft only
+Card payments figures pertain only to Point of Sale (POS) transactions.
++Debit card figures for 2003- 04 and 2004-05 are estimated based on 2005-06 figures.
TABLE 2: GROWTH VOLUME OF ELECTRONICS AND PAPER PAYMENTS
(2003-04 to 20012-13)
Volume (Million)
FY
EFT/
NEFT
ECS
(Credit)
ECS (Debit)
Credit
Cards
Debit
Cards
Paper
Clearing
EP (Total)
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
0.82
2.55
3.07
4.78
13.32
32.16
66.34
132.34
226.11
394.13
20.32
40.05
44.22
69.02
78.37
88.39
98.13
117.30
121.50
122.18
7.87
15.30
35.96
75.20
127.12
160.05
149.28
156.74
164.74
176.53
100.18
129.47
156.09
169.54
228.20
259.56
234.24
265.14
319.96
396.61
37.76
41.53
45.69
60.18
88.31
127.65
170.17
237.06
327.54
469.05
1022.80
1166.85
1286.76
1367.28
1460.56
1397.39
1380.27
1387.40
1341.87
1313.48
166.94
228.90
285.01
378.71
535.32
667.81
718.16
908.58
1159.85
1558.50
GROWTH
(%)
2007-08
178.78
13.55
69.04
34.60
46.74
06.82
41.35
2008-09
141.61
12.80
25.91
13.74
44.55
-04.43
24.75
2009-10
2010-11
011-12
106.27
99.49
70.86
11.02
19.54
03.62
-06.73
05.00
05.10
-09.76
13.74
20.68
33.31
39.31
38.17
-01.23
-0.52
-03.28
07.54
26.52
27.66
2012-13
74.30
0.56
07.16
23.96
43.20
-02.12
34.37
Source: Compiled from RBI Bulletin, Money and Banking - up to December 2013
The tables 1&2 capture through out of various electronic payments and paper based payments
channels in India during the financial year ending 2003-04 to 2012-13 both in terms of value and
volume. This data clearly indicate that all the EPs are growing at phenomenal rate in volume and in
value than paper based payments systems. During the year ending 2007-08, paper based payments
system was reported higher growth of payments at the rate of 11.24 per cent and also a remarkable
highest growth of e-payments has three hundred and forty two per cent (342%) during five years
ended on 31st march 2008. During 2008-09, there was a decline reported both in paper based
instruments and e-payments at the rate of -6.92 per cent and -51.98 per cent respectively. But epayments were mainly due to the refund of the over subscription amount of IPOs floated by
companies using electronic mode as mandated by the Stock Exchange (cf: RBI Report 2008-09).
During the same period, Electronic Clearing Service (ECS) debit has increased by an incredible
36.86 per cent by value and 25.91 per cent by volume. ECS credit down to -87.54 per cent by value
and grew up 12.80 per cent by volume of transactions. The EFT/NEFT grew by 79.55 per cent by
value and 141.61 per cent by volume, debit cards grew by 48.13 per cent by value and 44.55 per cent
by volume, and Credit cards grew by 12.71 per cent by value and about 13.74 per cent by volume of
transactions. The paper-based payments have not been growing; alternatively these have negatively
grown up in India at - 4.43 per cent by volume and -6.92 per cent by value of transaction in 2008-09.
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5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 5, Issue 1, January (2014), © IAEME
The growth volume of transaction directed through electronic payment method, decelerated
from 41.35 to 24.75 per cent by volume and 342.10 per cent to-51. 98 per cent by value during FY
2007-08 to 2008-09. More strikingly, the value and volume of transactions directed through epayment method declined sharply during 2008-09. The entire decline of -87.54 per cent is also due
to fall in value of transaction in respect of ECS – credit. It is noteworthy in this regard that the
sharp rise in ECS credit value during 2007-08 was mainly due to the refund of the over subscription
amount of IPOs floated by companies using electronic mode as mandated by the Stock Exchange (cf:
RBI Report 2008-09). Therefore, the decline in value in ECS credit transactions during 2008-09
may be interpreted more as returning to normal trend rather than a matter of concern. The volume of
ECS credit and more significantly ECS debit continued to show an increasing trend during 2008-09
in line with the trend witnessed during past few years.
In recent years, the use of total electronic payments has witnessed manifold increase, partly
reflecting increased adoption of technology. Further, the data clearly indicates that during the year
ending 2009-10, ECS credit incredible of 20.64 per cent by value and 11.02 per cent by volume of
payments. The NEFT also grew up by 62.54 per cent by value and 106.27 per cent by volume. Due
to the notification issued by the RBI allowing free use of ATM-debit card in all the banks throughout
the country would increase further by value and volume of e-payments. The growing popularity and
acceptance of the NEFT system for the interbank funds transfers is reflected in the volume and value
handled by the system, which increased by 74 per cent by volume and 62 per cent by value in the
year 2012–13 compared to the year 2011–12. NEFT has become a flagship remittance system in the
country catering to the needs of individuals, corporate and governments alike, many efficiency
enhancements have also been made in the system.
The volume of electronic transactions has increased to 1.6 billion in 2012–13 from 1.2 billion
in 2011–12, indicating a growth of 34 per cent. The total value of electronic transactions has
increased to Rs 33,849.57 billion in 2012–13 from Rs.22, 075.33 billion in 2011–12, registering a
growth of 53.34 per cent. The trend clearly indicates rising consumer acceptance for the e-modes of
payments. On the flipside, however, the growing importance and usage of electronic payments has
increased the vulnerability towards risks and threat of frauds.
During the year 2008-09 to 2011-12, the paper based payments continued to slow down in
value and in volume also. In the year 2012-13, volume of paper based payments again slowed down
to -2.12 per cent but the value remained the same due to low penetration of acceptance for electronic
payments and government receipts done predominantly through cash, cheques and draft. It indicates
that bank need to encourage for further subsidized for e- payment option to the users. The total EPs
increased continuously from -51.98 per cent to 53.34 per cent by value and 24.75 per cent to 34.37
per cent by volume within five FY ending on 2008-09 to 2012-13. It is important to understand that
during the year 2011-12 to 2012-13, growth rate of payments is increasing trend by value (53%) and
by volume (34%) through electronic mode but not in paper based clearing.
During the ten financial years commencing from 2003-04 to 2012-13, the negative growth of
the paper based transaction in value (-14%) and in volume (-28%) has been recorded. It did not grow
much but total electronic payments have grown around sixty five (65) times in value and nine (9.5)
times in volume also. Obviously customers prefer electronic mode of transaction which are healthy
practices for Indian economic growth. These are clear indications that corporate India is aware of
these options and are beginning to use them. The banks in India are also aggressive in promoting epayments options as part of their cash management options as they also benefit from the migration of
paper based payments instruments (that are inherently costly) to paper- free EP options which are
more cost effective. The EP options also allow the companies to track the receipts in a more
transparent manner and manage payments and liquidity more efficiently.
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Volume 5, Issue 1, January (2014), © IAEME
6. SUGGESTION AND RECOMMENDATIONS
The following suggestions and recommendations have been observed are:
The usage of a payment product is dependent on the customer being aware of the existence of
such a product and its use as also the safeguards against its misuse. Therefore, it is necessary
that awareness of various payment products is created through the innovative use of available
mass media. Stakeholders, singly or as groups of common purpose, must make efforts to
spread awareness in making both the urban and rural user (as user or beneficiary) aware of
their respective payment products. Both regulators and the government can assist to widen
this spectrum to wean away population from cash to less cash with attendant benefits of
efficiency and better productivity.
Availability and awareness of payment products will not lead to increased usage unless the
payment product is accepted by all. The acceptability of formal payment channels including
e-payments is based on the ease of use, convenience, interoperability, language neutrality and
incentive factors associated with the particular mode of payment. Thus, a multi-pronged
strategy is required to increase the acceptability of payment products from the regulators,
government and stakeholders.
It is important to create awareness amongst the consumers/customers using these electronic
payment methods. Reserve Bank has initiated a series of awareness programmes – e-BAAT
(Electronic Banking Awareness Training) along with banks and other stakeholders. At the
same time, serious attention needs to be paid to related issues of consumer protection,
grievance redressal mechanisms, and issues of consumer liability in case of negligence or
complicity in the event of unauthorized/fraudulent transactions.
Finally, for large value electronic payments systems, RBI's vision should be to bring them up
to world standards like ISO 20022 message standards reduce the complexities and integrated
with global systems. Cross-border payments are an important facet of international trade and
integration, and this can lead to settlement risks. RBI should address operational and
regulatory issues to minimize these risks.
7. CONCLUDING REMARK AND IMPLICATIONS
Despite RBI’s efforts to promote electronic banking, almost 90 per cent of total payments are
estimated to be collected through cash/cheque (RBI Annual report). Our vision document by RBI,
proactively encourage efficient electronic payments systems through developing accessibility,
availability, affordability and assurance among other things are needed for cash-free society. Banks
and other financial institutions should concentrate further on efforts to encourage corporate,
individual /retail customers and also noted that the gaps in the bill payments eco-system for lack of
inter-operability, high cost of cash, cheque /draft collection and poor accessibility in semi-urban and
rural areas to ensue efficient innovative paper free electronic payments and settlement systems form
the backbone of economic well being of the nation.. In addition, simplifying documentation
requirements, increasing role of non-banks in the payment systems, innovation and competition,
uniformity, addressing risks could facilitate more usage of the innovative efficient paper free mode.
This study has number of limitations that must be acknowledged. Data on Internet banking
and Mobile banking were not available. Therefore, these results of this study are not applicable to the
full extent of paper free electronic payment systems in India. This is the future scope for the further
research.
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