Every country has a financial system of its own that serves as backbone of its entire development. A financial system is a set of institutional arrangements through which financial surplus in the economy is mobilized from surplus units and transferred to deficit spenders. The financial system of any country consists of banking and non banking financial institutes, these institutes are providing various types of financial services to the customers. In the financial services, financial clearing and fund transfer service is most important service than other services. Payment systems improve financial intelligibility, stimulating business growth and consumption .The success of the banking system has depends upon the efficient and quality of clearing system of the industry. If we overlook the worldwide this system has changing drastically with technological advancements. Last few years evident that, Information and Communication Technology (ICT) have become a mean for improvement of financial system worldwide. In India, most of banks and financial institutions are offering ICT based financial products and services to improve their business efficiency and speed of services e.g. called e - banking, internet banking, electronic fund transfer, electronic clearing, mobile banking etc.

1. 1
CASE STUDY ON THE GROWING SAGA OF E – PAYEMENTS AND
SETTLEMENT SYSTEM IN INDIA WITH SPECIFIC REFRENCE TO
INDIAN BANKING SECTOR
Varun Kesavan, Research Scholar, Palakkad, Email Id – varunkesavan@yahoo.com
INTRODUCTION
Every country has a financial system of its own that serves as backbone of its entire
development. A financial system is a set of institutional arrangements through which
financial surplus in the economy is mobilized from surplus units and transferred to
deficit spenders. The financial system of any country consists of banking and non
banking financial institutes, these institutes are providing various types of financial
services to the customers. In the financial services, financial clearing and fund
transfer service is most important service than other services. Payment systems
improve financial intelligibility, stimulating business growth and consumption .The
success of the banking system has depends upon the efficient and quality of clearing
system of the industry. If we overlook the worldwide this system has changing
drastically with technological advancements. Last few years evident that, Information
and Communication Technology (ICT) have become a mean for improvement of
financial system worldwide. In India, most of banks and financial institutions are
offering ICT based financial products and services to improve their business
efficiency and speed of services e.g. called e - banking, internet banking, electronic
fund transfer, electronic clearing, mobile banking etc.

2. 2
Review of Indian Financial System
In Indian financial system 19 nationalised commercial banks, SBI group of 06 banks
including State Bank of India, 14 old and 07 new private sector banks and 32 foreign
banks are dealing banking business as on March, 2012. The mechanisation and
computerisation of banking were started from 1985 by the first phased plan of bank
automation in India. Now in India, 97 percent of public sector bank branches, cent
percent private and foreign banks are computerised. These International Journal of
Enterprise Computing and Business Systems ISSN (Online) : 2230-8849 Volume 2
Issue 2 July 2013 International Manuscript ID : ISSN22308849-V2I2M1-072013
banks are offering lots of ICT based banking service to bank customers and using
modern technology to internal business operations. After financial reform period
1991, various foreign and new private sector banks are entering in Indian banking
industry with their high-tech banking services. It leads to competition of ICT based
banking services in Indian banking system and creates efficiency. For the further
developments the Reserve Bank of India (RBI), Institute for Banking Research and
Development of Technology has continuously trying to enhance the system by
required facilities to banking and financial institutes in India.
PaymentSystem in India
Payment instruments and mechanisms have a very long history in India. The earliest
payment instruments known to have been used in India were coins, which were
either in gold, silver and copper. In the Mughal period, Indian has starting use of bills
of exchange in the commercial centres. In the Muslim period traders' were use Pay
orders it was issued from the Royal Treasury on one of the District or Provincial
treasuries. They were called Barattes and were akin to present day drafts or

3. 3
cheques. In the in the twelfth century one of the most important financial instrument
were evolved that is Hundi it has continued till today. Till 1835 there were variety of
currency systems and coinage in India, but in 1835, the East India Company
introduced the Company's Rupee to bring about uniformity of coinage over British
India. A paper currency system were implemented in 18th century, earliest issues of
paper currency were issued by the Bank of Hindustan, then after issued by the
General Bank in Bengal and Bihar, the Bengal Bank and three Presidency Banks.
The Paper Currency Act of 1861 conferred the monopoly of the Government of India
and presidency banks working in India. After the establishment of the RBI all rights of
currency system has given to the RBI in India.
Modern PaymentSystem in India
The Reserve Bank of India (RBI) has played a significant role in developing the
payment and settlement systems in the nation from its establishment. The
emergence of e-commerce has created new financial requirements that in many
cases cannot be effectively fulfilled by the traditional payment systems. To
recognizing these needs the RBI has implemented bank computerisation project in
India and providing ICT based networking facilities to the banks and financial
institutions in India. Since 1991 the RBI has started'BANKNET' it is network for
banking institutes other than Banknet The 'INFINET' - Indian Financial Network is a
satellite based wide area network using VSAT (Very Small Aperture Terminal)
technology set up in June 1999. The Centralised Funds Management System
(CFMS) facilitates centralised balance viewing of and funds transfer between own
accounts of a member bank maintained with the Bank at different locations. In Indian

4. 4
banking system ATM also providing better alternative to traditional payment system it
can be used for payment of utility bills, funds transfer between accounts, deposit of
cheques and cash into accounts, balance enquiry and several other banking
transactions. Apart from these facilities RBI has enhancing the payment system by
introducing MICR technology, ECS, EFT, NEFT, Card Based Clearing and RTGS
etc.
THE KEY PROPOSED BY RBI IN INTODUCING MODERNPAYMENT
SYSTEM ARE AS FOLLOWS.
1. Accessibility: Access to formal payment systems, including e-payments as
indicated above, is not available to sizeable sections of the society. In view of this
cash is still the predominant mode of payment used in the country. It is therefore,
necessary that access to the formal payment systems is made as easily available
to all, as is the case with cash. Institutions and stakeholders must invariably focus
on their own strengths and convenience of their products to make them more
accessible.
2. Availability: Availability of the modern payment systems beyond the banking
relationship has now been made possible through non-bank entities as well after
the enactment of the Payment and Settlement Systems Act, 2007. This
development has provided an enabling atmosphere to make available the formal
payment systems to all segments of society. Notwithstanding this, it is recognised

5. 5
that more sustained efforts in this regard are required to be taken by all the
stakeholders.
3. Awareness: 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.
4. Acceptability: 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. Receivers of e-payments, in particular, need to be
sensitized of the benefits of such receipts over cash/cheques.

6. 6
5. Affordability: The payment services, including the e-payment option, should be
affordable to all segments of the society. Effective technology deployment and
incentive structure should result in the creation of low cost payment products that
encourage all customers and users towards their repetitive usage and cut down
their dependency on cash.
6. Assurance: It is an aspect which is related to trust in the products and processes
and the security and authenticity relating to the transactions. For non-cash
payments to proliferate, they should provide a high degree of comfort and offer
an appropriate level of security in their repeated and regular usage with a zero-
fail rate.
7. Appropriateness: Appropriateness is the combined effect of all the above
features. The payment products should adapt to the social and cultural milieu and
meet the needs of existing and prospective customers.
PAPER BASED SYSTEM IN INDIA
1. MICR Clearing
Use of paper-based instruments (like cheques, drafts, and the like) accounts for
nearly 60% of the volume of total non-cash transactions in the country. In value
terms, the share is presently around 11%. This share has been steadily decreasing
over a period of time and electronic mode gained popularity due to the concerted
efforts of Reserve Bank of India to popularize the electronic payment products in

7. 7
preference to cash and cheques. Since paper based payments occupy an important
place in the country, Reserve Bank had introduced Magnetic Ink Character
Recognition (MICR) technology for speeding up and bringing in efficiency in
processing of cheques.Later, a separate High Value Clearing was introduced for
clearing cheques of valueRupees one lakh and above. This clearing was available at
select large centres in the country (since discontinued). Recent developments in
paper-based instruments include launch of Speed Clearing (for local clearance of
outstation cheques drawn on core-banking enabled branches of banks), introduction
of cheque truncation system (to restrict physical movement of cheques and enable
use of images for payment processing), framing CTS-2010 Standards (for enhancing
the security features on cheque forms) and the like.While the overall thrust is to
reduce the use of paper for transactions, given the fact that it would take some time
to completely move to the electronic mode, the intention is to reduce the movement
of paper – both for local and outstation clearance of cheques.
2. Electronic Payments
The initiatives taken by RBI in the mid-eighties and early-nineties focused on
technology-based solutions for the improvement of the payment and settlement
system infrastructure, coupled with the introduction of new payment products by
taking advantage of the technological advancements in banks. The continued
increase in the volume of cheques added pressure on the existing set-up, thus
necessitating a cost-effective alternative system.

8. 8
Electronic Clearing Service (ECS) Credit
The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and
repetitive payment requirements (like salary, interest, dividend payments) of
corporates and other institutions. ECS (Credit) facilitates customer accounts to be
credited on the specified value date and is presently available at all major cities in
the country.
During September 2008, the Bank launched a new service known as National
Electronic Clearing Service (NECS), at National Clearing Cell (NCC), Mumbai.
NECS (Credit) facilitates multiple credits to beneficiary accounts with destination
branches across the country against a single debit of the account of the sponsor
bank. The system has a pan-India characteristic and leverages on Core Banking
Solutions (CBS) of member banks, facilitating all CBS bank branches to participate
in the system, irrespective of their location across the country.
3. RegionalECS (RECS)
Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of
the NECS is confined to the bank branches within the jurisdiction of a Regional office
of RBI. Under the system, the sponsor bank will upload the validated data through
the Secured Web Server of RBI containing credit/debit instructions to the customers
of CBS enabled bank branches spread across the Jurisdiction of the Regional office
of RBI. The RECS centre will process the data, arrive at the settlement, generate
destination bank wise data/reports and make available the data/reports through

9. 9
secured web-server to facilitate the destination bank branches to afford credit/debit
to the accounts of beneficiaries by leveraging the CBS technology put in place by the
bank. Presently RECS is available in Ahmedabad, Bengaluru, Chennai and Kolkata
4. Electronic Clearing Service (ECS) Debit
The ECS (Debit) Scheme was introduced by RBI to provide a faster method of
effecting periodic and repetitive collections of utility companies. ECS (Debit)
facilitates consumers / subscribers of utility companies to make routine and
repetitive payments by ‘mandating’ bank branches to debit their accounts and
pass on the money to the companies. This tremendously minimises use of paper
instruments apart from improving process efficiency and customer satisfaction.
There is no limit as to the minimum or maximum amount of payment. This is also
available across major cities in the country.
5. ElectronicFunds Transfer (EFT)
This retail funds transfer system introduced in the late 1990s enabled an account
holder of a bank to electronically transfer funds to another account holder with
any other participating bank. Available across 15 major centers in the country,
this system is no longer available for use by the general public, for whose benefit
a feature-rich and more efficient system is now in place, which is the National
Electronic Funds Transfer (NEFT) system.
6. National Electronic Funds Transfer (NEFT) System

10. 10
In November 2005, a more secure system was introduced for facilitating one-to-
one funds transfer requirements of individuals / corporates. Available across a
longer time window, the NEFT system provides for batch settlements at hourly
intervals, thus enabling near real-time transfer of funds. Certain other unique
features viz. accepting cash for originating transactions, initiating transfer
requests without any minimum or maximum amount limitations, facilitating one-
way transfers to Nepal, receiving confirmation of the date / time of credit to the
account of the beneficiaries, etc., are available in the system.
7. Real TimeGross Settlement (RTGS)System
RTGS is a funds transfer systems where transfer of money takes place from one
bank to another on a "real time" and on "gross" basis. Settlement in "real time"
means payment transaction is not subjected to any waiting period. "Gross
settlement" means the transaction is settled on one to one basis without bunching
or netting with any other transaction. Once processed, payments are final and
irrevocable. This was introduced in in 2004 and settles all inter-bank payments
and customer transactions above `2 lakh.
8. Clearing Corporation of India Limited(CCIL)
CCIL was set up in April 2001 by banks, financial institutions and primary dealers,
to function as an industry service organisation for clearing and settlement of
trades in money market, government securities and foreign exchange markets.
The Clearing Corporation plays the crucial role of a Central Counter Party (CCP)
in the government securities, USD –INR forex exchange (both spot and forward
segments) and Collaterised Borrowing and Lending Obligation (CBLO) markets.
CCIL plays the role of a central counterparty whereby, the contract between

11. 11
buyer and seller gets replaced by two new contracts - between CCIL and each of
the two parties. This process is known as ‘Novation’. Through novation, the
counterparty credit risk between the buyer and seller is eliminated with CCIL
subsuming all counterparty and credit risks. In order to minimize the these risks,
that it exposes itself to, CCIL follows specific risk management practices which
are as per international best practices.In addition to the guaranteed settlement,
CCIL also provides non guaranteed settlement services for National Financial
Switch (Inter bank ATM transactions) and for rupee derivatives such as Interest
Rate Swaps.
CCIL is also providing a reporting platform and acts as a repository for Over the
Counter (OTC) products.
9. Other Payment Systems
Pre-paid Payment Systems
Pre-paid instruments are payment instruments that facilitate purchase of goods
and services against the value stored on these instruments. The value stored on
such instruments represents the value paid for by the holders by cash, by debit to
a bank account, or by credit card. The pre-paid payment instruments can be
issued in the form of smart cards, magnetic stripe cards, internet accounts,
internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.
Subsequent to the notification of the PSS Act, policy guidelines for issuance and
operation of prepaid instruments in India were issued in the public interest to
regulate the issue of prepaid payment instruments in the country.

12. 12
The use of pre-paid payment instruments for cross border transactions has not been
permitted, except for the payment instruments approved under Foreign Exchange
Management Act,1999 (FEMA).
10. Mobile Banking System
Mobile phones as a medium for providing banking services have been attaining
increased importance. Reserve Bank brought out a set of operating guidelines on
mobile banking for banks in October 2008, according to which only banks which
are licensed and supervised in India and have a physical presence in India are
permitted to offier mobile banking after obtaining necessary permission from
Reserve Bank. The guidelines focus on systems for security and inter-bank
transfer arrangements through Reserve Bank's authorized systems. On the
technology front the objective is to enable the development of inter-operable
standards so as to facilitate funds transfer from one account to any other account
in the same or any other bank on a real time basis irrespective of the mobile
network a customer has subscribed to.
11. ATMs / Point of Sale (POS) Terminals / Online Transactions
Presently, there are over 61,000 ATMs in India. Savings Bank customers can
withdraw cash from any bank terminal up to 5 times in a month without being
charged for the same. To address the customer service issues arising out of
failed ATM transactions where the customer's account gets debited without actual
disbursal of cash, the Reserve Bank has mandated re-crediting of such failed
transactions within 12 working day and mandated compensation for delays
beyond the stipulated period. Furthermore, a standardised template has been

13. 13
prescribed for displaying at all ATM locations to facilitate lodging of complaints by
customers.
There are over five lakh POS terminals in the country, which enable customers to
make payments for purchases of goods and services by means of credit/debit
cards. To facilitate customer convenience the Bank has also permitted cash
withdrawal using debit cards issued by the banks at PoS terminals.
The PoS for accepting card payments also include online payment gateways.
This facility is used for enabling online payments for goods and services. The
online payment are enabled through own payment gateways or third party service
providers clled intermediaries. In payment transactions involving intermediaries,
these intermediaries act as the initial recipient of payments and distribute the
payment to merchants. In such transactions, the customers are exposed to the
uncertainty of payment as most merchants treat the payments as final on receipt
from the intermediaries. In this regard safeguard the interests of customers and
to ensure that the payments made by them using Electronic/Online Payment
modes are duly accounted for by intermediaries receiving such payments,
directions were issued in November 2009. Directions require that the funds
received from customers for such transactions need to be maintained in an
internal account of a bank and the intermediary should not have access to the
same.
Further, to reduce the risks arising out of the use of credit/debit cards over
internet/IVR (technically referred to as card not present (CNP) transactions),
Reserve Bank mandated that all CNP transactions should be additionally

14. 14
authenticated based on information not available on the card and an online alert
should be sent to the cardholders for such transactions.
12.National Payments Corporation of India
The Reserve Bank encouraged the setting up of National Payments Corporation
of India (NPCI) to act as an umbrella organisation for operating various Retail
Payment Systems (RPS) in India. NPCI became functional in early 2009. NPCI
has taken over National Financial Switch (NFS) from Institute for Development
and Research in Banking Technology (IDRBT). NPCI is expected to bring greater
efficiency by way of uniformity and standardization in retail payments and
expanding and extending the reach of both existing and innovative payment
products for greater customer convenience.
13. Oversight of Payment and Settlement Systems
Oversight of the payment and settlement systems is a central bank function
whereby the objectives of safety and efficiency are promoted by monitoring
existing and planned systems, assessing them against these objectives and,
where necessary, inducing change. By overseeing payment and settlement
systems, central banks help to maintain systemic stability and reduce systemic
risk, and to maintain public confidence in payment and settlement systems.
The Payment and Settlement Systems Act, 2007 and the Payment and
Settlement Systems Regulations, 2008 framed thereunder, provide the necessary

15. 15
statutory backing to the Reserve Bank of India for undertaking the Oversight
function over the payment and settlement systems in the country.

16. 16

17. 17
TREND AND PROGRESS IN PAYMENT SYSTEMS
The electronic payment systems registered high volumes in 2014-15, following
the determined efforts made by the Reserve Bank for migration to electronic
payments. (Table IX.1).Correspondingly, transactions processed by the paper-
based clearing systems have shown a continuous decline both in volume and
value terms. Overall, the payment and settlement systems posted a higher
growth of 27.1 per cent in volume and a lower growth of 5.4 per cent in value in
2014-15 in relation to the previous year.
1. Paper clearing
The share of paper-based transactions in total transactions continued to show a
declining trend over the years. In volume terms, paper-based transactions accounted
for 25.4 per cent of the total transactions during 2014-15, down from 33.9 per cent in
the previous year. Their share in value terms also declined to 5.4 per cent from 6.2
per cent.
2. Retail electronic payments
The growth in retail electronic payments has been encouraging both in terms of
coverage and usage. As on March 31, 2015, the national electronic funds transfer
(NEFT) facility was available through 121,845 branches of 161 banks, in addition to
the business correspondent (BC) outlets. NEFT handled 928 million transactions
valued at around `60 trillion in 2014-15 as against 661 million transactions for `44

18. 18
trillion in the previous year. During the month of March 2015, NEFT processed the
largest ever monthly volume of 106 million transactions.
The increasing trend is also reflected in case of bulk electronic payments systems
[total of electronic clearing service (ECS) and National Automated Clearing House
(NACH)]. Banks continued to use both NACH operated by National Payments
Corporation of India (NPCI) as well as ECS operated by the Reserve Bank.
As regards card transactions, during 2014- 15, 615 million transactions valued at
around `1.9trillion were carried out through credit cards, while 808 million
transactions valued at `1.2 trillion were carried out through debit cards. Transactions
through prepaid payment instruments (PPIs) also grew substantially, recording 314
million transactions valued at `212 billion. Mobile banking service, which is a
relatively newer entrant among the payment options, has shown encouraging growth
and handled 171 million transactions valued at `1 trillion during the year.
BHIM APP
Bharat Interface for Money (BHIM) is an app that lets you make simple, easy and
quick payment transactions using Unified Payments Interface (UPI). You can make
instant bank-to-bank payments and Pay and collect money using just Mobile number
or Virtual Payment Address (VPA).

19. 19
The following are the features of BHIM:
1. Send Money: User can send money using a Virtual Payment Address (VPA),
Account Number & IFSC, Aadhaar Number or QR code.
2. Request Money: User can collect money by entering Virtual Payment
Address (VPA). Additionally through BHIM App, one can also transfer money
using Mobile No. (Mobile No should be registered with BHIM or *99# and
account should be linked)
3. Scan & Pay: User can pay by scanning the QR code through Scan & Pay &
generate your QR option is also present.
4. Transactions: User can check transaction history and also pending UPI
collect requests (if any) and approve or reject. User can also raise complaint
for the declined transactions by clicking on Report issue in transactions.
5. Profile: User can view the static QR code and Payment addresses created or
also share the QR code through various messenger applications like
WhatsApp, Email etc. available on phone and download the QR code.

20. 20
6. Bank Account: User can see the bank account linked with his/her BHIM App
and set/change the UPI PIN. User can also change the bank account linked
with BHIM App by clicking Change account provided in Menu and can also
check Balance of his/her linked Bank Account by clicking “REQUEST
BALANCE”
7. Language: Up to 8 regional languages (Tamil, Telugu, Bengali, Malayalam,
Oriya, Gujarati, Kannada ,Hindi) available on BHIM to improve user
experience.
8. Block User: Block/Spam users who are sending you collect requests from
illicit sources.
9. Privacy: Allow a user to disable and enable mobilenumber@upi in the profile
if a secondary VPA is created (QR for the disabled VPA is also disabled).

21. 21
QUESTIONS
1. What are the various challenges present for e – payment system in INDIA?
2. Which kind of technology can be adopted for e – payment system in near
future?

22. 22
REFERENCES
1. http://www.thehindu.com/todays-paper/tp-business/share-of-epayments-
grows/article7620339.ece
2. https://en.wikipedia.org/wiki/Payment_and_settlement_systems_in_India
3. https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6725&Mode=0
4. https://www.rbi.org.in/scripts/PublicationVisionDocuments.aspx?ID=678
5. https://www.rbi.org.in/scripts/PaymentSystems_UM.aspx

23. 23
6. https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1127
7. https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/00A157C1B5ECBE6984
F6EA8137C57AAEF493C.PDF
8. http://www.ijecbs.com/July2013/1.pdf