INDIAN BANKS' ASSOCIATION

The retail payments system in India comprising of paper based and electronic systems, handle large volume of transactions. These relate to various customer segments spread across the country. The cheque clearing is the dominant retail payment system in India. The model rules and regulations are prescribed by RBI and are adopted by the clearing houses spread across the country. There are over 1047 clearing houses in the country today. RBI themselves manage 16 such clearing houses, SBI Group manages the bulk of the clearing houses numbering about 1000 and a few other public sector banks, manage the remaining clearing houses. The banks managing the clearing houses also act as the settlement banks. Cheque clearing is done by MICR technology at over 40 centres and manually at other centres. These MICR centres are run by RBI, SBI, PNB and a few other PSU banks. The electronic clearing facilities like ECS, EFT and SEFT are gaining importance. The Electronic Clearing Service (ECS) is provided through a clearing house for bulk payments/ receipts electronically. This facility is extended at 47 centres of which 15 are managed by RBI and the rest by SBI. The EFT and SEFT systems are wholly managed by RBI and facilitate same day account to account funds transfer from one bank to another. These are transacted through 15 RBI clearing centres and 3000 bank branches respectively. The ATMs are operated by different banks with their own switches and through some shared arrangements.

"Payment Systems in India Vision 2005-08" document released by the Reserve Bank of India in May 2005 recognized the significance of establishing a safe, secure, sound and efficient payment system for India, matching international standards and best practices. To give shape to its vision, the RBI envisaged in its document that the Indian Retail Clearing function, in its entirety, could be entrusted to a separate legal entity at national level and Reserve Bank can provide settlement services for all the clearing systems, besides being the regulator and supervisor of the payment and settlement systems. To achieve this objective, the RBI requested the Indian Banks’ Association to set up, in consultation with the member banks, a single umbrella organization for retail payment systems in India on a robust technology platform having regard to optimization of resource use through consolidation of existing infrastructure and building up of new infrastructure to enable national reach in a seamless manner and provide service of the highest quality to the bank customers at affordable optimal price.

The Vision document further visualised the advantage of setting up of the national entity for running all retail payment system activities as this entity will have uniformity in the structure, operations and procedures. The disparate local practices which impede efficiency and customer service in the functioning of the clearing operations would be effectively neutralized. This single entity would deploy professionally skilled and competent personnel to manage and run clearing operations. It will create an enabling environment for bringing out innovative products. It will pave the way for conducting all clearing at national level, leading to better information dissemination and better customer education on various payment services and systems. To achieve these goals, The RBI proposed to initiate steps towards a new organizational structure for retail payment systems.
To fulfill the above objective of RBI, a Working Group was set up in the IBA under the Chairmanship of Mr. S. Natarajan, Chief General Manager (Banking Operations), State Bank of India to examine the issues relating to setting up an Umbrella Organisation, a national level institution, as a Section 25 Company under the Companies Act, 1956, to own and operate all retail (both paper-based and electronic) payment systems in the country. The Working Group was broadly represented by leading banks in all the four major sectors of Banking Industry in the country, viz., Public, Private, Foreign and Cooperative Banks.
The Working Group after examining various issues involved in setting up the Umbrella Organisation, such as viability, pricing, capital, ownership, management, staffing, settlement, activities/business, etc. had made recommendations to set up the Umbrealla Organisation with the following objectives:

To develop a robust retail payment system by consolidation of the existing systems.
To evolve standards and procedures as are necessary to promote efficiency, safety, soundness, security and cost effectiveness of the payment systems and settlement processes.
To usher in advanced technological platforms and to ensure constant upgradation to meet the best international standards.
To focus on customer-centric initiatives with emphasis on product innovations and on high quality service levels.
To identify and control all risks (settlement, credit, liquidity, operational and systemic) and preserve the integrity of the system
To monitor retail payment system developments and related issues in the country and abroad to avoid shocks, frauds and contagions that may adversely affect the system.
To fulfill public policy objectives and ensure that principles of fairness, equity and competitive neutrality are applied in its functioning.
To work with RBI towards national clearing facility and national settlement of funds including introduction of new mechanism for the same.
To create the necessary environment for moving towards electronic based clearing system and reduce dependence on paper based clearing.
To extend its services in an inclusive manner covering rural and remote areas so that the benefits are not denied to any sections of the society.
To facilitate interaction of its clearing and settlement systems and related arrangements with other systems/entities involved in the exchange, clearing or settlement of payments.

Considering the need to provide for investment in technology, product innovations and the scope of activities of the company including MICR, cheque truncation and the electronic clearing services to be managed and operated by the corporation in the future, it was agreed by the Group that the corporation will have a paid up capital of Rs.100 crore with an authorized capital of Rs.300 cr.

Taking into account the number of banks, ownership pattern of the Banks, geographical spread, different levels of technology/emerging technological changes, growing expectations of customers, the Working Group decided to opt for a structure, which would provide for dispersed ownership. Geographical coverage and representation to the different segments of the banking industry would be ensured. In the course of time, the ownership structure would be expanded to include interest groups like Post Offices, other payment system providers etc.
The organization will be professionally managed to promote the objectives. It should be such as to enjoy high credibility among the various stakeholders and create the required confidence that it has the necessary vision and objectivity.
To start with, the corporation would take over the 9 MICR centre operations at the 4 Metros which are run by RBI and SBI. Along with this the corporation would take over clearing house operations managed by RBI, High Value Clearing etc. at these centres. All the on going projects at the above centres including cheque truncation introduced at New Delhi will be taken over by the new corporation. Management of electronic payments like ECS/ EFT/SEFT will also be taken over simultaneously at these centres. During the year 2006-07, 20 other top centres would likewise be taken over including the12 other RBI managed clearing centres. Endeavour would be made to have a centralized settlement of funds at these centres. The MICR centres other than top 50 centres spread across the country would be run on agency basis on terms to be mutually agreed between the new entity and the agency bank and will not be taken over by the new entity till they have run for a minimum period of 3 years. Minimum service level standards will be laid down by the entity. The other clearing houses will also be run on agency basis on agreed terms by the banks running them now with assurances on minimum service standards. At all centres the corporation will take over the management of clearing house, MICR centres, ECS/SEFT/ EFT, high value clearing, etc.

The corporation will be responsible for future expansion and roll out of all retail payments in India. Emphasis will be placed on technology and modernization with roll out of electronic services to a large number of centres at the earliest. Credit/ debit cards, smart cards/ ATMs etc. may be taken up at a later stage.

The new entity will put in place risk mitigating factors to ensure that the retail payments are run on sound lines. It will provide guidelines for guarantee fund in high value clearing in line with the recommendations made by the RBI Working Group on the subject. The new entity will also issue guidelines on other measures like membership and sub membership in clearing houses. It will also ensure that the electronic services are provided on a sound and secure footing to ensure against systemic defaults. The new entity will also take steps for data integrity and security.

RBI will have regulatory authority over the new entity. It will have a payment system oversight function over the new corporation to ensure that the schemes and their delivery comply with the RBI’s vision and the regulatory and legal framework. RBI will also provide funds settlement for all the retail payments. It will help put in place a proper environment for payment system to flourish including guidelines on risk mitigating factors, secure settlement of funds, efficiency enhancement measures etc. RBI will also help in the enactment of laws on electronic documents, digital signatures, electronic payments, e-money/ commerce and m-commerce etc.

The Reserve Bank of India had agreed to the recommendations of the IBA Working Group and advised the IBA to go ahead with setting up of the proposed Umbrella Organisation. The Managing Committee of IBA set up a Core Group, with representatives from State Bank of India, Bank of Baroda, Canara bank, Citibank N.A., The HDFC Bank Ltd., HSBC, ICICI Bank Ltd., Punjab National Bank and Union Bank of India as Members to work out the modalities for setting up the Umbrella Organisation.

The IBA Core Group decided to incorporate the Umbrella Organisation as a Section 25 Company, under the name of National Payments Corporation of India (NPCI). The Members of the Core Group, who are also the initial promoters of the proposed Company, approached the Registrar of Companies, Mumbai and obtained their approval for the name of the Company as National Payments Corporation of India (NPCI).

Applications for registration of National Payments Corporation of India have now been filed both with the Regional Director and Registrar of Companies, Mumbai.

NPCI is expected to be incorporated as a Section 25 Company by end of March 2006.