The payment system of India and the relevant legislation

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Date added: 17-06-26

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Introduction

The development of a country depends upon the financial stability of that country. The government or central authority of country formulates the schemes which can work efficiently and adequately for the proper functioning of the financial sector of a country. The financial sector of India has undergone drastic change in the last two decades. Payment plays a vital role in the financial sector and it is considered as indispensable part in everyday transactions. A payment system is a mechanism that facilitates transfer of value between a payer and a beneficiary by which the payer discharges the payment obligations to the beneficiary.[1] The payment and settlement system serve as a backbone of financial system of a country.[2] Payment increases the GDP of the country therefore the payment system of country should be safe, secure, efficient and accessible. A safe and efficient payment and settlement system is sine qua non for the proper functioning of the financial system and it also plays an important role in the implementation of monetary policy as they provide conduit through which policy signals are transmitted.[3] Generally the central bank of any country works for the development of national payment system. The Reserve Bank of India (RBI), like other central banks, has been endeavoring to develop the payment and settlement system in India on a safe, sound, secure and efficient basis.[4] The Indian payment system is based on the paper- transaction but with the changing time the situation has changed. An alternative method of payment has been encouraged by reserve Bank of India which will make the process of banking system easier and bring safety, security and efficiency in the payment system. With the efforts of the Reserve Bank of India, the Indian banking sector has been progressing and trying to adopt and implement electronic payment to enhance the banking system.[5] The Reserve Bank of India has introduced Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) and National Electronic Clearing Services which facilitates customer to adopt electronic method of payment. It is confirmed by the survey that use of electronic method of payment has increased over a period of time. The reason behind this is advancement in the technology, increasing awareness among the consumers and internet accessibility. The Reserve Bank of India has played pivotal role in the implementation of electronic payment system. The payment and settlement system works efficiently and smoothly if is maintained by a sound legal framework. The major step in this direction is the enactment of the Payment and Settlement Act of 2007. The payment and Settlement Act, 2007 was declared in 2007 but came into effect on August 12, 2008. The Act authorizes Reserve Bank of India to regulate and supervise the payment system in India. In India, the payment and settlement system is regulated by the Payment and Settlement Act of 2007.

History Of The Legislation

The Payment and Settlement draft Bill was prepared in 2002 under the chairmanship of Dr. RH Patil. The committee was formed by the Reserve Bank of India to examine the various aspects of the payment system related to the legal basis of the system. The terms of reference of the committee set up by the Reserve Bank of India were as follows:- [6]
  1. “To examine the adequacy of legal basis for payment system;
  2. To suggest appropriate legislative changes for regulation of payment systems;
  3. To suggest an administrative set-up within the bank for administering regulation and supervision of payment systems;
  4. Any other related matter.”[7]
Finally the R H Patil committee examines the Payment and Settlement Systems Bill prepared by the Task Force on legal issues of the National Payment Council to proffer advice on matters relating to payment systems. [8] The Payment and Settlement bill was composed in 2002 but it was introduced in the Parliament in 2006. The Act came into the declaration in December by receiving the assent of the President and finally it is enforced on August 12, 2008.

Payment And Settlement Act 2007 – Critical Study

The Act constitute of the eight chapters and thirty- eight sections. Two regulations have been notified by the Reserve Bank of India in 2008 under the Payment and Settlement Act. These regulation are;-
  1. Board for Regulation and Supervision of Payment and Settlement System Regulations 2008 (BPSS).
  2. Payment and Settlement Systems Regulations (2008).[9]
The BPSS Regulation cover:
  1. Composition of the Board;
  2. Functions and powers of the Board;
  3. Powers to be exercised on behalf of the Board;
  4. Constitution of sub- committees.
Settlement System Regulations cover the following:
  1. Authorization of payment systems including submission of application for authorization for commencing or carrying on a payment systems, grant of authorization certificates, certificate formats, etc.;
  2. Payment instructions and determination of standards;
  3. Furnishing of returns, documents and other information;
  4. Furnishing of audited balance sheets, etc.[10]
Objective Behind The Payment And Settlement Act The payment and settlement system considered to be the backbone of the financial sector of our country. Gradually the financial sector has been progressing and has undergone change in the payment transfer from paper- based clearing to the Real Time Gross Settlement. The electronic payment system is developed to facilitates non- cash mode of payment. There are several retail payment system operated in India like manual paper-based clearing, Electronic Fund Transfer System, card-based system, MICR Clearing etc. The Reserve Bank of India operates and manages the paper- based cheque processing across India at four places which includes Delhi, Mumbai, Chennai and Kolkata. In addition to these places it is managed by twelve centers which are operated by public sector under the supervision of the Reserve Bank of India. The other centers involved are the clearing house, which are voluntary bodies of bank who get involved expressly to for the purpose of clearing payment system and following the instruction given by the Reserve Bank of India. The Electronic Transfer System is defined under the Payment and Settlement Act as “Electronic Fund Transfer (EFT) is a system whereby anyone who wants to make payment to another person/company, etc., can approach his bank and make cash payment or give instructions/authorization to transfer funds directly from his own account to bank account of the receiver/beneficiary. Complete details such as the receiver's name, bank account number, account type (savings or current account), bank name, city, branch name, etc., should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiaries' account correctly and faster. RBI is the service provider for EFT.”[11] The Real Time Gross Settlement System (RTGS) for the large – value payment system is operated by the Reserve Bank of India. The Card Based System is not operated by the Reserve Bank of India but it is indirectly operated and regulated by the card issuing bank. Under the section 58(2)(p) of the Reserve Bank of India Act of 1934, the Central Board of Directors Of the Reserve Bank of India is authorized to prepare regulations for clearing house of banks. Therefore because of the above mentioned reasons and the pivotal role played by the Reserve Bank of India it was proposed that there should be some legislation which will empower the Reserve Bank of India to act as a designating authority and to bestowed with the following powers and functions;
  1. It is the responsibility to RBI to check the payment and settlement system across the country including card companies, Clearing Corporation of India etc.
  2. The RBI should lay down the procedure for authorization of payment system and also for the revocation of the payment system.
  3. The RBI should give directions and guidelines to system providers.
  4. The RBI should maintain operational and technical standards for payment system.
  5. To call for information and furnish returns and documents from the service providers.
  6. To audit and inspect the systems and premises of the system providers
  7. To make legislation for carrying out the provision of the proposed legislation
  8. To impose fines and penalties for not providing information or documents or wrongfully disclosing information, etc.[12]
Finally the Bill was passed by the Parliament seeking to achieve above mentioned objects. Designated Authority And Its Committee Chapter 2 of the Act contains the section 3 which deals with authorities designated by this Act. Under this section, the Payment and settlement Act designates the Reserve Bank of India as the authority for the supervision and regulation of payment system. It also provides for the constitution of the committee of the Central Board of Directors of the Reserve Bank of India.

Board For Regulation And Supervision Of Payment And Settlement System (BPSS)

The board for regulation and supervision of payment and settlement system is constituted under the section 3(2) of the Act for the regulation and supervision of the payment system. The board constituted shall consist of the following members;
  1. Governor, Reserve Bank, who shall be the chairperson of the board;
  2. Deputy Governors, Reserve Bank, out of whom the Deputy Governor who is in- charge of the Payment and Settlement System, shall be the Vice- President of the Board;
  3. Not exceeding three Directors from the Central Board of the Reserve Bank of India to be nominated by the governor, Reserve Bank.[13]
Powers and functions of the Board:-
  1. Board should lay down the policies for the regulation and supervision of the payment and settlement system.
  2. Board should lay down the standards for existing as well as for the future payment and settlement system.
  3. The authorization of payment and settlement system.
  4. The board to decide the criteria for membership of payment and settlement system.
  5. Board to examine the rule and regulations framed under any statutes for giving direction from time to time.
  6. Board should take major and effective steps for proper regulation and supervision of the payment and settlement system.
  7. The board should create the essential administering structure within the existing rules and regulations for effective regulation and supervision of the payment and settlement system.
The BPSS meets regularly and gives direction for bringing in efficiency, safety and customer convenience in the payment and settlement systems. There are several areas in which BPSS has provided direction such as; preparation of a framework for payment through mobile phones, extension of the jurisdiction of magnetic ink character recognition (MICR), clearing house and computerization of non- MICR clearing houses, launching the Indo- Nepal remittance system, making use of electronic mode of payment mandatory for large value transaction, making all RTGS branches NEFT enabled- while upgrading the NEFT system into a round- the – clock type remittance system, exploring the feasibility of of developing a domestic card to inject competition in the market in a non- discriminatory manner, facilitating optimum use of ATM’s by cash withdrawal.[14]

Authorization Of Payment System

Chapter 3 deals with the authorization of payment system. Section 4 of the Act states that no person can operates the payment system without obtaining authorization from Reserve Bank of India. Under the Act the RBI is empowered to act as designating authority to regulates and supervise the payment system. Section 4 conveys that person can operates the payment and settlement system after obtaining authorization from the RBI. The Reserve Bank of India can authorizes a person to operate or regulate the existing houses or new clearing houses of banks in order to have a common retail clearing house throughout the country.[15] Under section 5 of the Act person who wants to operate the payment system can apply for authorization. The application for the authorization should be
[1] M.L. Tannan, Tannan’s Banking Law And Practice In India 354 (25th ed. Lexis Nexis Butterworths Wadhwa 2012) [2] M.A. Rashid, Law Relating To Electronic Transfer Of Money 11 (1st ed. Lexis Nexis Butterworths Wadhwa 2010) [3] N.S. Toor, Handbook Of Banking Information 58 (31st ed. Skylark Publications 2010) [4] M.L. Tannan, Tannan’s Banking Law And Practice In India 355 (25th ed. Lexis Nexis Butterworths Wadhwa 2012) [5] Ibid [6] M.A. Rashid, Law Relating To Electronic Transfer Of Money 11 (1st ed. Lexis Nexis Butterworths Wadhwa 2010) [7] Ibid [8] N.S. Toor, Handbook Of Banking Information 58 (31st ed. Skylark Publications 2010) [9] supra note 6 [10] Ibid [11] Payment and Settlement Act, 2007 2(c) [12] supra note 2 [13] Payment and Settlement Act of 2007 3(2). [14] M.L. Tannan, Tannan’s Banking Law And Practice In India 354 (25th ed. Lexis Nexis Butterworths Wadhwa 2012) [15] Payment and Settlement Act of 2007 4(2)
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