Provisions on Payment Systems of Nepal

1. Provisions on Payment Systems of Nepal Dev Kumar Dhakal Executive Director Nepal Rastra Bank

2. Presentation Outline

3. Payment System • Payment systems are an integral part of every country’s financial system. • A Payment System (PS) is defined as an arrangement, which allows transfer of funds between the payee and payer. • It includes systems, networks, payment instruments and all other unseen arrangements that helps move funds from accounts held at one financial institution to another. • Payments institutions and mechanisms are also the integral component of payments landscape.

6. Payment Selects desired product and Pays to store Visits store

7. Payment System Selects desired product and Pays to store Acquiring Bank Credits to Merchant A/C Settlement Bank Authentication Switch/Payment Gateway Issuing Bank Debits the Customers Accounts

8. Existing Payment Structure

10. Cheque Clearing in Nepal • Nepal Rastra Bank provided • Final settlement between the member Banks/FIs • Regulation of clearing & settlement Settlement System • Single Clearing House for all Banks/FIs in Nepal • Electronic Cheque Clearing • (Same day clearing all over Nepal)

11. Who and How different sectors Benefits Economy Customers and Merchants BFI’s/Non BFI’s Central Bank

13. Large Value Payment System Messaging Standard ISO20022 SWIFT-F/V • High Value but low volume • High Value High Risk • RTGS for LVT and Time Critical Payments Transactions Limit Montran, Logica, CMA

14. Retail payment systems are defined as funds transfer systems which typically handle a large volume of payments of relatively low value in forms such as cheques, credit transfers and direct debits. • Retail payments play a critical role in supporting economic activity and growth in commerce.

15. International Standards • Central bank follows international standards and principles for SIPS (Systematically Important Payment System), SSS (Security Settlement System), CCP (Central Counter part) • CPMI (Committee on Payment and Market Infrastructure)-IOSCO (International Organization of Securities Commission) -Principles for Financial Market Infrastructures • 24 Principles and 5 responsibilities for FMI • 10 Principles and 4 responsibilities defined for SIPS • General Principles for International Remittance Services(GPIRS) • CPSS (Committee on Payment and Settlement System)general principles for oversight

16. Payment Market Infrastructures SEBON Operates CDS For Secondary Securities Market Clearing House ECC , IPS & Connect IPS PSP (NBFIs) Payment Service Providers, 4 are Licensed and still more are on pipeline PSO Payment System Operators, 3 are licensed , others are in pipeline

17. Retail Payment : Instruments All the other instruments shows the growing trend except prepaid cards. What may be the reason ?

18. Online Payment Challenges

19. Risks in Payment System • Systemic Risk • Legal Risk • Credit Risk • Settlement Risk • Liquidity Risk • General Business Risk • Operational Risk

20. Legal Framework in Nepal Payment and Settlement Act • NRB Act • Payment and Settlement Bylaws 2072 • Licensing Policy for Payment Related Institutions 2073 • Payment System Oversight Framework 2018 • Issued 7 Directives • Electronic Card Operations • Financial Services through telecommunication Network • Safety Measures to be followed while providing electronic payment services • Provision for Settlement Bank • Transactions Limit for Electronic Payment • Approval Required before Publishing Financial Statement • Licensing provisions for Micro Credit Institutions

21. Nepal Rastra Bank Act • The NRB Act of 2002 includes an “to develop a secure, healthy and efficient system of payment” (Chapter 2, Section 4 c). The NRB Act states that one of its functions, duties, and powers is “to establish and promote the system of payment, clearing and settlement and to regulate these activities” (Chapter 2, Section 5 i), and gives it powers to regulate, inspect, and supervise payment, clearing, and settlement arrangements (Chapter 12).

22. Banks and Financial Institutions Act • The BFI Act of 2006 empowers the central bank to grant and revoke licenses to BFIs, frame various instruments to regulate the activities of licensed BFIs, sanction non-compliance with those regulatory instruments, and exercise resolution powers over BFIs which experience financial distress. Payment and Settlement Bylaw 2015 • The Payment and Settlement Bylaw, issued under the NRB Act (Chapter 12, Section 110) provides the central bank with the authority to regulate, supervise, inspect and oversee services and instruments issued by the institutions/mechanism operating payment and settlement services.

23. Licensing Policy for Institutions and Mechanisms Operating Payment Related Activities 2016 • The NRB Licensing Policy aims to regulate institutions and mechanisms that operate payment related activities. • The scope of this policy includes all BFIs and non-BFIs. • For licensing purposes, institutions and mechanisms are classified under two groups. • Payment service providers are institutions that provide payment activities through electronic means, carry out domestic money transfers, and make bill payments for goods and services, and also have a direct relationship with customers in providing such payment services. • Payment system operators cover institutions and mechanisms whose objectives are the operation, control and clearing of payment related activities. This includes clearing houses, and institutions or mechanisms operating electronic card networks, electronic payment networks, and providing large and small value payments. • The NRB Licensing Policy also includes specific provisions on paid up capital, settlement bank, payment card security, and the separation of customer funds from the accounts of licensed institutions or mechanisms.

24. Licensing Policy for Institutions and Mechanisms Operating Payment Related Activities 2016 • The provision related to Paid up capital except BFIs a) Institution operating business through cards- Rs 50 million b) Institutions operating business through telecommunication technology and network- Rs 10 million c) PSO- Rs 100 million d) Domestic institution operating domestic and abroad- Rs 250 million e) Foreign institution providing domestic service -Rs 300 million • Telecommunication service provider cannot operate the business as PSP by using their own network however they can operate through subsidiary company. such subsidiary institutions should obtain license from NRB • PSP should select and operate settlement account at settlement bank for final settlement of transactions. All the settlement should be in Nepalese currency.

25. Payment System Oversight Framework 2018 • NRB considers the oversight of national payment system as one of its core functions whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems and instruments, assessing them against these objectives and where necessary inducing change. Oversight is a necessary complement for NRB to achieve its public policy objectives for payment and settlement systems. In this regard to facilitate the oversight function, this Payment System Oversight Framework has been work out in the context of Nepalese payment market infrastructure. Proposed Payment and Settlement Act • As per the draft of “Payment and Settlement Act”, the objective is for BFIs and payment related institutions/mechanism to be regulated, supervised, inspected and overseen to develop secure, healthy and efficient payment system. The scope of the Act will cover all institutions operating for payment related activities that will come under its domain. Specific provisions currently include National Payment Board, licensing, regulation, supervision, oversight and dispute settlement.

26. Directive 1: Electronic Card Operations • Only licensed institutions can issue card. Commercial banks categorized as A grade bank can issue debit card, credit card, prepaid card and other electronic cards. B and C class institutions can issue cards other than credit cards. PSP can only issue prepaid card in domestic currency. • SMS alert should be sent to every customer • During the transactions through ATM, POS, POT, Cash dispense Machine etc, if the account is debited but the transaction is unsuccessful then, reconciliation should be done within the same day in case of same issuer and acquirer, within 7 days in case of different issuer and acquirer (both Nepali Institutions), and within 90 days if Issuer and Acquirer are different and are foreign companies. • All the cards should be chip based.

27. Directive 2 : Financial Services through telecommunication Network • PSP can use internet to provide financial services where they should ensure safety and efficiency in transactions processing. • Using Internet Banking, PSP can notify fund status, transfer of funds, deposit of funds, provide account statement, utility payments etc. • PSP can use telecommunication network and SMS platform for providing services.

28. Directive 3 : Safety Measures to be followed while providing electronic payment services • PSP/PSO should manage DR and DR plan for safety and risk management. • PSP/PSO should perform System Audit within 6 months after the end of fiscal year. • Institutions providing card services should manage security related to Card Personalization and Dispatch, PIN Generation and Dispatch, Card and PIN Recovery etc. • Minimum 2FA is required for Electronic Payment Transaction Authentication.

29. Directive 4 : Provision for Settlement Bank • Institutions providing payment services should open settlement account for settlement purpose. • The settlement account should be managed at A class commercial bank . • Agreement of opening settlement account with bank should be submitted to NRB

30. Directive 5 : Transactions Limit for Electronic Payment • The transaction amount limit and provisions for credit card, debit card, prepaid card, mobile banking, internet banking for BFIs has been defined by NRB through the directive. • One can withdraw cash maximum of 25% limit provided in credit card . • Prepaid card can be issued with maximum limit of Rs 1,00,000. • Using prepaid card one can withdraw minimum of Rs 500 to maximum of Rs 25000 for each transactions. However, the monthly limit of withdrawal is Rs 50000. • The transaction limit for Mobile banking is Rs 5,000 per transactions and Rs 15,000 per day. The monthly transactions is limited to Rs 50,000 per month. However, this provision does not apply in case of availability of bill and information. • The maximum transaction limit for Internet banking is Rs 100000. Monthly transaction limit is set to maximum of Rs 5,00,000. # for more details : https://nrb.org.np/psd/directives/Threshold_Limit_20750331.pdf

31. Directive 5 : Transactions Limit for Electronic Payment • Limits for remittance payments: • Payment of cash remitted by Nepalese citizen: Maximum of RS. 1,00,000. through agent/sub agent. • Payment can also be made through Remittance card issued by the remittance company. • KYC no., name, address, amount, contact number shall be verified while making payments. • Wallet operator remittance company can deposit maximum of Rs. 25000. per month on clients wallets. • Domestic Remittance maximum transaction limit per person/transaction/day is Rs. 60,000. (System of Remittance company should be used for such transactions). • Electronic fund transfer limits are not applicable for Agents or sub Agents and corporate clients. • KYC documents should be kept safely at payment providing offices and agent appointee offices for payments. # for more details : https://nrb.org.np/psd/directives/Threshold_Limit_20750331.pdf

32. Directive 6 : Approval Required before Publishing Financial Statement • All the Payment Institutions licensed from NRB should appoint auditor and prepare audit report. • The approval should be taken from NRB before publishing the financial reports/statements. Directive 7 : Licensing provisions for Micro Finance Institutions • Micro Finance intuitions can apply for license of PSP • NRB has defines certain criteria like paid up capital (100 millions ) , DC and DR requirements, no of branches (at least 20)

33. How can we mitigate risks? • Security issues • ISO certified, PCI-DSS(Payment Card Industry-Data Security Standard) standard, messaging standard • Frauds • CCTV surveillance, awareness, legal provisions • Interoperability • Less intermediaries, VPN (Virtual Private Network) • Customer Data Protection • Data security, Encryption , disclosure principle SELF REGULATION IS THE BEST REGULATION

34. Greater customer empowerment • Customer awareness, phishing trap • Follow Principles and guidelines • International practices, SOC (Security Operation Centre) • Strong monitoring and Oversight • Monitoring of suspicious transactions • Oversight of system • Strong Internal control • 4 eye, access control, defined roles and responsibilities

35. Way Ahead (NRB) • Building Payment Infrastructures • Payment System ACT • NPS (RTGS, CSD, NPG) • Interoperability • Licensing • Strong Oversight and regulations • Creating awareness and fostering digitization • Enhancing Less Cash Economy