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Indian Payment and Settlement Systems Responsible Innovation and Regulation

Indian Payment and Settlement Systems Responsible Innovation and Regulation. IDRBT Banking Technology Excellence Awards 2011-12 Hyderabad August 3, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India. 1. Financial Innovation in the Context of the Crisis.

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Indian Payment and Settlement Systems Responsible Innovation and Regulation

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  1. Indian Payment and Settlement SystemsResponsible Innovation and Regulation IDRBT Banking Technology Excellence Awards 2011-12 Hyderabad August 3, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India 1

  2. Financial Innovation in the Context of the Crisis • The crisis has triggered a number of questions about financial innovation • The big lesson is that both innovators and regulators will have to more ‘responsible’

  3. Payment and Settlement Systems Why have I chose to speak about responsible innovation and regulation in payment and settlement systems?

  4. RBI as a Responsible Regulator RBI values financial innovations that • improve the efficiency of financial intermediation • do not erode financial stability • do not compromise customer interest • further financial inclusion

  5. RBI as a Responsible Regulator • PSS Act, 2007, designates Reserve Bank as the statutory regulator of the payment and settlement systems • Even as the regulator, RBI continues to take the lead in facilitating innovation

  6. Topics I will Cover • RBI’s role in modernizing payment systems • RBI’s approach to responsible regulation • RBI’s role as facilitator of innovation

  7. RBIs Role in Modernising Payment Systems Paper Based Clearing • Introduction of MICR technology in the mid 80s • Introduction of Speed Clearing for outstation cheques in 2008 • Cheque Truncation System (CTS) in Delhi in 2008 • Grid-based CTS in Chennai in 2011

  8. RBIs Role in Modernising Payment Systems Electronic Payment Systems Retail electronic payment systems: • ECS for bulk retail payment transactions • EFT for one-to-one payments Today • ECS has transformed into NECS • EFT has transformed into NEFT

  9. RBIs Role in Modernising Payment Systems Real Time Gross Settlement (RTGS) • RTGS was introduced in 2004 as a large value payment system • Huge expansion in turnover since then, both in value and volume terms

  10. RBI’s Approach to Responsible Regulation Think Global, Act Local

  11. RBI’s Approach to Responsible Regulation Leveraging on Non-Banks • Non-banks allowed to enter the retail payment space • Now, non-bank also allowed to set up "White Label ATMs"

  12. RBI’s Approach to Responsible Regulation Promoting Safety and Security of Payment Instruments • Security of online card transactions • Implementing CTS2010 standards • Immobilizing cash retraction facility in ATMs

  13. RBI’s Approach to Responsible Regulation Customer Centric Regulation • Disputed amounts in failed ATM transactions should be credited within seven days • Introduction of differential MDR to encourage debit card transactions • Helping migrant population - domestic person-to-person fund transfers

  14. RBI as a Facilitator of Innovation in Payment Systems Introduction of New Payment Products • Remarkable growth in new payment products and access channels • Regulatory initiatives in the area of pre-paid instruments • Operating guidelines on mobile banking

  15. RBI as a Facilitator of Innovation in Payment Systems Aadhaar Initiative in Payment Systems • Transfer of benefits by Government to beneficiaries through Aadhar enabled electronic payment systems. • This will reduce cost, time and leakages.

  16. RBI as a Facilitator of Innovation in Payment Systems Mobile Financial Services • Around the world, two models: • bank-led model • non-bank led model • India has opted for the bank-led model • Why?

  17. RBI as a Facilitator of Innovation in Payment Systems Focus on Central Clearing • Express preference for central clearing arrangement for large value interbank transactions wherever feasible • CCIL set up in 2001 to act as a central counterparty (CCP)

  18. RBI as a Facilitator of Innovation in Payment Systems Institution Building RBI promoted • The Clearing Corporation of India (CCIL) • Institute for Development and Research in Banking Technology (IDRBT) • National Payments Corporation of India (NPCI)

  19. Taking Stock Where do we stand? • Large value payment systems have shifted to electronic mode. • Retail payment systems are still largely paper centric. • Why this lag?

  20. Why are Retail Payment Systems Still Paper Centric? • Slow pace of infrastructure building • Limited product innovation • Lack of initiative by banks

  21. Conclusion • ‘Adopt’ world’s best practices • ‘Adapt’ them to the Indian environment • Vision Document (2012-15) by RBI

  22. Conclusion Responsible Innovation and Regulation Innovators - ‘Push the envelope’ Regulators - Make sure the envelope is sturdy and strong

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