Project on Assessment of Key Issues Related to Monetary Policy
[Source: RBI Report on Currency & Finance 2003-04]

Module: 7 Monetary Transmission Mechanism

Financial Stability: The Indian Approach
Payment and Settlement Systems & Electronic Money

A wide range of improvements in the payment and settlement systems has been undertaken over the past several years. Salient among these include Electronic Clearing Service (ECS - Debit and Credit), Electronic Funds Transfer (EFT), the Special EFT and card-based systems (credit, debit, ATM and smart cards). An important feature of technological development in recent years has been the growth of large value payment systems (LVPS) (comprising inter-bank clearing, high-value clearing, negotiated dealing system and forex clearing). More recently, the Real Time Gross Settlement (RTGS) has been operationalised since March 2004. The RTGS provides for an electronic based settlement of inter-bank and customer-based transactions with intra-day collateralised liquidity support from the Reserve Bank to the participants in the system. More than 75 per cent of the value of inter-bank transactions, which were earlier settled through the Deferred Net Settlement (DNS) system based inter-bank clearing, is since being settled under the RTGS. The status of conformity with the Core Principles for Systemically Important Payment Systems (CPSS) reveal a high degree of compliance (RBI, 2003). The ongoing initiatives of the Reserve Bank are intended to provide a safe, secure, efficient and integrated payment and settlement system in the country and thereby contribute to financial stability.

In India, where cash transactions are high in number, the use of e-money can be beneficial in terms of reduced miscellaneous costs, viz., cost of printing and minting of smaller denomination notes and coins and transportation and storage costs. However, certain additional costs for setting up of network infrastructure to operate nationwide are also associated with it. The Reserve Bank has been partnering a multi-application smart card project -under the aegis of the Ministry of Communications and Information Technology, Government of India to run a pilot project on the use of multi-application smart cards in the country. Various issues relating to technology, security, regulatory and supervisory concerns and legal implications have been examined to make the use of smart cards a viable proposition after the conclusion of the pilot project. The project is aimed at combining applications relating to banking, insurance, postal services, identification, etc in a single card.

To examine the likely challenges that may emanate from the use of e-money, the Reserve Bank set up a Working Group on Electronic Money in 2002 (RBI, 2002). The Group examined various dimensions and implications of e-money for payments system, its potential use and suggested appropriate policies from a central bank's point of view. The Working Group recommended the introduction of a multi-purpose e-money by banks only against payment of full value of central bank money or against credit only by the banks. In order to preserve unit of account function of money and control money supply, the issuing authority of e-money must ensure its obligation to offer redemption of E-money liabilities net of service charges, if so required. Non-banks should not be permitted to issue multi-purpose money. Since there is scope for issuers of e-money (on credit) to assume a leveraged position, there is a need for continuous monitoring of the behaviour of issuing authorities for balanced growth of their assets and liabilities arising out of issuance of e-money.

Three banks have been given permission by the Reserve Bank to issue prepaid multi-purpose cards. A few banks allow withdrawal of cash from ATMs using the prepaid card. The fee structure has been left to the participants. In order to facilitate faster and more efficient service to customers, some banks in India have started providing services via the internet banks and are integrating the internet banking services being offered into the RBI Electronic Funds Transfer (RBI-EFT) system, facilitating transfers of funds across accounts with other banks (BIS, 2004a).

To conclude, the regulatory and supervisory setup in India has moved from micro management to prudential regulation. The Reserve Bank's approach to the institution of prudential norms has been one of gradual convergence with international standards and best practices with suitable country specific adaptations. One of the successes of the Indian financial sector reforms has been the maintenance of financial stability and no reversal of direction in the financial sector reform process over the last 15 years, in addition to the avoidance of any major financial crisis during the reform period. In recent years, emphasis has been laid on issues relating to governance and transparency. Notwithstanding a few areas of concern, the gamut of policies has been successful in imparting stability to the Indian financial sector, especially the systemically important banking sector. The Indian financial system on the whole is in sound health.