November 23, 2016 2:02:01 am
In the early 80s, when Manmohan Singh was Governor, the Reserve Bank of India recognised that the load on the banking system, which led to inefficiencies and huge delays in the transfer of funds across the country for both industry and millions of customers, would lead to multiple problems. Cheques, demand drafts or other paper-based forms of transactions were physically processed at banks, and payments for outstation cheques took a few weeks to be settled. In 1982, therefore, the RBI started to look at introducing Magnetic Ink Character Recognition or MICR technology, which allowed a machine to swiftly read and process cheques in a particular format, such as nine digits.
The easing of the process of sorting millions of cheques using computers marked the first move towards an electronic payments system in India. It started with the four metros of Bombay, Madras, Calcutta and Delhi at a time when there was major resistance to automation by banks unions led by leaders from the Left parties. As the RBI and the government pushed for computerisation of banking operations, there was protests in many parts of the country. Chakravarthi Rangarajan, then a Deputy Governor, and the man who had headed a committee which recommended in the mid-80s that Automated Teller Machines or ATMs should be introduced in India, was gheraoed in Calcutta.
But policymakers had realised by then that it was imperative to move towards electronic transfers of funds — inter-bank transfers first — and services such as ATMs. Alongside, as computerisation gained pace, the operations of clearing houses started to get linked.
The next step was to build a communications network for banks, which would facilitate the transfer of funds between banks — for their own accounts, those of customers, and for government transactions. This was done through BANKNET, which was owned by the RBI and state-owned banks, and the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system of transmitting and receiving international financial messages.
The early push for credit cards came around this time. It was backed by an RBI committee headed by Rangarajan, which wanted a single All Bank credit card which would be accepted widely by merchant establishments. Steps such as the electronic clearing system and promotion of a card culture would help reduce the load on cheque transactions for banks and lower the demand for cash, it was argued.
The push for ATMs came from private banks in the mid-90s who invested more in technology to introduce new products and reach customers in the absence of a branch network. State-owned banks followed as RBI kicked off electronic fund transfers in the mid-90s — initially for institutions at busy hours of the day, and for retail customers at the end of the day. The securities scam of 1992 too forced changes in the system — the RBI moved from a manual system of settlement of securities at its public debt offices to a delivery versus payment system, or DVP. Given the rapid technological changes banking was seeing in the West, RBI moved to promote an Institute for Development and Research in Banking Technology (IDRBT) in Hyderabad — and to create a network using VSATs (Very Small Aperture Terminal) to electronically link banks, a first at a time when connectivity was a major issue. The IDRBT was also in charge of the national financial switch; the progression from there on was to Real Time Gross Settlement or RTGS for SWIFT high-value transactions.
During the late 90s and the early part of 2000, when Bimal Jalan was Governor and Y V Reddy was Deputy Governor, the central bank sent out its officers to the UK and some other countries to study their payment systems and the law governing these systems.
In 2004, banks were forced to waive ATM charges. When banks protested, Governor Reddy told them that since the RBI had granted them virtual monopoly in the payment system, they had an obligation to provide such a service for free. The move pushed ATM use — and the logic was that it would reduce banks’ workloads. To Reddy, this was one of his most satisfying professional moves. He saw the waiving of ATM charges as democratisation of banking — master and servant standing in the same ATM queue, unlike in the branches where the wealthier customer got the better service.
This phase also saw the introduction of electronic clearing in both the money and forex markets, even as legislation for a payment system was approved by Parliament. After the law came into force, Infosys founder N R Narayana Murthy, who headed the RBI board’s committee on payments and settlements, said at one of its first meetings that India should move towards global best practices and standards on payments and settlements. By then, the RBI had come up with a two-step authentication process for payments — electronic and on mobile — a global first, which was to be adopted in other parts of the world.
As the economy grew, electronic transactions surged — and the RBI and banks promoted the National Payments Corporation of India (NPCI) in 2008 as an umbrella organisation for retail payments. From 2 million transactions in 2009, the NPCI now handles 20 million transactions daily — a number that is bound to rise with the launch of the Unified Payments Interface (UPI), a platform for transferring and receiving funds using an App with a virtual identity, and the proposed Bharat Bill Payments System (BBPS), an integrated system for a variety of bill payments. In 2010, the Immediate Payment Service or IMPS was launched, leading to increasingly larger numbers of people transferring funds electronically.
The broader policy aim of moving towards a less-cash economy may have been achieved with electronic payments having outstripped paper-based transactions such as cheques over the last couple of years, and through the working of a world-class payments system. RBI’s Payments and Settlements System Vision 2018 now aims to ensure that a variety of electronic payments are cost-effective for both users and service providers, and to decrease paper-based clearing instruments. That’s well under way.
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