In less than 10 years, India has made enormous strides in
creating the foundation of a modern payments system. Spearheaded by
the Reserve Bank of India, the country has now embarked on a
development process to create an electronics payment system
rivaling the most advanced anywhere in the world.
This year, India looked back at
completion of Vision 2005-08, the second ambitious payment systems
development programme spearheaded by the Reserve Bank of India
(RBI). However, India’s payments systems remain a work in progress
that the RBI is tackling with a strategy spelt out in its new
agenda, Vision 2009-12.
Central to the previous one, Vision 2005-08,
was recognition by RBI that its primary objective was establishing
a secure and efficient payment system for India, matching
international standards and best practices. In a report on Vision
2005-08, RBI declared its objectives were by and large
Among the most significant developments under
Vision 2005-08 was establishment of a company to operate retail
payments, National Payments Corporation of India (NPCI). The
objective was to create a uniform, national retail payment system
that would consolidate disparate local systems impeding delivery of
efficient customer and clearing services.
Indicative of the consolidation challenge, RBI
reports that India has 1,138 clearing houses, 16 of which are
managed by RBI and about 1,000 by India’s largest commercial bank,
State Bank of India (SBI). Public sector banks manage the
The product of a lengthy planning process by
the RBI and Indian banks under the auspices of the Indian Bankers’
Association, work on creating NPCI began in 2005 with its
incorporation coming in December 2008.Its Certificate of
Commencement of Business was issued by RBI in April 2009.
NPCI, a non-profit company, has nine core
promoter banks: SBI, Punjab National Bank, Canara Bank, Bank of
Baroda, Union Bank, ICICI Bank, HDFC Bank, Citibank and HSBC.
Another important development under Vision
2005-08 was the launch of the National Electronic Funds Transfer
(NEFT) system. This came in 2005 and represents a significant
enhancement of the Electronic Funds Transfer (EFT) system
introduced under the RBI’s Vision 2001-03 initiative and available
only in certain major centres. NEFT services were available at a
total of 52,427 branches of the 89 participating banks at the end
According to RBI, at the end of March 2009
there were 64,608 bank branches in India of which 20,058 branches
were in rural areas. A total of 32.16 million NEFT/EFT transactions
were reported by the RBI in the in the fiscal year ended 31 March
2009, up from 13.32 million in 2007-08 and 3.07 million in
The value of NEFT/ EFT transactions increased
from INR612.8 billion ($13 billion) in 2005-06 to INR1.4 trillion
in 2007-08 and INR2.52 trillion in 2008-09.
In another significant move to provide
national coverage to a popular local payment method, direct debit
and credit transactions, RBI launched the National Electronic
Clearing Service (NECS) in September 2008. Access to NECS is via a
centralised location in Mumbai. NECS is currently running in
parallel to local services available in 76 major centres.
During the course of the RBI’s Vision 2005-08
initiative, the reach of its real-time, gross settlements (RTGS)
system introduced in March 2004 was also considerably expanded. RBI
reported that by the end of 2008, the RTGS service was available in
more than 52,000 branches.
Usage of RTGS has also increased
substantially, rising from 1.77 million transactions in 2005-06 to
13.37 million in 2008-09, while the value of transactions during
this period increased from INR115.4 trillion to INR368.3
Measured in terms of the reduction
in paper-based transactions, RBI has good reason to be satisfied
with progress under its Vision 2005-08 initiative.
According to RBI, the value of paper-based
transactions slumped from 70 percent of total non-cash payments in
2003-04 to only 18 percent in 2008-09. Much of this decline is
attributable to a migration from cheques used for high-value
payments to the RTGS system.
In volume terms, paper-based payments, though
in decline, continue to dominate, accounting for 67 percent of
non-cash payments in 2008-09 compared with 88 percent in 2003/04.
The significance of paper-based transactions primarily reflects the
popularity of cheques in India. In the low-value transaction sector
alone, RBI reported that 1.374 billion cheques were processed in
But despite this progress the RBI concedes,
not unsurprisingly, that India remains overwhelmingly a cash-based
economy. Indicatively, RBI reported the value of non-cash payments
equaled a mere 12.9 percent of India’s GDP in 2008-09. Contrast
this with countries such as the US, where in 2007 non-cash payments
totalled more than five time the GDP.
Promoting a transition from cash to electronic
payments is a focus of the RBI’s Vision 2009-12 initiative, in
which the NPCI is earmarked to play a central role.
NPCI’s role is that of a hub in all electronic
retail payment systems, which will also facilitate a variety of
products, delivery channels, service providers and technology
solutions. To fulfil its role, the first priority is the creation
of a state-of-the-art national financial transaction switch that
will provide a comprehensive range of switching
As a first step towards achieving its
objective, NPCI recently issued a document calling for an
expression of interest from technology solution providers in the
area of switching of electronic transactions. From this NPCI
intends creating a shortlist of the solution providers eligible to
participate in a detailed bidding process.
In the document, NPCI specified: “The proposed
switch aims to provide switching of all retail electronic payment
transactions from all possible channels like ATM, POS, internet,
mobile payments, m-commerce, e-commerce, real-time electronic funds
Also, NPCI has called for a switch solution
that would preferably be platform independent and provide for
real-time, continuous or near real-time clearing and
This call is in accordance with RBI’s Vision
2009-12 which envisages working with NPCI to enhance the NEFT
system into one capable of providing an always-available funds
transfer service akin to the UK’s Faster Payments Service (FPS).
RBI has dubbed this contemplated service, India MoneyLine.
The working processes of UK payments processor
Vocalink, a central player in the FPS, is viewed by NPCI as a key
benchmark to emulate. For its two other key benchmarks, NPCI has
selected the national payments switching systems of South Africa
(Bankserv) and Korea (Korea Financial Telecommunications and
Clearings Institute) in terms of operational efficiency, reach
across the country and range of products and services.
National card scheme
Signaling a potential wide reaching
change in India’s payment card market, NPCI also called for the
switch to have merchant acquiring capabilities. Vision 2009-12
emphasises the concept of a domestic payment card, to be called
IndiaPay Card, and a POS switch network for issuance and acceptance
of payment cards would be assessed.
RBI stressed the need for such a domestic card
scheme stemmed from two major considerations: the high cost borne
by the Indian banks for affiliation with international card
associations in the absence of a domestic price setter; and the
need for routing even domestic transactions, which account for more
than 90 percent of the total, through a switch located outside the
Notably, NPCI said in a recent statement that
China UnionPay (CUP), China’s only card organisation, has “shown
interest in building international switching arrangement to enable
the utility of CUP cards in India”.
Domestic card ‘not a
NPCI continued: “A domestic card
such as IndiaPay Card is not a distant dream if all banks work in a
co-operative framework. NPCI can reach the scale of China UnionPay
by excelling in service quality and by placing the next generation
products and services.”
There are some 1.8 billion CUP cards in issue
with their acceptance now extending to 26 countries.
Loss of even a portion of the Indian market
would be a significant setback for the international card
associations which are enjoying rapid growth in the Indian
Growth in 2008-09 was led by a surge in debit
card use, with RBI reporting the number of debit cards in issue at
the end of the period stood at 137.4 million, up 34.2 percent
compared with the end of 2007-08.
Debit card transactions increased at an even
faster pace, rising 44.6 percent compared with 2007/08 to 127.7
million while the total value of transactions grew 48.1 percent to
Notably, the increase in both the number and
value of debit card transactions was significantly higher than
during the period 2003-04 to 2007-08 when increases of 23.6 percent
and 26.6 percent, respectively, were recorded.
In terms of value, credit cards remain the
largest card sector with transactions in 2008-09 totalling
INR653.56 billion. This was up a healthy12.7 percent compared with
2007-08 though well below the CAGR of 34.6 percent recorded between
2003-04 and 2007-08.
Also facing a shake-up is ATM
transaction switching. At present about 35,000 ATMs (80 percent of
India’s ATM network) are connected by the National Financial Switch
(NFS) operated by the Institute for Development & Research in
Banking Technology (IDRBT).
The IDRBT, a banking technology development
and research body established by RBI, launched the NFS in 2004.
Commenting on the NFS, NPCI noted RBI and
IDRBT did a “splendid task” of proving that ATM switching can be
done domestically at one tenth of the fees levied in 2004 by
international switching companies. However, NPCI added that NFS
failed to reach the sophistication in technology and could not
demonstrate as much efficiency as the international switches. This
is something NPCI will clearly be aiming to achieve with its
national switch. Indications are that, as a first step, NPCI will
take responsibility for the NFS.
Meanwhile India’s ATM network continues to
expand apace, having grown from 34,789 ATMs at the end of 2007-08
to 43,651 at the end of 2008-09. Despite this growth, penetration
remains low at only one ATM per 22,000 inhabitants.
Given its vast population, most of which
remains underserved by financial services even as basic as ATMs,
there is little wonder that India is turning to mobile technology
to provide a vital solution. In RBI’s Vision 2009-12 and NPCI’s
proposed national switch, mobile phone-based payments feature
In its Vision 2009-12 summary, RBI noted:
“Mobile phones are expected to emerge as an important channel for
transmission of payment instructions.”
While all inter-bank mobile transfers are
payment instructions for settling funds through existing payment
systems, RBI envisages building a national infrastructure for
facilitating real time mobile payments.
Overall, RBI’s Vision 2009-12 looks set to
make India’s electronic payments markets one of the world’s most