Part II. Annual Statement on Developmental and
Regulatory Policies for the Year 2007-08
V. Institutional Developments
Payment and Settlement Systems
191.The Reserve Bank continues to take initiatives to strengthen the framework for a secured and integrated real time payment and settlement systems in line with technological developments. The emphasis has been on utilising the full potential of information technology (IT) to improve operational efficiency and maintain public confidence. In 2007-08, there will be continued focus on prompt and timely customer service, financial inclusion and further improvements of electronic payment products.
(a)Technology and Convergence of Financial Business
192.In the recent period, there is an increasing trend towards convergence of various financial business segments with significant parts of the convergence chain resting with the banking sector. With the rapid developments in technology and changing customer preferences, delivery channels in the banking sector have concomitantly undergone a metamorphosis in order to remain competitive. Internet-based delivery services and mobile telephony have emerged as potential channels for prompt customer services necessitating convergence between banking and mobile communication services. In this context, while technology would facilitate the process of convergence, there is an imperative need to ensure that separate identities of each of the business processes are retained for rendering better customer service. Accordingly, banks are urged to evaluate various options available in this regard and implement them as appropriate, keeping in view their business requirements.
(b)Use of Public Networks for Financial Transactions
193.The use of public networks for transmission of financial information is increasingly gaining acceptance in the recent period. Processing of financial messages is, however, associated with risks necessitating putting in place all requisite safeguards, viz., confidentiality, authenticity and integrity of messages flowing through such networks. In this context, it is proposed that the Indian Financial Network (INFINET) system should be operationalised as a Multi-Protocol Label Switching (MPLS) network by the Institute for Development and Research in Banking Technology (IDRBT).
(c)Process of Outsourcing
194.With increased dependence on outsourcing, especially in areas relating to information technology, managing the outsourced entities by banks assumes greater importance. Banks are urged to ensure adequate safeguards of the processes of outsourcing and appropriately address confidentiality of the information and customer privacy with a view to rendering seamless customer service.
(d)Disaster Recovery and Business Continuity Plans
195.With increasing migration to centralised systems and usage of information technology (IT), there is a need for conducting regular and periodic tests of disaster recovery (DR) and business continuity plans (BCP) of banks to ensure continuous service. The Reserve Bank has been supporting banks in their individual testing of DR. The Reserve Bank has initiated DR testing, which has migrated to a single comprehensive performance testing for the whole system with all members participating on a synchronous basis with a view to ensuring a holistic approach towards DR testing and effective BCP. The first such test cycle was performed in December 2006 and similar tests would be conducted at regular intervals in future.
(e)Centralised Public Accounts Department System
196.As indicated in the Annual Policy Statement of April 2006, the Centralised Public Accounts Department (CPAD) System was developed, tested and implemented at the Chennai Office of the Reserve Bank. The system, which would improve management of accounting transactions processed by the Reserve Bank on behalf of the Central and State Governments, would be extended to cover all its offices during the year 2007-08.
(f)Payment Systems: Developments
197.An Internal Group constituted by the Reserve Bank examined various aspects of payment systems, particularly relating to switching over to electronic modes. Based on the recommendations of the group, the minimum value for customer based Real Time Gross Settlement (RTGS) transactions was enhanced to Rs. 1 lakh from January 1, 2007. Other measures which are proposed to be implemented during 2007-08 include: mandating all inter-bank transactions for settlement only through the RTGS mode; review of the norms relating to membership of the INFINET to facilitate larger participation in electronic payment based message transfers; effecting the settlements arrived at by the Clearing Corporation of India Ltd. (CCIL) and the major stock exchanges National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) as RTGS batch settlements; implementation of the National Settlement System (NSS) for processing the clearing settlements of the major clearing houses as RTGS batch settlement; implementation of the National Electronic Funds Transfer (NEFT) for greater coverage and reach for the common man; gradual upward revision of the per-transaction limit for customer based transactions to a level of Rs.10 crore; migration of Government-based payment and receipt transactions to electronic means.
(g)Message Based Information Transmission
198.The need for a secure and safe message transmission process is critical in view of extensive use of electronic means for communication amongst banks and between banks and their customers. The use of the Structured Financial Messaging System (SFMS) of the IDRBT holds promise for ensuring Straight-Through Processing (STP) of financial messages in a secure manner. Banks are urged to take steps to ensure the safety of message-based information transmission.
(h)Electronic Payment Products: Status and Proposed Action
199.Coverage of the RTGS system has increased significantly. By April 13, 2007 RTGS connectivity was available in more than 28,776 bank branches and the Reserve Bank is committed to improving the quality of services through the RTGS.
200.The launch of the pilot project for Cheque Truncation System, which aims at enhancing efficiency in the retail cheque clearing sector, is expected to be implemented in December 2007.
201.As indicated in the Mid-Term Review of October 2006, the Multilateral Net Settlement Batch (MNSB) mode to facilitate settlement of various CCIL-operated clearings (inter-bank government securities, inter-bank forex, CBLO and National Financial Switch) was operationalised through the RTGS in Mumbai. A Committee (Chairman: Dr.R. B. Barman) has been constituted to examine the proposal of introducing the NSS which aims at settling clearing positions of various clearing houses centrally.
202.The Reserve Bank had waived processing fees on banks for electronic clearing service (ECS) and electronic fund transfer (EFT) transactions as well as for the RTGS and the NEFT transactions up to March 31, 2007 with a view to promoting electronic transactions. The Reserve Bank would continue with the waiver of processing fees to banks in order to further promote electronic transactions system, till the retail operations are taken over by the National Payments Corporation of India (NPCI). Accordingly, the Reserve Bank has waived processing fees for transactions relating to RTGS, ECS, EFT and NEFT up to March 31, 2008.
(i)Introduction of Eligibility Criteria for Access to Payment Systems
203.At present, all the banks are direct members of the clearing houses for cheque clearing system. In view of the rapidly evolving payment systems and emerging systemic risks due to probable failure of financially weak members of the clearing houses, it is imperative to put in place appropriate eligibility criteria. It is, therefore, proposed:
•to prepare comprehensive draft guidelines on minimum eligibility criteria to become direct members of the clearing houses and to place these guidelines on the Reserve Bank’s website for comments/feedback by May 31, 2007.
204.The eligibility criteria will also cover membership in RTGS, NEFT, ECS and INFINET connectivity.
(j)Annual Review of Payment and Settlement Systems
205.The objective of an efficient payment and settlement system is to ensure timely, cheap and dependable service to customers. In the context of progressive integration of financial markets, both domestically and cross-border, and the fast-paced changes in technology and institutional infrastructure, there is a need for annual review of payment and settlement systems. The parameters of the reviews would be based on timeliness of customer service, cost of operation, service charges and overall impact on the financial system. To begin with, it is proposed that the first such review would be made for the year ended March 31, 2007. The outcome of the review would be placed in the public domain by August 2007.
(k)Migration from Paper-Based Payment Systems to ElectronicPayment Systems: Time-Bound Action Plans
206.The Reserve Bank has been continuously taking initiatives to migrate from paper-based payment to electronic payment systems by creating appropriate technological infrastructure, while the ongoing endeavour has been to adopt international best practices. In this context, an Internal Group was constituted to examine various issues connected with the use of electronic payment systems. The Group’s report has been placed on the Reserve Bank’s website inviting comments/suggestions. On the basis of the feedback, a time-bound action plan would be drawn up by June 1, 2007.
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