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Payment Systems in Banks

Inaugural Address by Shri M V Nair, Chairman & Managing Director, Union Bank of India at Banknet India's Third Conference on Payment Systems in Banks on 10th January 2007 at Mumbai

• I am honoured by this invitation to speak here at the Annual Conference on payment systems in Banks. I thank Banknet India for giving me this opportunity. I am delighted to have the company of two eminent personalities, who are in the forefront of implementation of payment systems in the country. Since they will be dealing with the subject in detail in their Special Address and Key Note Address , respectively, I would like to flag off a few issues from the perspective of a practising banker.

• For me, nostalgic memories of one incident that took place in the year 1994 is very significant for the theme of the conference ie ‘Payment Systems in Banks’. Dr. Rangarajan, then Governor RBI visited the “ Fast Collection Centre” of my previous Bank, where I had an opportunity to explain the process put in place in collecting local cheques/ drafts at 100 centres, sending the information various channels such as telex, telegram and fax , processing the information at FCC and then crediting the amounts to Corporate customers.

Dr. Rangarajan appreciated the innovative collection system put in place but flagged off one key issue. That is : how can we offer a similar product to the common man?

During the last decade, many significant achievements in the area of Payment Systems in India have been achieved. Thanks to the initiative by RBI and the great strides India took in the ICT space. But the challenge today remain or less the same: How can we include every Indian in this movement?

• MICR technology transformed cheque processing systems by enabling the introduction of automated clearing houses. The system is well stabilized in India with the overall reject rates of around 1% while international reject rates are around 2%. Cheque clearing accounts for ovr 95% of the retail payment and more than 70% of cheque clearing is based on MICR technology. ECS facilitated process of huge volumes of small amount instruments. Introduction of RTGS in 2004 a systemically important payment system has spread across 26,000 branches and I understand accounts for daily settle of Rs 60,000 crore.

While RTGS real time settlement system is meant for large volume payments, NEFT is becoming popular for small payments. Cheque truncation and SFMS enable trade payment systems is expected to add further value to the payment system transactions.

I would like to narrate an incident involving Lata Mangeshkar . At the end of one of her performances, a member of the audience came up to her and said “ What a gift God has given you! I would give my life to sing like that” She replied “ It is a God given gift it is true. But I have devoted my entire life to developing the gift. I have given my life to be able to sing like this.” When I think of the efforts of RBI and others in putting in place a settlement system, I am reminded of this story. They have truly given their lives to make this a reality.


Payment systems improve financial transparency, by bringing cash into the banking system, which would otherwise have been kept out of the system. Banks can then effectively deploy additional cash flow, thus stimulating business growth and consumption.

In fact, according to a study by the McKinsey, India ranks No.4 in the world, in terms of currency in circulation. India’s currency in circulation is 11.8% of GDP against the OECD average of 6.3%. This could be attributed to the fact that more than half of India’s economic output is produced by small-scale agriculture and some 44 million household businesses. Mckinsey estimates that improving the payment systems in India, by fully moving to electronic systems, could result in an annual savings of close to $6.3 billion.

We need to ensure that payment systems are benchmarked with the best in the world, in terms of the structure, processes and operations.

While substantial strides have been made in the Systemically Important Payment Systems (SIPS) by the establishment of the Clearing Corporation of India and the RTGS system, the Retail Payment Systems (RPS) are still dominated by paper-based cheque clearing processes.


The increased use of payment systems in the retail segment can be achieved by widening their reach and developing practical commercial applications that would directly benefit the users. To widen the reach and awareness, integration of the semi-urban and rural areas into the electronic clearing system is required. Participating institutions like banks have a significant role to play in achieving the objectives.


I would like to highlight five issues that would need to be tackled if the efforts put in with regard to Payment and Settlement Systems are to truly impact the economy.

1. There has been till now, an emphasis on online systems. While the efforts in this direction are laudable, the benefits are largely restricted to the metro and urban areas. It is high time that we start examining systems that extend the benefit of the financial system even to remote areas lacking in infrastructure. Smart cards, hand held devices and other technology could ensure that these benefits reach the hitherto unreached at reasonable costs.

2. It would be interesting and challenging to envisage leveraging technology to ensure that payment and settlement systems extend the benefits to all the participants in the supply chain. Look at the extent to which the Amul Co-operative movement has truly empowered the common man by extending the benefits of the supply chain to the last link in the chain. Similarly if the benefits and advantages of a payment system can reach out to the last individual the impact of the revolution would be deep and lasting.

Information and communication technology can bring about radical changes in the rural area. Union Bank of India has used technology in the rural areas to empower the local population. It has set up Village Knowledge Centres, where technology in the form of an internet connection is used to enable the local population to access information on crops, weather conditions, prices of fertilizers and other inputs as well as prevailing market rates for produce. The last mentioned is of particular interest since the farmer is enabled to reap the benefits of his efforts. Corporates are talking of connecting farm to folk by establishing retail chains and collection centers for rural produce. If payment systems could integrate with this endeavour, for corporates it means integrating as much of the financial supply chain with the physical supply chain as possible. For Banks it means adding value to the clients.

3. There is an urgent need to ramp up technology based delivery channels particularly in the rural areas. The density of delivery channels in relation to the population is quite low in our country. The challenge would be to identify a delivery channel that is not only cost effective but user friendly given the literacy levels of potential users in the rural areas and migrant labour. The introduction of low cost biometric ATMs would go a long way to bridge this gap. Ensuring that the benefits of technology reaches the unreached is another challenge. It is essential that we think in terms of introduction of a Biometric National Identity Card which will be utilized for all the needs of the individual and not just the financial needs. I visualize a situation in which loans can be availed of by rural folk through the use of Biometric ATMs.

4. If the technology revolution is to fully impact the rural areas, concentration on providing soft infrastructure is a must. The potential of mobile phone usage should be maximized. It is estimated that today there are approximately 170 milllion land lines in this country. As against that there are 130 million users of mobile phones. Mobile phone usage is another factor that transcends social and economic barriers. This is another application of technology that could be examined to expand the scope and reach of our payment and settlement systems.

5. Credit / Debit cards are being widely used in the country as they provide a convenient form of making payments for goods and services without the use of cheques and cash. Isuue of credit cards is exhibiting a phenomenal growth of above 50% every year. Many banks are issuing the cards with co-brandings such as Master/ Visa for wider acceptability. Since processing of card transactions through these agencies take place at international locations, there is a risk of compromising with the personal information of individuals. Further, the settlement through the card associations as interchange cost has proved to be on the higher side. Apart from this, banks have to compensate for volatility in interchange schedules. Therefore the Banks in India have scope to establish a national payment switch using the IDRBT’s INFINET network and can explore the possibility of floating a new card branding like Visa/ Master for card operations – maybe an INDIACARD. This will enable us to reduce the costs and also minimize the value of inter-bank liabilities arising out of the card transactions, as the settlements will take place through central bank, just like in RTGS.


Payment systems are the backbone of the financial infrastructure of the nation, enhance globalization and act as tools of economic empowerment by financial inclusion. There is a need to create payment systems that are efficient, reliable, affordable and of global standards.

Proliferation of modern payment systems have far reaching economic and social implications for India where significant population have so far been excluded from the benefits of the financial system. Efficient payment systems help in financial inclusion. Implementation of such systems increase transparency, lower transaction costs, improve operational efficiency of trade and commerce and provide support to globalization of economy.

I record my appreciation for Banknet India who is organizing such highly focused banking conferences and workshops. I am sure, this initiative on the part of Banknet India will provide a platform for knowledge sharing and networking for the professionals from banking industry.

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