The Reserve Bank of India (RBI) has recently made headlines as it now permits non-bank Payment System Providers (PSPs) to become direct members of the Centralised Payment Systems (CPS), which includes the Real-Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT).
Phased Inclusion of Non-Bank PSPs
The initiation of this policy will take place in phases. During the first phase, Prepaid Payment Instruments (PPIs), card networks, and White Label ATM (WLA) operators will be granted access. To clarify, WLAs refer to ATMs that are established, owned, and managed by non-banking entities. Presently, only banks and a few non-banks such as NABARD (National Bank for Agriculture and Rural Development) and Exim Bank (Export-Import Bank of India) hold access to the RBI-owned CPS – NEFT and RTGS.
Allocation of Separate IFSC to Non-Banks
This involvement of non-banks entails the allocation of a distinct Indian Financial System Code (IFSC), as well as their maintaining a settlement account with the RBI. This 11-digit character IFSC aids in distinguishing individual bank branches involved in online money transfer options like RTGS and NEFT. Non-banks will also have to open a current account within RBI’s central banking system, e-Kuber, contributing to enhanced customer-centric services available round-the-clock.
Membership of INFINET and SFMS Use
Non-banks will have to be members of the Indian Financial Network (INFINET) – an exclusive Closed User Group (CUG) Network comprising the RBI, Member Banks, and Financial Institutions. They will also have to utilize the Structured Financial Messaging System (SFMS) for communication with the CPS. SFMS primarily forms the backbone of India’s inter-bank financial messaging and CPS.
Significance of Direct Access to CPS for Non-Banks
Direct access for non-banks to CPS has several implications that could reshape the payments ecosystem. It can reduce overall risk, cut down payments costs, decrease dependence on banks, and minimize the time needed for concluding payment transactions. The probability of fund transfer failure or delays can be mitigated when non-bank entities initiate and process transactions directly. This alteration can boost efficiency, lead to innovative practices, improve data security standards, and foster superior risk management.
Centralised & Decentralised Payment Systems in India
The centralised payment systems in India include RTGS and NEFT, both owned and operated by the Reserve Bank. RTGS caters specifically to high-value transactions and facilitates real-time fund transfers to a beneficiary’s account. On the other hand, NEFT deals with electronic fund transfers processed in batches for funds up to Rs. 2 lakh. The decentralised payment systems will comprise clearing houses managed by the RBI and other banks, along with any other system deemed suitable by the RBI.
The Role of e-Kuber
e-Kuber, the Core Banking Solution of RBI introduced in 2012, has made the concept of a “one-stop” shop for financial services a tangible reality. With CBS, customers can access their accounts from any branch, regardless of the location where they initially opened their accounts. All branches of commercial banks, including the Regional Rural Banks (RRBs), are integrated into the core-banking network. The e-Kuber system can be accessed either through INFINET or the Internet.