Table of Contents
Recent Developments in the Financial System: An Overview
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♠Recent Developments in the Financial System
- Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty in 1985 to review the Indian monetary system. Later, working group on the money market (Chairmanship of Narayanan Vaghul, 1988), a number of measures were taken up by the RBI to widen and deepen the money market through institution jointly by RBI, Public sector bank and financial institutions, commenced operations in April 1988, to deal in short term money market instruments with the primary objective of improving liquidity. The introduction of new instruments, broadening of participants base and strengthening of institutional infrastructure have been pursued during the 1990s, based on the framework provided by the Narayanan Vaghul and the Narasimham Committee II.
- As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market.
- Deregulation of the Interest Rate
- Money Market Mutual Fund (MMMFs)
- Liquidity Adjustment Facility (LAF)
- Electronic Transactions
- Establishment of the CCIL
- Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.
- Commercial paper is an unsecured money market instrument issued in the form of a Promissory note was introduced in India in1990. It enables highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Information on CP issuance as reported by the Issuing and Paying Agents (IPAs) on the NDS platform has been made available on the Reserve Bank’s website with effect from July 2005, to enhance transparency and facilitate wider dissemination.
- Minimum: 7 days
- Maximum: 1 year
♦Certificate of deposit
- A certificate of deposit is a negotiable money market instrument which is issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. CD were introduced in India in 1989. The minimum maturity period of CP is 7 days with effect from 29 Apr 2005.
- Minimum: 7 days
- Maximum: 1 year
- Note: FIs can issue CDs for a period not exceeding 3 years from the date of issue.
- The Reserve Bank has taken many initiatives towards introducing and upgrading safe and efficient modes of payment systems in the country to meet the requirements of the public at large.
- Since paper based payments occupy an important place in the country, Reserve Bank had introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and bringing in efficiency in processing of cheques.
- Later, a separate High Value Clearing was introduced for clearing cheques of value Rupees one lakh and above. This clearing was available at select large centres in the country (since discontinued).
- Recent developments in paper-based instruments include launch of Speed Clearing (for local clearance of outstation cheques drawn on core-banking enabled branches of banks), introduction of cheque truncation system (to restrict physical movement of cheques and enable use of images for payment processing), framing CTS-2010 Standards (for enhancing the security features on cheque forms) and the like.
- In pursuance of the recommendations of the committee on banking sector reforms (Chairmanship M. Narasimham,1998), the process of transforming the call/ notice money market into a pure inter-bank market was completed in August 2005.
♠Payment and Settlement Systems
- Payment and Settlement Systems: In India, the payment and settlement system are regulated by the Payment and Settlement systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well as the Payment and Settlement System Regulations, 2008 framed there under came into effect from August 12, 2008. In terms of section 4 of the PSS act, no person other than the RBI can commerce or operate a payment system in India unless authorized by RBI. RBI has since authorized payment system operator of pre-paid payment instruments, card schemes, cross border in bound money transfer, Automated Taller Machine networks and centralized clearing arrangements.
- Electronic Payments: The continued increase in the volume of cheques added pressure on the existing set-up, thus necessitating following cost-effective alternative systems.
♠Types of Electronic payments
- Electronic Clearing Service (ECS) Credit: The RBI introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive payment requirements (Like salary, interest, Dividend payments) of corporates and other institutions During September 2008, the RBI launched a new service known as National Electronic Clearing Service (NECS), at National clearing Cell (NCC), Mumbai. NECS (credit) facilitates multiple credits to beneficiary accounts with destination branches across the country against a single debit of the account of the sponsor bank.
- Regional ECS (RECS): RECS has been launched during the year 2009. RECS, a miniature of the NECS is confined to the bank branches within the jurisdiction of a Regional Office of RBI.
- Electronic Clearing Service (ECS) Debit: The ECS scheme was introduced by RBI to provide a faster method of effecting periodic and repetitive collections of utility companies.
- National Electronic Funds Transfer (NEFT) System: In November 2005, a more secure system was introduced for facilitating one to one funds transfer requirement of individuals/ Corporates.
- Real Time Gross Settlement (RTGS) System: This was introduced in 2004 and settles all inter-bank payments and customer transactions above Rs 2 lakhs.
- Clearing Corporation of India Limited (CCIL): CCIL was setup in April 2001 by banks, financial institutions and primary dealers, to function as an industry services organization for clearing and settlement of trades in money market, government securities and foreign exchange markets.
- Electronic Funds Transfer: This retail fund transfer system introduced in the 1990s enabled an account holder of bank to electronically transfer funds to another holder with any other participating bank.
Other Payment Systems
- Pre-paid Payment systems: Pre-paid instruments are payment instruments that facilitate purchase of goods and services against the value stored on these instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The pre-paid payment instruments can be issued in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.
- The use of pre-paid payment instruments for cross border transactions has not been permitted, except for the payment instruments approved under Foreign Exchange Management Act,1999 (FEMA).
- Reserve Bank brought out a set of operating guidelines on mobile banking for banks in October 2008, according to which only banks which are licensed and supervised in India and have a physical presence in India are permitted to offer mobile banking after obtaining necessary permission from Reserve Bank
- ATMs / Point of Sale (POS) Terminals / Online Transactions: As on Feb, 2014, there are over 1,50,008 ATMs (76836 onsite and 73172 offsite) in India. Savings Bank customers can withdraw cash from any bank terminal up to 5 times in a month without being charged for the same (refer RBI circulars for latest changes).
- Reserve Bank has mandated re-crediting of failed transactions within 7 working day and mandated compensation for delays beyond the stipulated period.
- As on Feb, 2014, there are over 10 lakh POS terminals in the country, which enable customers to make payments for purchases of goods and services by means of credit/debit cards.
- To facilitate customer convenience the Bank has also permitted cash withdrawal using debit cards issued by the banks at PoS terminals.
- Further, to reduce the risks arising out of the use of credit/debit cards over internet/IVR (technically referred to as card not present (CNP) transactions), Reserve Bank mandated that all CNP transactions should be additionally authenticated based on information not available on the card and an online alert should be sent to the cardholders for such transactions.
- National Payments Corporation of India: The Reserve Bank encouraged the setting up of National Payments Corporation of India (NPCI) to act as an umbrella organisation for operating various Retail Payment Systems (RPS) in India. NPCI became functional in early 2009. NPCI has taken over National Financial Switch (NFS) from Institute for Development and Research in Banking Technology (IDRBT).
- Oversight of the payment and settlement systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change. By overseeing payment and settlement systems, central banks help to maintain systemic stability and reduce systemic risk, and to maintain public confidence in payment and settlement systems.
- “Rupay” is the country’s own card payment network developed by National Payments Corporation of India (NPCI). It was dedicated to the national by the Hon. Former President of India Shri Pranab Mukherjee on May 8, 2014. “Rupay” minimize the dependency on the international schemes.
♠The Depositor Education and Awareness Fund Scheme, 2014
- Pursuant to the amendment of the Banking Regulation Act 1949, section 26A has been interest in that Act, empowering Reserve Bank to establish The Depositor Education and Awareness Fund (The Fund) Under the provisions of this section the amount to the credit of any account of the credit of any account in India with any bank which has been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than 10 years shall be credited to the fund, within a period of 3 months from the expiry of the said period 10 years.
Transfer of Funds
- The amount to be credited to the fund includes credit balance in any deposit account maintained with banks with have not been operated upon for ten years or more, or any amount remaining unclaimed for 10 years or more as under:-
- Saving bank deposit account
- Fixed or term deposit account
- Cumulative/ recurring deposit accounts
- Current deposit accounts
- Other deposit accounts in any form or with any name
- Cash credit accounts
- Loan accounts after due appropriation by the bank
- Margin money against issue of letter of credit/ Guarantee etc any security deposit etc.
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