1. 1 Indian Payment and Settlement Systems Responsible Innovation and Regulation IDRBT Banking Technology Excellence Awards 2011-12 Hyderabad August 3, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India 1

2. Financial Innovation in the Context of the Crisis The crisis has triggered a number of questions about financial innovation The big lesson is that both innovators and regulators will have to more ‘responsible’ 2

3. Payment and Settlement Systems Why have I chose to speak about responsible innovation and regulation in payment and settlement systems? 3

4. RBI as a Responsible Regulator RBI values financial innovations that improve the efficiency of financial intermediation do not erode financial stability do not compromise customer interest further financial inclusion 4

5. RBI as a Responsible Regulator PSS Act, 2007, designates Reserve Bank as the statutory regulator of the payment and settlement systems Even as the regulator, RBI continues to take the lead in facilitating innovation 5

6. Topics I will Cover RBI’s role in modernizing payment systems RBI’s approach to responsible regulation RBI’s role as facilitator of innovation 6

7. RBIs Role in Modernising Payment Systems Introduction of MICR technology in the mid 80s Introduction of Speed Clearing for outstation cheques in 2008 Cheque Truncation System (CTS) in Delhi in 2008 Grid-based CTS in Chennai in 2011 7 Paper Based Clearing

8. RBIs Role in Modernising Payment Systems Retail electronic payment systems: -ECS for bulk retail payment transactions -EFT for one-to-one payments Today -ECS has transformed into NECS -EFT has transformed into NEFT 8 Electronic Payment Systems

9. RBIs Role in Modernising Payment Systems RTGS was introduced in 2004 as a large value payment system Huge expansion in turnover since then, both in value and volume terms 9 Real Time Gross Settlement (RTGS)

10. RBI’s Approach to Responsible Regulation 10 Think Global, Act Local

11. RBI’s Approach to Responsible Regulation Non-banks allowed to enter the retail payment space Now, non-bank also allowed to set up "White Label ATMs" 11 Leveraging on Non-Banks

12. RBI’s Approach to Responsible Regulation Security of online card transactions Implementing CTS2010 standards Immobilizing cash retraction facility in ATMs 12 Promoting Safety and Security of Payment Instruments

13. RBI’s Approach to Responsible Regulation Disputed amounts in failed ATM transactions should be credited within seven days Introduction of differential MDR to encourage debit card transactions Helping migrant population - domestic person- to-person fund transfers 13 Customer Centric Regulation

14. RBI as a Facilitator of Innovation in Payment Systems Remarkable growth in new payment products and access channels Regulatory initiatives in the area of pre- paid instruments Operating guidelines on mobile banking 14 Introduction of New Payment Products

15. RBI as a Facilitator of Innovation in Payment Systems Transfer of benefits by Government to beneficiaries through Aadhar enabled electronic payment systems. This will reduce cost, time and leakages. 15 Aadhaar Initiative in Payment Systems

16. RBI as a Facilitator of Innovation in Payment Systems Around the world, two models: -bank-led model -non-bank led model India has opted for the bank-led model Why? 16 Mobile Financial Services

17. RBI as a Facilitator of Innovation in Payment Systems Express preference for central clearing arrangement for large value interbank transactions wherever feasible CCIL set up in 2001 to act as a central counterparty (CCP) 17 Focus on Central Clearing

18. RBI as a Facilitator of Innovation in Payment Systems RBI promoted The Clearing Corporation of India (CCIL) Institute for Development and Research in Banking Technology (IDRBT) National Payments Corporation of India (NPCI) 18 Institution Building

19. Taking Stock Large value payment systems have shifted to electronic mode. Retail payment systems are still largely paper centric. Why this lag? 19 Where do we stand?

20. Why are Retail Payment Systems Still Paper Centric? Slow pace of infrastructure building Limited product innovation Lack of initiative by banks 20

21. Conclusion ‘Adopt’ world’s best practices ‘Adapt’ them to the Indian environment Vision Document (2012-15) by RBI 21

22. Conclusion Innovators - ‘Push the envelope’ Regulators - Make sure the envelope is sturdy and strong 22 Responsible Innovation and Regulation