RTGS: India’s First Big Tryst With Digital Payments
Payments weren’t always as easy as they are now. In fact, memories of the times when large sums of money couldn’t be moved with a few clicks are still fresh in many minds.
Ask VG Kannan, who retired as managing director of the State Bank of India in 2016 and went on to become the chief executive of the Indian Banks’ Association till 2019.
The year was 2001, a large value inter-bank transaction was to be made. SBI had sent a representative with the cheques, as was common practice then, but an accident meant that this person couldn’t reach the clearing house before it closed. The payment couldn’t be cleared. To prevent the other lender from defaulting, SBI had to step in to make the payment.
The payment system until the early 2000s was mostly paper-based and cheques were the dominant instrument. In the case of high-value payments, a representative from the bank branch would physically go to the clearing cell of the RBI, which would confirm the transaction with the counter-party bank, verify identities of those issuing the cheque and the ones receiving it, before approving the transaction.
The whole process of getting these funds cleared and transferred to the intended bank account would often take days, recalls Kannan. “The system was known for a number of delays in clearing as bank representatives would arrive around the clearing house’s deadline to process the transaction.”
But change had started to creep in starting the year 2000. With the passing of the Information Technology Act, electronic data became viable proof of a transaction, which was acceptable in court during a dispute.
This was a watershed moment for the RBI, a former RBI official said, speaking on condition on anonymity. Right after that The Institute for Development & Research In Banking or IDRBT, which is the RBI’s research and development wing, started studyng the implications of implementing electronic fund transfer systems, this person said.
By 2002, the regulator had contracted UK’s Logica Plc. and an Indian partner Tata Consultancy Services to prepare the RTGS framework in India, the RBI official quoted above said.
The RTGS Journey
Since then, the journey of digital payments in India has been rapid.
Transactions worth more than Rs 2 lakh can be made via RTGS. Lower value fund transfers can be done through other modes of payments such as the National Electronic Fund Transfer (NEFT), Immediate Payment Service (IMPS) and Unified Payments Interface (UPI).
According to Nikhil Kumar, chief evangelist officer, Setu, in a payments ecosystem where multiple pipelines such NEFT, IMPS and UPI ensure small value transactions happen securely and quickly, the RTGS platform is the big pipe, which ensures the flow of funds to the entire network. The platform continues to be the only secure method of transferring large value funds from one bank account to another.
Over the last 16 years, the RBI has constantly tweaked the system, making it more secure and cost effective for higher adoption.
In 2010, the RBI rationalised charges for transfers, ensuring that low value funds are transferred through NEFT and the RTGS platform only processes transactions worth more than Rs 2 lakh. In 2013, under then RBI Governor Raghuram Rajan, the regulator went in for a full revamp of the RTGS platform, to meet the global standards of ISO 20022.
In 2019, the RBI also made transactions fully free on the RTGS platform for banks and asked them to pass on the benefits to their customers. This was aimed at pushing up participation of small businesses on the platform.
This year, in the month of November alone, the system processed 1.38 crore transactions worth nearly Rs 80 lakh crore. Of these, transactions worth Rs 68 lakh crore were initiated by customer accounts, while the rest were interbank transfers.
Starting Monday, RTGS enters into a new phase. From 00:30 hours on Dec.14, RTGS will be available around the clock.
R Gandhi, former deputy governor of the RBI, said that while some technologically advanced banks were offering better services on fund transfers as a business advantage, there was a need felt for uniformity in experience for customers.
“By making RTGS round the clock, the RBI is ensuring that any customer across any bank is able to transfer funds with the same amount of efficiency, 24x7. This also helps in serving businesses since global trade in India has been on the rise,” said Gandhi.
Moreover, other fund transfer mechanisms available in the rest of the world take up a considerable chunk of the transferred amount as commissions.
“The commissions charged by other fund transfer mechanisms reduce the benefits of ecommerce in other countries. With RTGS, that problem can be covered and a boost can be given to sectors such fintech and agritech which are growing in India. This is going to be the second, third order benefits the country is going to derive,” said Ashishkumar Chauhan, MD & CEO of Bombay Stock Exchange. This could also open doors to having T+0 settlements in the securities markets, even though that still has regulatory hurdles which need to be crossed, Chauhan said.
To make sure that the second order benefits are realised properly by the system, the banking regulator will need to consider improving the technological infrastructure governing the RTGS platform, Kumar of Setu said.
“Since these transactions are high value and critical in nature, any delay or problem will be very detrimental to the system. If the regulator intends to remove these artificial blocks, it must ensure that the process becomes more automated to improve efficiency,” he said.