The Hindu Business Line : Payments Corporation on anvil

THE Reserve Bank of India is preparing the ground to incorporate an umbrella organisation to operate all retail payments and settlement systems in the country, according to the RBI Governor, Dr Y.V. Reddy.

The Indian Banks Association (IBA), along with member banks, would form the new umbrella organisation as a company, which is likely to be christened `Payments Corporation of India', he said.

He spoke to newspersons here on Wednesday on the sidelines of an interaction with the students of Institute of Insurance and Risk Management (IIRM).

The new company for payments and settlement systems would act as a holding body and the 1,000-odd clearing houses would act as its franchisees. To decide on the nature and model of the proposed umbrella organisation, the IBA has already formed a working group with representatives from public sector banks, private banks, foreign banks and co-operative banks.

Many of the banks including ICICI Bank, Citibank, Standard Chartered Bank and 12 public sector entities are likely to pick up stake in the proposed payments corporation.

According to Dr Reddy, the RBI's committee of the board is currently taking care of regulation of payments system. "A separate umbrella body for regulation of payments system is being conceived by IBA and a number of banks. The new body should take off in the next few months."

The IBA views that the payment and settlement system would have to be strengthened to ensure transfer of funds on a real time basis while eliminating risks associated with transactions and settlement process.

A study conducted by the Boston Consulting Group (BCG) indicated that the payments business is core to banks' profitability, generating up to 35 per cent of their revenues and up to 40 per cent of their costs.

The IBA believes that if managed through a clear, coherent strategy, payments could be a real source of competitive advantage and consistent profitability for banks. Apart from being backbone of the banking operations, the payment system assumes importance in the context of domestic financial sector reforms and also global financial integration.

Earlier, the annual policy for 2005-06 announced by the apex bank on April 28 indicated a roadmap for upgradation of payment systems in banks over the next three years. Creation of a new umbrella organisation for retail payment systems was one of the key action plans indicated in the policy. In line with the action plan, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) was constituted to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems. The RBI had also constituted the Department of Payment and Settlement Systems for assisting BPSS in performing its functions.

"The RBI Committee is going to meet tomorrow to decide on the new regime of payments system to be handled by IBA and its member banks," Dr Reddy said.

Crucial in growing economy

PAYMENT and settlements systems help individuals and organisations to transfer money to each other. There is an increase in transactions between and among these constituents in a growing economy. The spread of banks and growth of customer basehas underscored the need for a modern payment system, which would enable flow of money in a fast and efficient manner.

Clearing houses are a central component of the payment system - they facilitate the exchange of payment instructions or cheques at a central location between various banks. These are spread across the country and operated by the Reserve Bank of India, State Bank of India in over 900 centres and a few other select banks.

The RBI, in keeping with its policy of gradually withdrawing from operational responsibilities,now prefers to have a separate corporation to handle these clearing houses and focus only on regulatory issues.

The new corporation would probably have to take the responsibility of the settlement bank (settling accounts between banks) that the RBI had taken on till now.

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