Change in India has rarely been easy. Just ask anyone trying to build a new road or receive approval for foreign investment in the country. Payment systems are no different.
The Reserve Bank of India (RBI) has been working since the 1990s to shift payment processing away from paper and into the digital realm. This would significantly reduce processing times, put money in the hands of corporate treasurers faster and make the country globally more competitive. To date, the central bank has succeeded in implementing basic electronic credit and debit-clearing systems, a high-value real-time gross settlements (RTGS) infrastructure and the low-value retail National Electronic Funds Transfer (NEFT) system.
"The government and central bank have realised that a paper- or cash-based economy is inefficient," said Chris Furness, transaction banking global head for cash management at Standard Chartered. "The economy will really benefit and grow faster if the government looks at improving the whole payments space instead of on a piecemeal basis."
In its Vision 2009-2012 plan, the central bank outlined plans to move all high-value payments to its RTGS system, enhance its existing electronic systems and create the National Payments Corporation of India (NPCI) to manage all retail transactions.
Nick Masterson-Jones, managing director of transaction services at Vocalink, who worked on deploying the UK's real-time consumer payments infrastructure in 2008, said the country "has a lot of ambition" in regards to achieving paperless payments.
Despite its ambition, India still has two distinctly different payment segments. One, comprising banks and large corporations, has adopted the country's electronic infrastructure for most of its high-value transfers. As a result, Rs792.7 trillion ($17.1 trillion), or 91% of the value of all paper and electronic payments tracked by the RBI, passed through the country's RTGS infrastructure in the nine months to December 2009.
The other segment, settlements involving retail payments, has been much slower to make the switch. Of all the retail transactions reported by the RBI, only 6%, or Rs4 trillion, were made electronically between March and December last year. Cheques continue to make up more than two-thirds of overall payment volume today.
Uneven adoption of electronic payments has not gone unnoticed. "We have no doubt covered considerable ground in modernising our payment and settlement system," said Vittaldas Leeladhar, the former central bank deputy governor, in a speech in August 2008 at the Conclave on Indian Banking, organised by the Indian Banks' Association, in Mumbai. "[But] there are several challenges that need to be effectively addressed if the full benefits of the achievements so far are to be reaped." He cited education and limited availability as deterrents of wider adoption - and specialists say these views still hold true.
Finding mass appeal
"Everybody wants to move to electronic [payments]," said Tom Schickler, head of cash management for HSBC in India. "But if you think of the array of constituents that corporate treasurers have - their suppliers, customers, vendors - they may have a desire to do it but the ability to influence, if not direct, those constituents to use electronic means is limited."
Take, for example, the treasurer at a multinational food or beverage company operating in India. They likely would prefer receivables to come in through direct debit or transfer but, because electronic means are far from universal in the country, they are unable to mandate the way their customers pay without potentially disenfranchising a sizeable chunk of their client base.
"When people receive a [paper] payment, they still trust an instrument they can touch and feel more than an electronic channel," said Amareesh Gulati, South Asia regional head of transaction banking products at Standard Chartered. "It seems more secure to them."
Despite the inherent issues, the central bank is actively promoting paperless payments to businesses and consumers alike. To attract corporate treasurers, on March 1 it shifted the NEFT to hourly settlements on weekdays from six per day, extended operating hours to 7pm from 5pm and tightened the requirements that banks confirm transactions within two hours of receipt instead of within 24 hours.
It has also expanded the accessibility of electronic payments. In the RBI's last annual report, it wrote that 26,275 bank branches were connected to the national credit and debit clearing system, 55,225 to the NEFT, and the number of ATMs expanded to 43,651 from 34,789 - a 25% year-on-year increase - as of the end of March 2009. In addition, the central bank has waived processing fees through March 31 and is expected to waive them for at least another year.
Finally, as part of its Vision 2012 plan, the central bank founded the NPCI in December 2008 to manage all of the retail payment systems in the country, including ATM systems, the electronic-clearing service and the country's new cheque truncation system. HSBC's Schickler said the organisation's creation promotes competition in payments through creating greater processing transparency.
While usage ultimately depends on consumers, the RBI's actions are generally seen in a positive light. "There's quite a bit of education that needs to be done for the corporate customers so they can begin leveraging these [electronic payment] capabilities but I think RBI has done a great job building this infrastructure in a phased manner and rolling it out," said Navinder Duggal, head of cash product management at DBS global transaction services.
Fees and formats
Banks, while by and large on-board with the RBI's plans, do have some complaints. One way India's central bank is promoting use of electronic payment systems is through waiving or capping fees. A move that, while potentially a way to increase volume, has created some unsustainable expectations among many of the country's corporate treasurers.
"It's very difficult to charge fees in India because corporates have been used to getting everything practically for free," said Duggal. He continued that this makes it difficult for financial institutions to derive revenue from electronic transactions, forcing them to depend on float income.
Another challenge is the speed at which the RBI demands compliance with regulatory changes. When it announced that the NEFT's operating hours would be extended to 7pm and batch processing would shift to an hourly basis, it gave banks less than a month to comply. "The RBI frequently issues changes in regulations and expects immediate compliance," said HSBC's Schickler. "As such, banks need an infrastructure in which you can implement the necessary changes within a short time frame in order to remain compliant. This is a very significant challenge."
India's situation, however, is much more complex than just the trouble of transaction fees and the speed at which the central bank makes changes. Moving payments from paper to electronic means is a paradigm shift for a country that has a large informal economy and, according to 2007 statistics, as many as 450 million unbanked citizens. The RBI's decisions are based on its desire to expand financial inclusion and modernise the economy, one aspect of which is implementing a national electronic payment infrastructure.
As demonstrated during the past 18-months, banks are not always driven by the most altruistic of motives. Executives love to say how much they are concerned about the community at large but actions show shareholder value remains a top priority. While the RBI's choices may not be perfect to many transaction bankers, they are made with India's best interests in mind.
Asked if there was anything unusual about the country's transition to electronic payments one Mumbai-based banker said: "India's transition is nothing special, it took the US 20 years to become largely electronic-based. The country has the infrastructure, now we just have to wait for people's mindset to change."
This story was first published in the March 2010 issue of FinanceAsia magazine.
