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Aug 17, 2014



ACKNOWLEDGEMENTI wish to express my heartful indebtness have contributed to this project. To begin with, I would like to thank Programme. I am deeply indebted to my project guide Mr. Neel Kamal (Assistant ManagerProf. V.V.Ratna for giving me the

& deep sense of gratitude to all those

opportunity to experience the realistic work culture through this Training

Commercial) for giving me his valuable time, advice, guidance, encouragement and help during the course of my project and for allowing me to pursue the summer training programme in 'PepsiCo' - a great place to work with. And at last, I am thankful to all divine light & my parents & friends, who kept my

motivation and zest for knowledge always high throughout tides of time. Regards, Neha Singh PGDM- 4 th trimester Jaipuria Institute of Management Lucknow.



Having a sound, reliable and fast payment system is not only important for the economy in general, the financial system, but also for the institutions and people having place in the economic world. Any bottleneck in payment systems, will

successively affect the banks, the production sector, individuals and ultimately the whole economy of a country. Hence, the payment system infrastructure, the presence of which cannot be noticed under normal circumstances, has a strategic importance for our country.

Payment and settlement systemsPayment systems also play an important role in the monetary policy implementation of as they provide the conduit through which policy signals are

transmitted. The central bank of any country is usually the driving force in the development of the national payment system. The Reserve Bank, like other central banks, has been endeavoring to develop the payment and settlement systems in India on a safe, sound, secure and efficient basis. With these objectives in view, the Reserve Bank took several initiatives during 2007-08. The branch coverage both for national electronic funds transfer (NEFT) expanded system as also the real time gross settlement (RTGS) system banks.

during the year as a result of the combined efforts of the Reserve Bank and the


Since payment systems can contribute to spreading problems from one system participant to the others, the central banks are becoming increasingly aware of risks inherent to these systems. Although it is normally considered very unlikely that payment systems will trigger systemic crises, the potential consequences are vast and might thus pose a threat to both domestic and in ternational financial stability.

Payment System RisksCentral banks are paying increasing attention to the various types of risk associated with the use of payment systems. Reason- [1] the mutual exposures of the system participants have increased considerably as payment systems have expanded by transaction volume. [2] The substantial potential losses in a payment system are to a particular extent related to its role as a possible source of contamination. The probability of the majority of payment system risks occurring is very small, but the potential losses to the system participants can be considerable and thus pose a threat to financial stability.

Payment system risks are normally classified as follows:

Credit Risk:

The risk that a participant in the system goes into

compulsory liquidation or is otherwise unable to meet its full financial obligations at the expected time or later.

Liquidity Risk:

The risk that a participant in the system does not have

sufficient liquidity to meet its obligations at the expected time-although the participant in question may be able to meet its obligations at a later time.


Operational Risk:

The risk that operational factors, e.g. system downtime or operational errors, result in or amplify credit or liquidity risks.

Legal Risk :

The risk that an inadequate legal basis for the system results in or amplifies credit or liquidity risks .

Systemic Risk:The risk that one participant's difficulties in meeting its financial obligations or problems inherent to the system itself, spread to other participants in the system or to other areas of the financial sector. Internationally, a number of other methods are applied to reduce or eliminate credit and liquidity risks in netting systems: Limits to the size of participants' mutual bilateral and/or multilateral positions.

This reduces both risks.

More intra-day net settlements, as seen in the

"hybrid systems".


combines the advantages of RTGS systems with the reduced liquidity requirements of netting systems.

Loss distribution agreements to ensure that clearing can take place even if one

or several participants cannot meet their obligations. The agreements are often structured to ensure that a situation where the participant with the largest payment obligation is disregarded can be handled.


A sound legal framework

is an important The Payment was notified on effect on

requirement for the safe and efficient functioning of the payment and settlement systems. and Settlement Systems Act, 2007

December 20, 2007 . The Act came into

August 12, 2008 . The regulations framed under the Act i.e. , Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 and the Payment and Settlement Systems Regulations, 2008, 2008. were also notified on August 12,

The Payment and Settlement Systems Act, 2007 has designated the Reserve Bank as the authority to regulate and supervise the payment systems in the country, including those operated by nonbanks such as the CCIL, card companies, other payment system providers and all prospective organizations for payments. The netting procedure and settlement finality, earlier governed by contractual agreement/s, have been accorded legal recognition under the Act. The entities that want to operate or continue to operate a payment system would need to apply to the Reserve Bank for authorization. The other powers vested with the Reserve Bank under the Act include laying down operational and technical standards for the various payment systems, calling for information and returns/ documents from the service providers and imposing fines on failure to do so or on providing false information. The Reserve Bank is empowered to issue directions and guidelines to the system providers, prescribe the duties to be performed by them and audit and inspect their systems/premises The Payment and Settlement Systems Regulations, 2008 cover:6


(a) Authorization of payment systems

including the form and manner of (b) payment instructions and and other

submission of application for authorization of commencement/ continuation of a payment system and grant of authorization certificate; determination of standards; (c) furnishing of returns, documents

information; and (d) furnishing of accounts and balance sheets.

Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)The BPSS, which was earlier constituted under the RBI Act, 1934, has since been reconstituted under the Payment and Settlement Systems Act, 2007. The BPSS Regulations 2008, cover: powers of the Board; (a) composition of the Board; (b) functions and and The BPSS meets (c) powers to be exercised on behalf of the Board;

(d) constitution of sub committees and advisory committees. regularly and gives directions for bringing in the Board has provided direction include

efficiency, safety and customer preparation of a framework for

convenience in the payment and settlement systems. Some of the areas in which payments through mobile phones, extension of the jurisdiction of magnetic ink character recognition (MICR) clearing houses and computerization of non-MICR clearing houses, launching the Indo-Nepal remittance system, making use of electronic mode of payment mandatory for large value transactions, making all RTGS branches NEFT-enabled while upgrading the NEFT system into a round-the-clock type remittance system, exploring the feasibility of developing a domestic card to inject competition in the market in a non-discriminatory manner, facilitating optimum use of ATMs by rationalizing cash withdrawal/balance enquiry charges and disseminating information on major payment services offered by banks including the service charges and quantum of compensation to be paid by banks for deficiency in those services.7

Core Principles for Payment Systems Who determined them? What are they? What are they not? Who are concerned with them? Core Principles in headlines? Systemically important payment systems Responsibilities of Central Banks

Who determined them?The Core Principles for Systemically Important Payment Systems have been determined by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) as a result of a study that aimed observing developments in payment systems field, determining the problems, and searching for the solutions.

What are they? What are they not?The core principles do not define the functions provided by a "good" payment system

the steps of the procedure to be followed in developing an individual payment system. Rather, they suggest the key characteristics that all payment systems should satisfy. systemically important

Who are concerned with them?8

Not all payment systems in a country are required to comply with the core principles. On the other hand, having financial system. The designers, operators and overseers of such payment systems are directly concerned with the core principles; whereas the participants are indirectly concerned. "Systemically important payment syste