Payment Systems in India: Opportunities and Challenges

An efficient payment system acts as an enabler for speeding up liquidity flow in the economy, apart from ensuring proper utilization of limited resources it also eliminates systemic risks. Flow of funds across borders demands the security, integrity of the payment system and the harmonization of the systems in the related countries. The paper dwells with the need to modernize the payment system and migrate from paper-based to electronic mode of payment system to enhance efficiency and save cost. It delves in to the core of payment systems in the select countries with a comparative analysis. Benchmarking against the BIS core principles of Systemically Important Payment Systems revised as core principles of Financial Markets Infrastructure has been done to ensure convergence with the international best standards for Governance of Payment systems. The payment system of any country, though advanced and sophisticated, does face various risks, viz. bank failures, frauds, counter-party failures, etc. Such aberrations could trigger a chain-reaction that might ultimately result in disruption and distrust of the payment system. For example, if one large payment transaction cannot be settled, it disturbs other transactions leading to failure of the institutions involved in the process ultimately upsetting the entire payment system in the country. Such systematic and cascading breakdown of the payment system can hinder efficacy of monetary policy and badly impact confidence in the financial system. Minimization of systemic risk is therefore a critical challenge facing the regulators. Like in any ambitious economy, in India too, the fast advances in information technology, changes in regulatory framework, setting up of new institutions have aided to the rise of new payment practices, products and delivery channels for small as well as large value, and urgent payments. The paper shows areas for improvement in the efficiency in existing payment systems in India and the other countries especially in regard to the liquidity risk, operational risks, access criterion, transparency etc. In the end, the paper makes a modest attempt to identify opportunities and challenges for India. Numerous major changes in the payment system would take place at a quicker pace as e-commerce becomes more prevalent in the economic activities in the country.