Why does India boast four distinct funds transfer systems, and what makes each one stand out?
Each of these holds a distinct position within India’s payments landscape.
- RTGS (Real Time Gross Settlement)
It continues to be the dominant force, despite the substantial surge in adoption and transaction volumes witnessed by UPI.
Certainly, UPI is primarily oriented towards retail transactions, featuring a maximum transaction value cap. On the other hand, institutions predominantly rely on RTGS, which does not impose any upper limit on transaction amounts. Prior to its introduction in 2004, banks utilized individual fund transfers among themselves. However, this practice posed a significant systemic risk. In the event of one bank failing to make a payment, it had the potential to trigger a domino effect, impacting all interconnected banks. To counter this, the RBI set up RTGS which is operated by the RBI itself. Each transaction gets processed and settled individually on a real time basis.
All these transactions happen on the books of the RBI which makes them irrevocable and legally valid. Initially designed for settling inter-bank transactions, the RTGS system was subsequently expanded to accommodate regular customers. The official launch for bank customers was facilitated by the RBI’s circular in 2004, which extended the RTGS service beyond inter-bank settlements. The RTGS system sets a minimum transaction limit of 2 lakhs. This service is predominantly utilized by institutions, large merchants, and businesses for fund transfers. As of August 2022, the average transaction size within the RTGS system was approximately around 62 lakhs.
Online transactions are free for many banks and RBI has kept a maximum cap on charges based on transaction size. For transactions of ₹2 lakh to ₹5 lakh, the cap is ₹25 and ₹50 for transactions above ₹5 lakh.
2. NEFT — National Electronic Fund Transfer
Digitalization has resulted in the formalization of payments, reduced expenses related to printing and operations, and increased convenience and transparency. The current structure of India’s payments ecosystem has been established on the fundamental frameworks of NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement).
Launched in November 2005, NEFT enabled retail bank customers to transfer funds between any two NEFT-enabled bank accounts. While contemporary methods like UPI and IMPS offer much quicker fund transfers today, in 2005, NEFT emerged as a groundbreaking innovation in facilitating fund transfers. Initially, NEFT transactions were settled in batches once a day. However, to meet the evolving requirements of customers, the settlement frequency was enhanced to once every 2 hours, and eventually, it was further improved to once every 30 minutes. Notably, there was no minimum transaction value set for NEFT, allowing individuals to transfer amounts as low as ₹1.
While the RBI oversees the operation of the NEFT system, banks also bear costs associated with maintaining the infrastructure, manpower, and ensuring security measures. Despite the potential justification for the RBI to recover these costs, the operation of NEFT has primarily been managed as a public good by the RBI. The RBI has advised banks against imposing charges on savings account customers for NEFT transactions. As a result, many banks have opted to offer free online transactions, while also implementing a cap on charges for transactions conducted through their branches.
Indeed, NEFT serves a multitude of purposes beyond simple funds transfer, including settling credit card dues, loan EMIs, handling inward forex remittances, among others. While UPI has emerged as a versatile and efficient system that can cater to these needs, NEFT, being an older mechanism, was primarily designed with a singular motive of fostering digital adoption in the financial landscape.
3. IMPS- Immediate Payment Service
Until 2010, the primary methods for online fund transfers were RTGS and NEFT, which were limited by their operating hours. Transactions within these systems could only occur during RTGS and NEFT working hours, creating a gap for real-time transfers outside these periods. To address this limitation, NPCI, in collaboration with select banks, conducted a pilot study aiming to establish a system capable of facilitating 24x7 fund transfers. This initiative led to the creation of IMPS (Immediate Payment Service).
IMPS was officially launched to the general public in November 2010, offering the capability to transfer funds in real-time, up to ₹2 lakhs. Notably, this limit was recently increased to ₹5 lakhs, providing users with an enhanced capacity for immediate fund transfers through the IMPS platform.
Unlike RTGS, where each transaction settles in real-time individually, the settlement process in IMPS operates on a deferred net basis. This means that transactions are not settled instantly between banks; instead, at the end of the day, only the net amount is transferred between participating banks.
In IMPS, where payments happen instantly but settlements occur on a deferred net basis, there are inherent risks that need effective mitigation strategies to ensure transaction reliability and security.
NPCI manages risk in IMPS by maintaining settlement guarantee funds, funded by participating banks and NPCI’s own funds, as well as utilizing lines of credit and other risk management tools. Interestingly, despite mechanisms which facilitate funds transfer without charges, IMPS has continued to grow over the years.
IMPS offers distinct advantages over UPI. Unlike UPI, which is primarily mobile-based, IMPS transactions can be initiated from various devices. Additionally, IMPS permits non-bank entities such as PPI issuers to enable transfers from wallets to the beneficiary’s bank account, expanding its accessibility and utility beyond traditional banking channels.
4. UPI — Unified Payments Interface
Indeed, UPI requires no introduction, having witnessed remarkable growth in recent years. Its impact has been significant, drawing numerous individuals into the financial system and simplifying digital payments to the extent that it’s as easy as taking a photo.
In its inception in 2016, the broader concept behind UPI aimed to facilitate peer-to-peer payments for even small amounts online. The primary objective was to reduce the amount of cash in circulation, ensure tracking of all transactions within the system, diminish instances of tax evasion, and subsequently increase government revenues.
Compared to IMPS, UPI offered enhanced safety as it eliminated the necessity to share intricate details like bank account numbers. With the rising adoption of smartphones in India, UPI was anticipated to facilitate a substantial number of transactions conducted through mobile devices, leveraging their widespread use for seamless payments.
In its simplest form, UPI enables instant fund transfers through your mobile device round the clock, 24x7. The true beauty of UPI lies in its sheer simplicity, allowing users to effortlessly send money from their bank account to another by just entering a phone number, UPI ID, or scanning a QR code.
Indeed, in 2020, the Government introduced a zero-charge framework for UPI transactions, implying that both users and merchants would incur zero charges for utilizing UPI services.
Even as early as 2016, there was optimism about UPI’s potential, with many considering it a game changer in the payment landscape. However, the full extent of its impact and transformative capabilities surpassed initial expectations.
Recently, discussions about charging for UPI services have resurfaced. However, the Ministry of Finance has clarified that UPI will continue to operate as a digital public good, emphasizing that there are no plans to impose any charges for UPI services.
That’s all for today, folks.
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