Payment and Settlement Systems Act, 2007

Background and evolution

As India's financial system grew, new payment systems such as electronic funds transfer, card networks and clearing houses emerged, but there was no specific law governing them. Questions of legal finality of settlements, especially if a participant became insolvent, created systemic risk. The RBI recommended a dedicated law, and Parliament passed the Payment and Settlement Systems Act in 2007.

The Act gave the RBI broad powers to authorise, regulate, supervise and set standards for payment systems. Under it, the RBI encouraged the creation of the National Payments Corporation of India (NPCI) in 2008 as an umbrella organisation for retail payments, which later developed systems such as IMPS, RuPay, Aadhaar Enabled Payment System, BHIM and UPI.

Key features and provisions

• Authorisation (Section 4): no person other than the RBI may operate a payment system without authorisation.
• Regulation (Sections 10 and 18): the RBI may set standards, issue directions and lay down conditions for operators.
• Information and inspection (Sections 12 to 14): operators must provide information and accounts; the RBI may inspect.
• Settlement finality (Section 23): settlements effected under a system are final and irrevocable, even if a participant becomes insolvent.
• Netting (Section 23A, added 2015): protects netting arrangements.
• Dispute resolution (Section 24): disputes among participants are settled by the BPSS.
• Penalties: for operating without authorisation, failure to comply with directions and other contraventions.
• Payment system defined: a system that enables payment between a payer and a beneficiary, involving clearing, payment or settlement, including card operations, money transfer and prepaid instruments, but not stock exchanges.