Payment and settlement systems are the backbone of any economy, the Reserve Bank of India (RBI) said in the foreword to its new report—‘Payment and Settlement Systems in India: Vision – 2019-2021’.

Through the vision document, released in May, RBI highlighted that digital payment transaction turnover vis-à-vis GDP (at market prices-current price) increased from 7.14 times in 2016 to 7.85 times in 2017 and further to 8.42 times in 2018. The turnover in payment transactions (after including Clearing Corporation of India figures and paper) vis-à-vis GDP (at market prices-current price) increased from 14.41 times in FY16 to 14.73 times FY17 and further to 15 times in FY18.

And, on expectations over 2019 to 2021, RBI expects digital payment transaction turnover vis-à-vis GDP (at market prices-current price) to further increase to 10.37 times in 2019, 12.29 times in 2020 and 14.80 times in 2021. Payment transaction turnover, including CCIL transactions and paper, is expected to be 22.30 times GDP (at market prices-current price) by December 2021.

Interestingly, among the enabling initiatives listed by the central bank, RBI said that it will also examine the possibility to extend the timings for customer transactions in RTGS based on industry preparedness and customer demand. And, on May 28, RBI notified extension of timings for customer transactions in Real Time Gross Settlement (RTGS) System.

Further, on June 6, in its second bi-monthly monetary policy statement for FY20, RBI noted that it levies minimum charges on banks for transactions routed through RTGS meant for large-value instantaneous fund transfers and the National Electronic Funds Transfer (NEFT) System for other fund transfers. And, banks, in turn, levy charges on their customers. “In order to provide an impetus to digital funds movement, it has been decided to do away with the charges levied by the Reserve Bank for transactions processed in the RTGS and NEFT systems,” RBI said. “Banks will be required, in turn, to pass these benefits to their customers,” RBI added, with a strong intent that instructions to banks in this regard will be issued within a week.

Currently, RBI levies a monthly membership fee of ₹5,000 on scheduled commercial banks, while other entities, like primary dealers, clearing entities and other special entities pay a monthly membership fee of ₹ 2,500 to the central bank. In terms of processing charge per transaction, every outward transaction attracts flat ₹ 0.50, and a time varying charge. While there is no time varying charge over and above the flat processing fee between 08.00 to 11.00 hours, ₹2 are levied per transaction after 11.00 hours to 13.00 hours, ₹ 5 are levied per transaction after 13.00 hours to 18.00 hours, and ₹ 10 are levied per transaction after 18.00 hours.

At a time when RTGS and NEFT charges are going to see a decline, a look at the evolution of payment systems shows that RTGS has grown over 12.21 times, from ₹12,15,739 crore in April 2006 to ₹1,48,48,120 crore in April 2019. In CAGR terms, the growth was 19.57% over 14 years. On the other hand, the growth in transaction value of NEFT has seen over 482 times growth in these 14 years. From ₹4,261 crore in April 2006, NEFT transactions grew by a CAGR of 55.47% to ₹20,54,669 crore in April 2019. Interestingly, the combined value of cheque truncation system (CTS) and MICR clearing saw a de-growth 1.04% in CAGR terms in the 14 years from ₹8,38,068 crore in April 2006 to ₹7,23,533 crore in April 2019. Immediate Payment Service (IMPS), which started with mere ₹1 crore in April 2011, grew to a whopping ₹1,69,197 crore in April 2019.

The government’s demonetisation exercise announced on November 8, 2016, saw the de-legalisation of ₹500 and ₹1,000 banknotes, has caused a widespread change in the pattern of payments systems in India. Thirty months after demonetisation, RTGS and NEFT systems have seen an absolute growth of 45.72% and 133.28% each. While transaction value of RTGS grew from ₹1,01,89,449 crore in November 2016 to ₹1,48,48,210 crore in April 2019, NEFT transactions grew from ₹8,80,788 crore to ₹20,54,669 crore in the same period. On the other hand, IMPS transactions registered an absolute growth of 420.91%, from ₹32,481 crore to ₹1,69,197 crore during these 30 months. Transaction under the CTS system grew 33.51% from ₹5,41,922 crore in November 2016 to ₹7,23,533 crore in April 2019.

The time varying charges on RTGS transactions bring complexity in arriving at the amount of fees that RBI levies on banks and other entities. Currently, banks are allowed to levy a maximum charge of ₹25 plus applicable time varying charges, not exceeding ₹30 on RTGS transactions between ₹2 lakh to ₹5 lakh. And, on RTGS transaction exceed ₹5 lakh, the maximum fees that banks can levy is ₹50 plus applicable time varying charges not exceeding ₹55. Similarly, on NEFT transactions, banks levy charges in value bands. NEFT transactions up to ₹10,000 carry a maximum charge of ₹2.50; ₹5 can be charged on NEFT transactions from ₹10,001 to ₹1 lakh, ₹15 on NEFT transaction above ₹1 lakh to ₹2 lakh; and ₹25 on NEFT transaction above ₹2 lakh.

While the RBI instructions on the reduced charges are awaited, it will surely bring down the transaction cost for consumers once the banks pass through the lower cost benefits. Irrespective of the charges, the digital transaction systems have seen a tremendous growth, and lower charges will further boost the transactions. There are enough reasons to believe that the forecasts of the RBI in its Vision 2021 document can overshoot by a wider margin than anticipated.

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