Context: The Reserve Bank of India (RBI) has recently published its annual report for FY23 in which it has conceptualised a lightweight payment and settlements system (LPSS).

Key highlights of the report

• In 2022-23, there was an increase in the RBI’s income as compared to 2021-22 due to profits from its foreign exchange (FX) sales.

• RBI’s buffer provisions are now 6% of its balance sheet, which is more than the 5.5% for 2021-22.

• RBI’s new capital economic framework mandates buffer provisions between 5.5%-6.5% of its balance sheet.

• Gross non profitable assets (NPAs) has fallen from 15.5% in 2018-19 to 5.8% in December 2022. 

• Total Foreign Direct Investment (FDI) has fallen to a three-year low of $46 billion in 2022-23.

• There was an increase in digital transactions in 2022-23 as compared to the previous year. 

• In 2022-23, total digital payments had recorded growth of 57.8% and 19.2% in terms of volume and value.

• India has emerged as the largest users of real-time transactions globally, with a 46% share in 2022. 

• The UPI Lite was introduced in 2022 to facilitate small-value transactions in office mode through an on-device wallet using UPI.

• The cheque truncation system (CTS) will be migrated from the existing 3 regional grids to ‘One Nation One Grid’.

Issues with the existing conventional payment systems

• The existing conventional payment systems such as UPI can handle large volume of transactions but they are dependent on complex IT architecture and infrastructure. 

• The conventional payment systems can become temporarily unavailable during catastrophic events such as war or natural calamities.

About the Lightweight Payment and Settlement System

• LPSS will be independent of conventional technologies and can be operated from anywhere with minimum staff.

• LPSS can function under any extreme and catastrophic events.

• LPSS will operate on minimalistic hardware and software.

• LPSS will process transactions critical to ensure stability of the economy, such as government and market related transactions.

• LPSS system would be active only on a need basis.

• LPSS will facilitate uninterrupted functioning of essential payment services like bulk payments, interbank payments and provision of cash to participant institutions.

Importance of an LPSS

• Near-zero downtime: The RBI aims to create a payment system that can operate on minimalistic hardware and software, ensuring near-zero downtime of the payment and settlement system in the country.

• Continuous liquidity pipeline: The lightweight system will facilitate uninterrupted functioning of essential payment services like bulk payments, interbank payments, and provision of cash to participant institutions, thereby keeping the liquidity pipeline of the economy alive and intact.

• Stability of the economy: It is expected to process critical transactions, including government and market-related transactions that are crucial for maintaining the stability of the economy.

• Enhancing public confidence: The resilient nature of the system will act as a bunker equivalent in payment systems, enhancing public confidence in digital payments and financial market infrastructure, even during extreme conditions.

Differences between LPSS and UPI

• Existing payment systems: The RBI acknowledges the availability of various payment systems in India for individuals and institutions, each with its distinct character and application.

• Handling large transaction volumes: Conventional systems like RTGS, NEFT, and UPI are designed to handle large volumes of transactions while ensuring sustained availability, relying on complex wired networks and advanced IT infrastructure.

• Vulnerability to catastrophic events: However, catastrophic events such as natural calamities and war can temporarily render these payment systems unavailable by disrupting the underlying information and communication infrastructure.

• Preparedness for extreme situations: To address this vulnerability, the RBI believes it is prudent to be prepared with a lightweight payment system capable of functioning in extreme and volatile situations.

Artificial Intelligence for Handling Complaints

• The RBI is embedding artificial intelligence (AI), machine learning (ML) and other emerging technologies in its 24×7 online Complaint Management System (CMS).

• CMS facilitates lodging complaints easily and provide complainants necessary information on grievance redressal.

UPI for Remittances and International Transactions

• The UPI was also extended to Non-Resident Indians (NRIs) and foreign nations to undertake merchant payments in India. 

• The linking of UPI with Singapore’s PayNow eases the facilitation of low-cost fund transfer and remittances between two countries.

National Strategy for Financial Inclusion (NFSI)

• To expand the digital payments ecosystem in India, the state level bankers’ committees/union territory level bankers’ committees (SLBCs/UTLBCs) have identified the districts in their respective states/UTs to make them 100% digitally enabled.

• The NSFI lays down action plans and suggests recommendations to create necessary infrastructure to support the digital eco-system, strengthen inter-regulatory co-ordination for customer grievance redressal.

• The RBI’s Financial Inclusion Index (FI-Index) has improved, with growth witnessed across all sub-indices.

• The FI-Index is a quantifiable metric to evaluate the efficacy of efforts towards financial inclusion.

• The FI-Index is based on 97 indicators such as ease of access, availability and usage of services, and quality of services.

Payments Vision 2025

• Theme: E-Payments for Everyone, Everywhere, Everytime

• The Payment Vision 2025 aims to provide consumers with affordable payment options which can be accessed anytime and from anywhere with convenience. 

Conclusion

• The RBI has not provided a specific timeline for the launch of the lightweight payment and settlements system.

• However, the concept serves as a crucial step towards ensuring the resilience of the payment ecosystem during emergencies.

• Further research and development efforts are necessary to bring this system to fruition and enhance the overall stability and confidence in digital payments in India.