The smooth functioning of payment systems is vital for financial stability and trust in India’s banking ecosystem. To strengthen this framework, the Payment and Settlement Systems Act, 2007 (PSS Act, 2007) was enacted and came into force on 12th August 2008. This landmark legislation provides a legal foundation for regulating and supervising payment systems in India.
The Role of the Reserve Bank of India
The Reserve Bank of India (RBI) is designated as the authority under the Act to oversee and regulate payment systems. To discharge these duties, the RBI constituted the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a committee of its Central Board.
The Act also provides legal recognition for netting and settlement finality, which are essential for payment systems like NEFT, UPI, and card settlements that operate on a net basis.
Key Regulations under the PSS Act
Two important regulations were notified alongside the Act in 2008:
1. Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008– Deals with the constitution, powers, and functions of the BPSS.
2. Payment and Settlement Systems Regulations, 2008 – Covers applications for authorization, standards for payment systems, reporting requirements, and operational rules.
Important Definitions under the Act
* Payment Obligation: Payment Obligation is what one participant owes another in a payment system, arising from clearing or settlement instructions.
* Payment Instruction: Any instrument or order—manual (like cheques) or electronic—that directs a payment between system participants.
* Settlement: The completion of payment instructions, either on a net basis or gross basis.
* Payment System: Any system that enables clearing, payment, or settlement services between a payer and a beneficiary. This includes credit/debit cards, smart cards, money transfers, and similar operations. Stock exchanges, however, are excluded.
Entities operating such systems are called system providers.
Licensing and Authorization
Section 4 of the Act mandates that ‘no person other than the RBI can operate a payment system without authorization’. Applicants must:
* Apply in Form A under the 2008 Regulations.
* Pay an application fee of ₹10,000 (plus GST).
* Submit all required documents for RBI’s scrutiny.
Foreign entities are also eligible to apply, provided they obtain authorization from RBI. Several global players like Visa, MasterCard, Western Union, and MoneyGram operate in India under this framework.
Financial Market Infrastructures (FMIs)
FMIs such as payment systems, Central Securities Depositories (CSDs), Securities Settlement Systems (SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) are recognized under the Act. Their regulation follows international standards set by CPMI-IOSCO’s Principles for Financial Market Infrastructures (PFMIs).
RBI’s Oversight and Powers
The RBI evaluates applications based on factors such as system design, security standards, risk management, financial stability, consumer interest, and alignment with monetary policy. It also has the power to:
* Revoke authorization for non-compliance.
* Prescribe operational rules (e.g., membership criteria, settlement timelines).
* Collect authorization and security fees.
* Conduct inspections, including of foreign entities (with regulatory cooperation).
* Issue binding directions for smooth operation of systems.
Duties of System Providers
System providers must:
* Operate in compliance with the Act, regulations, and RBI directions.
* Disclose terms, charges, and liabilities clearly to participants.
* Maintain confidentiality of participant information.
* Provide relevant documents and rules to system participants.
Dispute Resolution
The Act establishes a dispute resolution framework:
* Panels are created by system providers to resolve participant-level disputes.
* If unresolved, disputes are referred to RBI for final adjudication.
* If RBI is a party to the dispute, it goes to the Central Government.
Penalties and Offences
The PSS Act, 2007 lays down strict penalties for:
* Operating a payment system without authorization.
* Failure to comply with authorization terms.
* Providing false information.
* Non-compliance with RBI directions.
Dishonour of an*electronic fund transfer due to insufficient funds is treated on par with cheque dishonour under the Negotiable Instruments Act, and offenders may face fines or imprisonment.
Key Takeaways
* The PSS Act, 2007 forms the legal backbone of India’s payment system regulation.
* RBI, through BPSS, is the designated authority for supervision.
* All entities—domestic or foreign—must obtain RBI authorization before operating a payment system.
* The Act provides legal certainty to settlement finality and recognizes both netting and loss allocation mechanisms.
*Offences under the Act can lead to penalties, prosecution, or revocation of license.
👉 This Act has been pivotal in supporting India’s digital payments revolution, ensuring that systems like UPI, NEFT, RTGS, and card networks operate in a secure, transparent, and regulated environment.
Related Posts:
