India: payments post crisis

Published: Mar 2014

David Blair

Managing Director

Twenty five years of management and treasury experience in global companies. David Blair was formerly Vice-President Treasury at Huawei where he drove a treasury transformation for this fast-growing Chinese infocomm equipment supplier. Before that Blair was Group Treasurer of Nokia, where he built one of the most respected treasury organisations in the world. He has previous experience with ABB, PriceWaterhouse and Cargill. Blair has extensive experience managing global and diverse treasury teams, as well as playing a leading role in e-commerce standard development and in professional associations. He has counselled corporations and banks as well as governments. He trains treasury teams around the world and serves as a preferred tutor to the EuroFinance treasury and risk management training curriculum.

Clients located all over the world rely on the advice and expertise of Acarate to help improve corporate treasury performance. Acarate offers consultancy on all aspects of treasury from policy and practice to cash, risk and liquidity, and technology management. The company also provides leadership and team coaching as well as treasury training to make your organisation stronger and better performance oriented.

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What a difference those few years make!

The India of my memories was a caricature nightmare of clearing times measured in weeks for so-called “up country” or “out station” cheques and byzantine bureaucracy. It was so awful that you just had to laugh – a lesson in acceptance worthy of any ashram.

Of course the licence raj is still thriving, and – regrettably for India’s people other corruption and inefficiencies remain problematic. However, someone lit a fire under India’s payment infrastructure and the progress has been remarkable in absolute terms and amazing in the context of India’s progress in most other areas.

For high value payments, India has a real-time gross settlement (RTGS) clearing system which is fast and widespread. Clearing is through the Reserve Bank of India (RBI) and is final. RTGS is also the final inter-bank clearing for the low value systems.

The early low value clearing systems are national electronic funds transfer (NEFT) and electronic clearing service (ECS). NEFT has become common for credit transfers. NEFT is a net settlement system with 12 clearing cycles from 08:00 to 19:00 daily. ECS is commonly used for direct debits, but its popularity is limited because of its paper-based mandate management. The newer NACH (below) addresses this and other issues.

In 2008, the RBI established a private company called the National Payments Corporation of India (NPCI) to set up and run low value payment systems. The shareholders are banks, including two foreign banks – HSBC and Citi.

NPCI started by setting up an efficient low value clearing system based on international best practice. The National Automated Clearing House (NACH) provides both credit transfers and direct debits including electronic mandate management, using ISO20022 standards. NACH is being phased in to replace NEFT and ECS.

Electronic settlement already accounts for some 95% of value of INR (Indian Rupee) settlement and 50% of volume. These are nationwide figures – MNCs (multinational corporations) report higher figures. Even for companies using a lot of cheques, the situation has improved greatly.

The RBI mandated that all banks implement a core banking platform (CBP) to support electronic settlement and to enhance cheque processing. CBP enables so-called SPEED clearing of cheques using magnetic ink character recognition (MICR) and cheque truncation system (CTS). The net result is that 99% of cheques now clear within 48 hours.

CBP and electronic payments support a 30-character alpha-numeric account number field. Many local and global banks have built robust virtual account capabilities on the back of this. The best allow corporate customers to define virtual account codes on the fly, without the administrative overhead of setting up virtual account codes at the bank before use. And the RBI mandate means that the virtual account code entered by the payer will survive through any intermediary bank systems to arrive intact at the beneficiary.

“In 2008, the RBI established a private company called the National Payments Corporation of India (NPCI) to set up and run low-value payment systems. The shareholders are banks, including two foreign banks – HSBC and Citi”

A very interesting, albeit still early stage, initiative of NPCI is IMPS. Initially, IMPS stood for Indian mobile payment system, but the evolution and use case has been so rapid that IMPS has been rolled out as a multi-platform service and renamed IMmediate payment system.

IMPS provides real-time and final settlement retail payments, requiring only an online device and a bank account. So it enables the shift from cash to electronic in markets and bazaars all over India. IMPS has also generated enthusiasm from insurance companies, telecom operators and other corporates with high volumes of retail collections.

It is a fast-moving space globally, but IMPS has to be a strong contender for the most sophisticated and usable mobile payment system worldwide.

Where cash is still unavoidable – think field force petty cash and so forth – India’s ATM network works across banks and although there is a nominal fee for inter-bank cash withdrawal most banks seem happy to waive it for corporate customers. An adjacent technology that is gaining popularity in such cases is the use of corporate-issued debit cards.

Statutory payments used to be a nightmare, requiring companies to maintain accounts with state banks solely to pay local taxes. The government is pushing for all statutory payments to be multi-bank, taking advantage of the new electronic payment platforms. Further, most global banks and large local banks have the correspondent banking relationships required to handle statutory payments nationwide. This helps treasurers to drastically reduce the number of bank accounts required in India.

Cynics might at this point be thinking that all this impressive bank payment infrastructure must be confined to limited pilot schemes in the big metropolitan areas. Not so. These are all live nationwide rollouts. Building on the back of RBI-mandated CBP, almost all banks are online. India is a huge country so I am not sure whether a remote corner like Port Blair in the Andaman Islands would be online, but 99% of India’s GDP is covered and all of the big banks, both global and local.

My focus has been primarily on domestic INR settlement but I would be remiss if I did not mention a couple of adjacent issues.

FX controls have traditionally been a drag on productivity and efficiency because of the requirement for paper documentation for all cross-border flows. Much of that remains, but the RBI has delegated checking of trade documentation to commercial banks. This allows the banks to provide process efficiencies such as allowing scanned supporting documents to be provided online through e-banking along with payment instructions. (Of course, paper documentation must be available for subsequent audit where required.)

On a less positive note, India’s Companies Act 2013 has made cash concentration even more difficult. Cash pooling has never been easy in India – notional pooling is not allowed and sweeping creates what the Act calls “inter-corporate deposits” which are strictly controlled to stop local conglomerates from shifting funds between partially floated affiliates. MNC cash management is collateral damage. The new Act makes cash pooling more difficult but care with company directors can normally resolve issues arising from the common directors rules.

India has leapfrogged several generations of payment technology in an astonishingly short time – broadly five years. In terms of payment infrastructure, India is now in the top league. For the sake of a billion Indians suffering from corruption and inefficiency, I hope this astonishing leap in payment technology becomes the model for other reforms.

The views and opinions expressed in this article are those of the authors

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