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  1. 1. International Journal of Management (IJM), ISSN OF 6502(Print), ISSN 0976 - 6510(Online), INTERNATIONAL JOURNAL 0976 – MANAGEMENT (IJM) Volume 5, Issue 1, January (2014), © IAEME ISSN 0976-6502 (Print) ISSN 0976-6510 (Online) Volume 5, Issue 1, January (2014), pp. 80-87 © IAEME: Journal Impact Factor (2013): 6.9071 (Calculated by GISI) IJM ©IAEME PAPER- FREE PAYMENT SYSTEMS IN INDIA-AN ANALYTICAL STUDY Dr. SUBRAMANIAN.S Professor, National Institute of Management Studies, Chennai, India ABSTRACT The primary goal of any national payment system is to ensure smooth circulation of money. It is recognized worldwide that an efficient and secure payment system triggers of economic activity. Efficiency in payment systems in general and electronic payment systems in particular, benefits both customer and country’s economic growth. There are diverse payment systems functioning in the country, ranging from the paper based systems where the instruments are physically exchanged and settlements worked out manually to the most sophisticated electronic fund transfer systems which are fully secured and transactions settled on a gross, real time basis. The retail payment systems in the country comprise of both paper based as well as electronic based systems. The proportions of electronic transactions, both in terms of volume and value, have increased sharply. It is indeed heartening to note that electronic payment in India has seen a huge growth and this augurs well for the corporate sector and the economy. The main purpose of the study is to analyze and evaluate whether electronic payment systems have been proving to be effective in India during the period of study. Furthermore, this study also reveals that all electronic modes of payments have attained a vast growth compared to the physical paper- based payments like cheques or drafts etc,. The study is based on secondary sources of information collected from various sources and the data is used from the periods of financial year (FY) 2003-04 to 2012-13. Key Words: Core Banking Solution, Cheque Truncation System, Card payments, Paper clearing, E- payment system. 1. INTRODUCTION The Reserve bank of India (RBI) proactively encourages electronic payment systems for ushering in a less-cash society in India and to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards as states the mission statement of India 2012-15. Regulation will channelize innovation 80
  2. 2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME and competition to meet these demands consistent with international standards and best practices. The overall regulatory policy stance is oriented towards promoting a paper less cash society. This “green” initiative has increased emphasis on the use of electronic payment products and services that can be accessed anywhere and anytime by all at affordable prices. 2. SIGNIFICANCE OF THE STUDY Cash is the preferred mode of payment for those sections of society not having access to formal payment systems. Electronic payments, even with an associated fee, can be less expensive compared to the available alternatives. The use of electronic payment instruments allows the unbanked to start building a transaction history, which can be a step towards initiating them towards financial inclusion. There is a huge potential of migrating government transactions (payments and receipts) to electronic mode. It is estimated that Government subsidies alone constitute more than Rs. 2.93 trillion and if these payments are effected electronically, it may translate to 4.13 billion electronic transactions in a year (, vision12-15). The e-commerce and m-commerce platforms are poised for a big stride in coming years. Similarly, electronic bill payments and settlements involving insurance, utility bills, taxes, school fees, etc. present a huge opportunity. The country needs to move away from cash-based towards a cash free (electronic) payment system. This will help reduce currency management cost, track transactions, check tax avoidance / fraud etc., enhance financial inclusion and integrate the parallel economy with main stream. According to World Bank Development report 2013, electronic payments can save over one per cent of India's gross domestic product (GDP). The "Cash may still be “king” at times, but compared with electronic payments, cash payments are inefficient," According to the multi-lateral agency, the rising use of payment by electronic medium can help to save 1.6 per cent of India’s GDP. "Cash can carry significant handling and transportation costs, and run the risks of theft, loss, and counterfeiting." This means that if we take the size of India's GDP which stood at Rs 100, 20,620 crore in 2012-13, India could save Rs 1,60,330 crore thanks to electronic payments( RBI annual report). This study makes an attempt to evaluate and analyze and find out whether the electronic payments or paper based payments are growing fast to enable the financial institutions or banks adopt a right business strategy of achieving our vision 2012-15 is the significance of the study. 3. REVIEW OF LITERATURE A review has been primarily to identify appropriate methodologies and a subset of the articles/reports which has been reviewed. Reviews of some of them are given below: Aparna Iyer (2013) in her article safety and security are the new challenges as banks go electronic even in the hinder land. As banks go more Hi-Tech, the regulator has to necessarily stay a step ahead. Ashish Das, and Rakhi Agarwal (2010), this technical report conclude that Cash as a mode of payment is an expensive proposition for the Government. The country needs to move away from cash-based towards a cashless (electronic) payment system. Linda Eagle (2010) in her report, as more bank customers begin to use electronic banking solutions, hackers and money launderers are becoming more creative in their fraud tactics. Sumanjeet (2009) in his study concluding remarks first is that despite the existence of variety of e-commerce payment systems, credit cards are the most dominant payment system. Raja et al., (2008) in their study the success of electronic commerce depends upon effective electronic payment systems. This paper also discusses the evolution and the growth of electronic technologies, which can provide more advanced technical supports for electronic payment systems. Banknet India (2008) in their report that the findings of the “bank customer survey on payment 81
  3. 3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME systems.” Interestingly, many customers have been unable to use internet banking due to the non availability of site or connectivity problems. As far as mobile banking is concerned, its popularity is limited mainly due to the charges for sending SMS's are not justified. Balakrishnan(2007) in his article published the adoption of new age electronic payments systems and use of new practices in inventory and production management help the companies achieve long-term reduction in working capital management requirement. Denny (2000) observes that the security of Internet access to client account is the biggest challenge facing banks. Furst et al. (1998) in their U.S. based study found out a significant shift by consumers and businesses to electronic payments. The gains from technological advancements in banking and payments are likely to be substantial both from the point of view of individual financial institutions and economy. Crocin (1998) observes that the implementation of SET, the standard for secure electronic transactions on the Internet and its widespread adoption including security measures like encryption, digital authentication, and verification of on-line identity increase consumer confidence. 4. METHODOLOGY The study covers the secondary sources of information’s collected through reference from books, IBA journal, RBI Bulletin, Published Articles and related banks Websites. The study covers during the financial year (FY) ending 31st March 2003-04 to 20012-13. The tool for analyses is percentage. 5. ANALYSIS AND DISCUSSIONS As a result of the technological development, the proportions of electronic payments both in terms of volume and value have increased sharply than paper based payments system. The following tables and figures show different payment systems. TABLE 1: GROWTH VALUE OF ELECTRONICS AND PAPER PAYMENTS (Rs. in Billion) 2003-04 EFT/ NEFT 171.25 2004-05 546.01 201.80 29.21 2005-06 612.88 323.24 129.86 **FY ECS (Credit) ECS (Debit) 102.28 22.54 +Credit cards 176.63 48.74 ***Paper Clearing 115,959.60 256.86 53.61 104,588.95 1,087.50 338.86 58.97 113,291.34 1,463.83 ++Debit cards *EP (Total) 521.43 2006-07 774.46 832.73 254.40 413.61 81.72 120,424.26 2,356.93 2007-08 1403.26 7822.22 489.37 579.85 125.21 133,960.66 10,419.92 2008-09 2009-10 2,519.56 4,095.07 974.87 1,176.13 669.76 695.24 653.56 618.24 185.47 264.18 124,691.35 104,099.42 5,003.22 6,848.86 2010-11 2011-12 9,391.49 17,903.50 1,816.86 1,837.84 736.46 833.55 755.16 966.13 386.91 534.32 101,341.28 99,012.14 13,086.87 22,075.33 2012-13 29,022.42 1,771.28 1,083.10 1229.51 743.36 99,982.25 33,849.57 GROWTH (%) 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 81.19 79.55 62.54 129.34 90.64 62.10 839.35 -87.54 20.64 54.48 01.15 03.62 92.36 36.86 03.80 05.93 13.18 29.94 40.19 12.71 -05.40 22.15 27.94 27.26 53.22 48.13 42.44 46.46 38.10 39.12 11.24 -06.92 -16.51 -02.65 -02.30 0.98 342.10 -51.98 36.89 91.08 68.68 53.34 Source: Compiled from RBI Bulletin, Money and Banking - up to December 2013. 82
  4. 4. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME *EPs-Electronic Payments, ECS-Electronic Clearing Service, NEFT- National Electronic Fund Transfer. **FY- 12 months commencing from 1st April to 31 March every year. ***Paper Clearing i.e Cheque &draft only +Card payments figures pertain only to Point of Sale (POS) transactions. ++Debit card figures for 2003- 04 and 2004-05 are estimated based on 2005-06 figures. TABLE 2: GROWTH VOLUME OF ELECTRONICS AND PAPER PAYMENTS (2003-04 to 20012-13) Volume (Million) FY EFT/ NEFT ECS (Credit) ECS (Debit) Credit Cards Debit Cards Paper Clearing EP (Total) 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 0.82 2.55 3.07 4.78 13.32 32.16 66.34 132.34 226.11 394.13 20.32 40.05 44.22 69.02 78.37 88.39 98.13 117.30 121.50 122.18 7.87 15.30 35.96 75.20 127.12 160.05 149.28 156.74 164.74 176.53 100.18 129.47 156.09 169.54 228.20 259.56 234.24 265.14 319.96 396.61 37.76 41.53 45.69 60.18 88.31 127.65 170.17 237.06 327.54 469.05 1022.80 1166.85 1286.76 1367.28 1460.56 1397.39 1380.27 1387.40 1341.87 1313.48 166.94 228.90 285.01 378.71 535.32 667.81 718.16 908.58 1159.85 1558.50 GROWTH (%) 2007-08 178.78 13.55 69.04 34.60 46.74 06.82 41.35 2008-09 141.61 12.80 25.91 13.74 44.55 -04.43 24.75 2009-10 2010-11 011-12 106.27 99.49 70.86 11.02 19.54 03.62 -06.73 05.00 05.10 -09.76 13.74 20.68 33.31 39.31 38.17 -01.23 -0.52 -03.28 07.54 26.52 27.66 2012-13 74.30 0.56 07.16 23.96 43.20 -02.12 34.37 Source: Compiled from RBI Bulletin, Money and Banking - up to December 2013 The tables 1&2 capture through out of various electronic payments and paper based payments channels in India during the financial year ending 2003-04 to 2012-13 both in terms of value and volume. This data clearly indicate that all the EPs are growing at phenomenal rate in volume and in value than paper based payments systems. During the year ending 2007-08, paper based payments system was reported higher growth of payments at the rate of 11.24 per cent and also a remarkable highest growth of e-payments has three hundred and forty two per cent (342%) during five years ended on 31st march 2008. During 2008-09, there was a decline reported both in paper based instruments and e-payments at the rate of -6.92 per cent and -51.98 per cent respectively. But epayments were mainly due to the refund of the over subscription amount of IPOs floated by companies using electronic mode as mandated by the Stock Exchange (cf: RBI Report 2008-09). During the same period, Electronic Clearing Service (ECS) debit has increased by an incredible 36.86 per cent by value and 25.91 per cent by volume. ECS credit down to -87.54 per cent by value and grew up 12.80 per cent by volume of transactions. The EFT/NEFT grew by 79.55 per cent by value and 141.61 per cent by volume, debit cards grew by 48.13 per cent by value and 44.55 per cent by volume, and Credit cards grew by 12.71 per cent by value and about 13.74 per cent by volume of transactions. The paper-based payments have not been growing; alternatively these have negatively grown up in India at - 4.43 per cent by volume and -6.92 per cent by value of transaction in 2008-09. 83
  5. 5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME The growth volume of transaction directed through electronic payment method, decelerated from 41.35 to 24.75 per cent by volume and 342.10 per cent to-51. 98 per cent by value during FY 2007-08 to 2008-09. More strikingly, the value and volume of transactions directed through epayment method declined sharply during 2008-09. The entire decline of -87.54 per cent is also due to fall in value of transaction in respect of ECS – credit. It is noteworthy in this regard that the sharp rise in ECS credit value during 2007-08 was mainly due to the refund of the over subscription amount of IPOs floated by companies using electronic mode as mandated by the Stock Exchange (cf: RBI Report 2008-09). Therefore, the decline in value in ECS credit transactions during 2008-09 may be interpreted more as returning to normal trend rather than a matter of concern. The volume of ECS credit and more significantly ECS debit continued to show an increasing trend during 2008-09 in line with the trend witnessed during past few years. In recent years, the use of total electronic payments has witnessed manifold increase, partly reflecting increased adoption of technology. Further, the data clearly indicates that during the year ending 2009-10, ECS credit incredible of 20.64 per cent by value and 11.02 per cent by volume of payments. The NEFT also grew up by 62.54 per cent by value and 106.27 per cent by volume. Due to the notification issued by the RBI allowing free use of ATM-debit card in all the banks throughout the country would increase further by value and volume of e-payments. The growing popularity and acceptance of the NEFT system for the interbank funds transfers is reflected in the volume and value handled by the system, which increased by 74 per cent by volume and 62 per cent by value in the year 2012–13 compared to the year 2011–12. NEFT has become a flagship remittance system in the country catering to the needs of individuals, corporate and governments alike, many efficiency enhancements have also been made in the system. The volume of electronic transactions has increased to 1.6 billion in 2012–13 from 1.2 billion in 2011–12, indicating a growth of 34 per cent. The total value of electronic transactions has increased to Rs 33,849.57 billion in 2012–13 from Rs.22, 075.33 billion in 2011–12, registering a growth of 53.34 per cent. The trend clearly indicates rising consumer acceptance for the e-modes of payments. On the flipside, however, the growing importance and usage of electronic payments has increased the vulnerability towards risks and threat of frauds. During the year 2008-09 to 2011-12, the paper based payments continued to slow down in value and in volume also. In the year 2012-13, volume of paper based payments again slowed down to -2.12 per cent but the value remained the same due to low penetration of acceptance for electronic payments and government receipts done predominantly through cash, cheques and draft. It indicates that bank need to encourage for further subsidized for e- payment option to the users. The total EPs increased continuously from -51.98 per cent to 53.34 per cent by value and 24.75 per cent to 34.37 per cent by volume within five FY ending on 2008-09 to 2012-13. It is important to understand that during the year 2011-12 to 2012-13, growth rate of payments is increasing trend by value (53%) and by volume (34%) through electronic mode but not in paper based clearing. During the ten financial years commencing from 2003-04 to 2012-13, the negative growth of the paper based transaction in value (-14%) and in volume (-28%) has been recorded. It did not grow much but total electronic payments have grown around sixty five (65) times in value and nine (9.5) times in volume also. Obviously customers prefer electronic mode of transaction which are healthy practices for Indian economic growth. These are clear indications that corporate India is aware of these options and are beginning to use them. The banks in India are also aggressive in promoting epayments options as part of their cash management options as they also benefit from the migration of paper based payments instruments (that are inherently costly) to paper- free EP options which are more cost effective. The EP options also allow the companies to track the receipts in a more transparent manner and manage payments and liquidity more efficiently. 84
  6. 6. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME 6. SUGGESTION AND RECOMMENDATIONS The following suggestions and recommendations have been observed are: The usage of a payment product is dependent on the customer being aware of the existence of such a product and its use as also the safeguards against its misuse. Therefore, it is necessary that awareness of various payment products is created through the innovative use of available mass media. Stakeholders, singly or as groups of common purpose, must make efforts to spread awareness in making both the urban and rural user (as user or beneficiary) aware of their respective payment products. Both regulators and the government can assist to widen this spectrum to wean away population from cash to less cash with attendant benefits of efficiency and better productivity. Availability and awareness of payment products will not lead to increased usage unless the payment product is accepted by all. The acceptability of formal payment channels including e-payments is based on the ease of use, convenience, interoperability, language neutrality and incentive factors associated with the particular mode of payment. Thus, a multi-pronged strategy is required to increase the acceptability of payment products from the regulators, government and stakeholders. It is important to create awareness amongst the consumers/customers using these electronic payment methods. Reserve Bank has initiated a series of awareness programmes – e-BAAT (Electronic Banking Awareness Training) along with banks and other stakeholders. At the same time, serious attention needs to be paid to related issues of consumer protection, grievance redressal mechanisms, and issues of consumer liability in case of negligence or complicity in the event of unauthorized/fraudulent transactions. Finally, for large value electronic payments systems, RBI's vision should be to bring them up to world standards like ISO 20022 message standards reduce the complexities and integrated with global systems. Cross-border payments are an important facet of international trade and integration, and this can lead to settlement risks. RBI should address operational and regulatory issues to minimize these risks. 7. CONCLUDING REMARK AND IMPLICATIONS Despite RBI’s efforts to promote electronic banking, almost 90 per cent of total payments are estimated to be collected through cash/cheque (RBI Annual report). Our vision document by RBI, proactively encourage efficient electronic payments systems through developing accessibility, availability, affordability and assurance among other things are needed for cash-free society. Banks and other financial institutions should concentrate further on efforts to encourage corporate, individual /retail customers and also noted that the gaps in the bill payments eco-system for lack of inter-operability, high cost of cash, cheque /draft collection and poor accessibility in semi-urban and rural areas to ensue efficient innovative paper free electronic payments and settlement systems form the backbone of economic well being of the nation.. In addition, simplifying documentation requirements, increasing role of non-banks in the payment systems, innovation and competition, uniformity, addressing risks could facilitate more usage of the innovative efficient paper free mode. This study has number of limitations that must be acknowledged. Data on Internet banking and Mobile banking were not available. Therefore, these results of this study are not applicable to the full extent of paper free electronic payment systems in India. This is the future scope for the further research. 85
  7. 7. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME REFERENCES JOURNALS, REPORTS AND WORKING PAPERS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Aparna Iyer (2013) the new “Face book of Indian banking”, The Financial Express, March p6. Ashish Das, and Rakhi Agarwal(2010), Cashless Payment System in India- A Roadmap Technical Report, . Balakrishnan. M (2007) “Working capital management – Impact of emerging electronic payment Options in India.” The Indian Banker, vol.2 (.6) pp.18-26. Banknet India’(2008) Bank Customer Survey Research Report on Payment Systems was released at Fourth International Conference on Payment Systems held on January 16, at Mumbai: Taj Lands End Business line, Chennai, August, 23, 2013 p5. Cover Story (2007) “E-payments as currency of the future.” The Indian Banker, Monthly Journal, vol.2 (6) pp. 14-16. Crocin Mary J (1998) “Defining net impact: The realignment of banking and finance on the web.” In Banking and Finance on the Internet. New York: John Wiley and Sons.Chap.1. Denny. S(2000). “The electronic commerce challenge.” Journal of Internet Banking and commerce, vol.3 (.3) Available /JIBC/article/htm (Accessed on 7th January 2001). Furst , K Lang, W.W and Nolle E. Daniel (1998)”, Technological innovation in banking and payments, industry trends and implication for banks”, Office of the controller of currency, Quarterly journal,Vol.17(3)September. Khan H R (2013) Payment systems in India – reflecting on some recent trends and future challenges Inaugural address at the International Seminar on “Adoption of ISO 20O22 in RTGS”, held at the College of Agricultural Banking, 30th September at Pune. Linda Eagle,(2010) Preventing EFT Fraud with Training Reducing Risk to Financial Institutions and Their Customers, Banker’s Academy, Briefings, May, 17, pp3 ( Accessed on 25th July, 2010 IST23.50 hrs) Periera Allen C.A,( 2006 )Inaugural address International conference on” New Vistas Of ePayments” held on September 7 at Pragati Maidan-New Delhi. Available on pg54.pdf (accessed on 18th July, 2010). Reserve Bank of India (2013) Money and Banking, Monthly Bulletin, Oct , RBI report on payment and settlement system, vision 2012-15 Subramanian .S and Swaminathan. M (2010) Payments in India going ‘e-way’-an analytical study, International Journal of research in commerce and management, Vol.1 (5) Pp54-62. Sumanjeet .S (2009) “Emergence of payment Systems in the Age of Electronic Commerce”: The state of Act” Global Journal of International Business Research, vol. 2(2) pp.17-36. ELECTRONIC SOURCES 17. 18. 19. 20. 21. www.iba. org. in accessed on 25th July,2010 24. 86
  8. 8. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online), Volume 5, Issue 1, January (2014), © IAEME 22. -accessed on 20th December, 2013. IST 23.10hrs. 23. Jan 2014.IST 20.00 hrs. 24. 20th Jan 2014 IST 22.10hrs. 87