The Journey of Payments and Clearing Systems in India: By Onkar Chachad

Ancient to Pre-Colonial Ages (Before 17th Century): The Dawn of Exchange

In ancient India, rudimentary forms of payment and exchange existed:

• Barter System: The earliest form of exchange involved direct trade of goods and services.
• Metallic Currency: As civilizations developed, coins made of various metals (copper, silver, gold) became the medium of exchange. This introduced standardization and divisibility.
• Indigenous Banking (Shroffs and Mahajans): Long before modern banks, India had a thriving indigenous banking system. Moneylenders, traders, and Shroffs (money changers and bankers) facilitated credit and remittances.
• Hundis: These were traditional financial instruments, akin to bills of exchange or promissory notes, used for transferring money across distances without physical movement of cash. They were crucial for financing trade routes within India
  and internationally. This was an early form of a clearing system, relying on networks of trust.

Colonial Era (17th Century – 1947): Introduction of Formal Banking

The British colonial period saw the gradual introduction of modern banking principles and institutions, primarily to facilitate trade and administration.

• Presidency Banks: The Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843) were established, later merging to form the Imperial Bank of India (1921), which eventually became the State Bank of India. These banks introduced
  formal ledger-based accounting and cheque payments.
• Cheque System: The cheque emerged as a formal payment instrument, requiring physical movement and manual clearing processes. This was a significant step towards non-cash payments but was slow and prone to errors.
• Reserve Bank of India (RBI) Establishment (1935): The RBI was established to regulate currency, provide banking services to the government, and act as a banker to banks. This laid the foundation for a centralized monetary authority and
  future oversight of payment systems.

Post-Independence (1947 – 1990s): Building the Foundation

After independence, India focused on strengthening its financial infrastructure and extending banking services.

• Nationalization of Banks (1969, 1980): A major policy shift aimed at increasing financial inclusion and directing credit to priority sectors. This expanded the reach of formal banking to rural areas.
• Manual Clearing Houses: Cheques remained the dominant non-cash payment instrument. Clearing houses, often managed by the RBI or lead banks, facilitated the physical exchange and settlement of cheques. This was labor-intensive and time-consuming.
• Introduction of MICR Cheques (1980s): Magnetic Ink Character Recognition (MICR) technology was introduced for faster and more accurate processing of cheques, reducing manual intervention.
• Early Electronic Initiatives (late 1980s/early 1990s): Limited electronic fund transfers began to emerge, mainly within banks or for specific corporate clients, but were not widely interoperable.

Liberalization and Early Digitization (1990s – 2000s): The Digital Dawn

The economic liberalization of 1991 spurred financial sector reforms and the adoption of technology.

• Computerization of Banks: Banks began significant computerization, moving from manual ledgers to core banking systems.
• Electronic Clearing Service (ECS) (1990s): Introduced for bulk, repetitive payments like salary disbursements and utility bill collections. This was a step towards automated recurring payments.
• Real-Time Gross Settlement (RTGS) (2004): A major leap forward, establishing a robust system for large-value, real-time interbank fund transfers, enhancing systemic efficiency and reducing settlement risk.
• National Electronic Funds Transfer (NEFT) (2005): Provided a nationwide electronic fund transfer system for retail payments, operating in batches. This democratized electronic fund transfers for individuals and small businesses.
• Cheque Truncation System (CTS) (2008 onwards): Replaced physical cheque movement with electronic images, significantly speeding up cheque clearing.
• Establishment of NPCI (2008): The National Payments Corporation of India (NPCI) was established by the RBI and Indian Banks’ Association (IBA) as an umbrella organization for operating retail payment and settlement systems. This proved
  to be a pivotal move in fostering indigenous innovation.

The Digital Revolution (2010s – Present): The UPI Era

The last decade has been transformational, driven by smartphone penetration, internet access, and strategic government and RBI initiatives.

• Immediate Payment Service (IMPS) (2010): NPCI launched IMPS, enabling instant 24×7 interbank fund transfers, a crucial step towards ubiquitous real-time payments.
• RuPay Cards (2012): NPCI launched India’s domestic card payment network, reducing reliance on international schemes and promoting domestic processing.
• Aadhaar Enabled Payment System (AePS) (2014): Leveraged Aadhaar biometric identity for financial inclusion, allowing basic banking services through biometric authentication at agent points.
• Pradhan Mantri Jan Dhan Yojana (PMJDY) (2014): Government scheme for financial inclusion, opening millions of zero-balance bank accounts, creating a broad base for digital payments.
• Unified Payments Interface (UPI) (2016): The game-changer. UPI enabled real-time, instant payments across multiple bank accounts via a single mobile application. Its simplicity, interoperability, and low cost made it an instant success.
• Demonetization (2016): While disruptive, it acted as a strong catalyst for digital payment adoption, pushing a large segment of the population to explore cashless transactions.
• Bharat Bill Payment System (BBPS) (2016): Standardized and simplified bill payments across the country.
• National Electronic Toll Collection (NETC) / FASTag (2016 onwards): Revolutionized toll payments, enabling seamless, cashless travel on highways.
• 24x7x365 Availability (2019-2020): NEFT and RTGS were made available round the clock, further enhancing real-time payment capabilities.
• UPI Enhancements: Constant innovation with UPI Lite (offline small payments), UPI 123Pay (feature phone users), Credit Line on UPI, Tap & Pay, and international linkages (e.g., UPI-PayNow with Singapore, now also active in UAE, France,
  Bhutan, Sri Lanka, Nepal, and Mauritius).

Current Stage of India’s Payment Systems (as of June 2025)

India is currently a global leader in real-time digital payments, particularly through UPI.

• UPI Dominance: UPI continues to set global benchmarks, accounting for nearly 46% of all global real-time digital transactions in 2022. It processes billions of transactions monthly, including a significant volume of small-ticket payments.
• Robust Infrastructure: A comprehensive suite of systems (RTGS, NEFT, IMPS, NACH, AePS, BBPS, NETC) provides a robust and resilient payment infrastructure for diverse needs, from large value interbank transfers to micro-retail payments.
• Financial Inclusion: Digital payments have significantly deepened financial inclusion, bringing millions of previously unbanked or underbanked individuals into the formal financial system.
• Innovation Hub: India’s payment ecosystem is a hotbed of innovation, with fintechs constantly developing new solutions, often leveraging UPI, Aadhaar, and other public digital infrastructure.
• Regulatory Framework: The Payment and Settlement Systems Act, 2007, and the oversight by the RBI (through its Department of Payment and Settlement Systems and Board for Regulation and Supervision of Payment and Settlement Systems – BPSS)
  provide a strong legal and regulatory foundation.

Future Outlook based on Government Policies and RBI Initiatives

India’s future payment landscape will be shaped by a continued push towards digitization, financial inclusion, security, and internationalization, guided by the RBI’s “Payments Vision 2025” and government’s “Digital India” initiatives.

1. Central Bank Digital Currency (CBDC – Digital Rupee):

   • Policy: RBI is actively piloting both wholesale and retail versions of the Digital Rupee (e₹). As of early 2025, pilot projects are underway in over 15 cities.
   • Future Vision: The aim is to reduce dependency on physical cash, improve settlement efficiency, and offer programmability. For instance, CBDC could be programmed for specific uses (e.g., subsidies for fertilizer use within a stipulated
     period), enhancing transparency and targeted delivery of government benefits. Integration with platforms like the Unified Portal for Education Loan is being explored.
   • Impact: While current usage is minimal, CBDC is expected to play a crucial role in future wholesale payments, cross-border transactions, and potentially in public service delivery, offering a more resilient and traceable payment method.

2. Cross-Border Payments Integration:

   • Policy: RBI and the government are actively pursuing linkages with other countries’ instant payment systems (e.g., UPI-PayNow, discussions with European nations). Efforts are ongoing to study the feasibility of settling foreign currencies
     on Indian payment systems.
   • Future Vision: Seamless, real-time, and cost-effective cross-border payments are a key focus. This includes exploring direct INR accounts for other central banks with RBI and vice-versa, and potentially linking multiple countries’ CBDCs
     via a digital bridge.
   • Impact: Significantly reduce remittance costs and time, boost international trade, and strengthen India’s position in the global financial architecture.

3. Enhanced Security and Resilience:

   • Policy: RBI continually updates security guidelines, emphasizes tokenization (e.g., for card details), and promotes robust fraud detection and resolution mechanisms.
   • Future Vision: Increased use of AI and machine learning for real-time fraud detection and prevention. The development of an Online Dispute Resolution (ODR) system for payment transactions and emphasis on cybersecurity for critical payment
     infrastructure (as outlined in DORA for Europe, India has its own evolving frameworks).
   • Impact: Build greater trust in digital payments, protect consumers and businesses from financial crime, and ensure operational resilience of the payment ecosystem.

4. Deepening Financial Inclusion:

   • Policy: Continued focus on increasing digital literacy, expanding acceptance infrastructure (e.g., PIDF scheme to subsidize PoS devices in underserved areas), and bringing more individuals into the formal banking fold. Initiatives like
     UPI 123Pay for feature phone users demonstrate this commitment.
   • Future Vision: Making digital payments accessible and intuitive for every segment of the population, including those in remote areas or with lower digital literacy. Voice-activated payments are a step in this direction.
   • Impact: Further bridge the urban-rural divide, ensure equitable access to financial services, and foster inclusive economic growth.

5. Innovation in Lending and Beyond:

   • Policy: RBI is open to innovation in digital lending, including regulating BNPL services. The development of Account Aggregators (AAs) aims to enable seamless data sharing with user consent, fostering new credit products.
   • Future Vision: Integration of payment data with credit scoring models to enable more personalized and inclusive lending solutions. New financial products built on public digital infrastructure (like UPI and Aadhaar) are expected to emerge,
     covering areas like micro-lending, wealth management, and insurance.
   • Impact: Drive credit penetration, particularly for MSMEs and individuals, and create a more dynamic financial services market.

6. Offline Payment Capabilities:

   • Policy: RBI is exploring solutions for offline digital payments, crucial for areas with intermittent internet connectivity. This includes offline functionality for CBDC.
   • Future Vision: Enabling digital transactions even without constant internet access, enhancing reliability and reach, especially in rural and disaster-prone areas.
   • Impact: Boost the resilience and accessibility of digital payments across the country.

In essence, India is at a pivotal stage where its robust payment infrastructure, built over decades, is being aggressively leveraged and augmented with cutting-edge technologies. The future promises a “faceless, paperless, cashless” economy, highly interoperable,
globally connected, and designed for universal access and security, driven by the synergistic efforts of the government, RBI, and the vibrant fintech ecosystem.