RBI’s Planned ‘Lightweight’ Payments and Settlement System

• 01 Jun 2023

Why in News?

The Reserve Bank of India (RBI) recently announced plans to introduce a 'Lightweight' Payment and Settlement System (LPSS) for emergencies which was proposed in RBI's annual report for 2022-23.

• The lightweight system aims to provide resilience and continuity of payment and settlement systems while ensuring efficiency during emergencies.

What is RBI’s Planned LPSS?

• About:
  • LPSS is independent of conventional technologies and wired networks that underlie existing payment systems such as UPI, NEFT, and RTGS.
• Background:
  • As a part of the ‘Utkarsh 2.0’ initiative, RBI will put in place a resilient framework for oversight of Centralized Payment Systems — NEFT and RTGS.
  • It will also look to upgrade the RTGS system, including improvements to the existing ones and the introduction of new functionalities.
• Enhancing Payment System Resilience:
  • LPSS for emergencies ensures resilience and continuity of payment and settlement systems during extreme and volatile situations.
  • Conventional payment systems like UPI, NEFT, and RTGS are vulnerable to disruptions caused by natural calamities or war due to their dependence on complex wired networks and advanced IT infrastructure.
    • Disruptions in existing systems can affect liquidity pipeline and hamper essential payment services.
  • Lightweight system provides a portable and easily activated solution that can be operated remotely with minimal resources.
  • It serves as a backup option for critical transactions, maintaining stability and ensuring the availability of essential payment services.
• Working Procedure:
  • Minimal Staff:
    • The system will have a bare minimum of trained staff who will handle payment and settlement operations securely and efficiently. They will also coordinate with government agencies, financial institutions, market participants, and service providers.
  • Focus on Essential Transactions:
    • The system will process only those transactions that are crucial for maintaining the stability of the economy, such as government and market-related transactions.
    • Retail or individual transactions that can be deferred or conducted through alternative modes will not be handled.
  • Simplified Authentication and Verification:
    • The system will employ a simplified mechanism to ensure the integrity and validity of transactions. It will also maintain transaction records for reconciliation and audit purposes.
• Benefits:
  • Ensures near-zero downtime of the payment and settlement system during emergencies.
  • Facilitates uninterrupted functioning of essential payment services, including bulk payments, interbank payments, and provision of cash to participant institutions.
  • Enhances public confidence in digital payments and financial market infrastructure.
  • Acts as a deterrent against malicious attacks or sabotage attempts on existing payment systems.
• Challenges:
  • Requires careful planning and coordination among stakeholders for readiness and effectiveness.
  • Requires testing and validation of functionality, security, and reliability before deployment.
  • Requires regular training and capacity building of staff.
  • Requires constant monitoring and evaluation of performance and impact.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Q1. With reference to digital payments, consider the following statements: (2018)

1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Ans: (a)

Q2. Which of the following is a most likely consequence of implementing the ‘Unified Payments Interface (UPI)’? (2017)

(a) Mobile wallets will not be necessary for online payments.
(b) Digital currency will totally replace the physical currency in about two decades.
(c) FDI inflows will drastically increase.
(d) Direct transfer of subsidies to poor people will become very effective.

Ans: (a)

Q3. Consider the following statements: (2017)

1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country.
2. NPCI has launched RuPay, a card payment scheme.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Ans: (c)

Source: IE