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.

Source: IE