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All about Payment and settlement System (PSS) in India

There are different payments system that has been introduced in recent years. India was dependent on paper-based transactions before adapting to e-transactions. In order to regulate the financial transactions in India, Payments and settlement systems Act was passed. This act was legislated in 2007 and is regulated by Reserve Bank of India.

Points covered in this article are

1. What is Payment and Settlement System?

2. About Payment system in India?

3. What is Settlement and what is netting?

4. Objectives of Payment and Settlement System Act

5. Are all the entities operating under PSS Act required to get an approval beforehand?

6. Rights of Reserve Bank of India under PSS Act, 2007

7. Can any foreign entity register under PSS Act, 2007?

8. Penalties for non-compliance under PSS Act 2007?

1. What is Payment and settlement system?

For regulation of payment systems in India, payment and settlement Act was brought in to force under the authority of Reserve Bank of India. It includes all payments, clearing or settlements except stock exchange transactions. Through this Act, RBI is encouraging alternative methods of payments so that there will be efficiency and scrutiny in transactions

2. About Payments system in India

A system through which financial transactions can be made is called payment system. There are different payment systems which is usually used such as, credit cards, digital wallets, bank transfers etc. In India there are both Real Time Gross Settlement (RTGS) and Net settlement system. India’s banking system has been growing and more and more people are trying to adopt electronic payment system and Unified Payments Interface (UPI)

3.i What is Settlement?

Settlement includes transfer of payment instructions and includes settlement of securities, foreign exchange or any other transactions that involve payment obligations. This includes both RTGS and netting

3.ii. What is Netting?

“Netting” means the determination by the system provider of how much amount of money or securities is due or payable, as a result of all the adjustments and the payment obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or any other circumstances as the system provider may specify

4. Objectives of Payment and System Act

This Act provides legal basis for “netting” and “settlement finality”. As most of the settlements take place on net settlement basis rather than Real Time Gross Settlement (RTGS), the PSS Act, 2007 has designated RBI as the authority to all the matters relating to the Act. RBI has constituted a Committee of its central board known as the Board for Regulation and Supervision of Payment and Settlement System (BPSS). So that increasing demand for electronic payments and rising institutions who provide netting services, it is important to regulate and legalise all the settlements. This act has made e-transactions transparent and trustable mode for monetary transactions

5. Are all the entities operating under PSS Act required to get an approval beforehand?

It is stated under PSS Act, 2007 that no organisations can introduce or operate in a new payment system other than RBI unless it is authorised by RBI. Any person who wants to operate a new payment system should apply for authorisation under PSS Act, 2007

The application for new payment system is to be made as per Form A under Regulation 3(2) of Payment and Settlement Systems Regulation, 2008. The duly filled application is to be submitted to Reserve Bank of India. If any person operates under an unauthorised payment system, it shall be considered as a legal offence and that person shall be liable for penal action under the Act.

6. Rights of Reserve Bank of India under PSS Act, 2007

RBI goes through all necessary steps and scrutinises all the technical and security standards of proposed payment system. If all the aspects are as per standard, only then RBI shall approve of new payments system

· Reserve Bank of India has all rights to refuse the grant to commence new payments system if it does not meet the specified standards under PSS Act, 2007

· RBI can revoke the grant given, if the system provider does not abide by the law

· RBI has the right to collect security deposit by the system provider for proper conduct of payment system

· RBI has the authority to visit the premises of entity registered under PSS Act, 2007 to inspect the system, document or equipment to ensure that the system provider is complying with the law

· RBI can share the information about a system provider with other regulators if necessary, to protect or secure the payment system

As RBI has the full authority on all payment systems, all the decisions from giving the grant to revoking it lies in the hands of RBI. All the system provides shall abide by the regulations specified under the PSS Act, 2007

7. Can any foreign entity register under PSS Act, 2007?

Under section 4 and 18 of PSS Act 2007, there is no restriction for foreign entities to get listed under PSS Act, 2007. No distinction shall be made between domestic and foreign entities. Every entity should get the approval of RBI to operate in accordance with the PSS Act. Foreign entities such as MasterCard, Visa Worldwide Pte Limited are registered under PSS Act, 2007

8. Penalties for non-compliance under PSS Act, 2007

Under section 26 and 30 of PSS Act, 2007 that RBI has full rights to decide the fines and penalties to be imposed if a service provider fails to comply with the regulations specified under the law. RBI has the authority to initiate criminal prosecution against the entity

Frequently Asked Questions

1. Who regulates PSS Act, 2007?

Payment and Settlement Systems Act is regulated under the authority of Reserve Bank of India

2. What is included under Payment and Settlement Systems Act?

It includes payment between a payer and beneficiary involving any monetary settlement except stock exchange transfers

3. Can foreign entities register under PSS Act 2007?

Any entities can register under the act if RBI has granted the approval whether the entity is domestic or foreign entity

4. Is there any registration fees to be submitted along with application ?

While applying for registration a sum of ₹10000 is to be paid along with the application. The said payment can be made in cash, demand draft, electronic fund transfer or cheque in favour of RBI

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