India’s First Big Tryst With Digital Payments

Payments weren’t always as easy as they are now. In fact, memories of the times when large sums of money couldn’t be moved with a few clicks are still fresh in many minds.

Ask VG Kannan, who retired as managing director of the State Bank of India in 2016 and went on to become the chief executive of the Indian Banks’ Association till 2019.

The year was 2001, a large value inter-bank transaction was to be made. SBI had sent a representative with the cheques, as was common practice then, but an accident meant that this person couldn’t reach the clearing house before it closed. The payment couldn’t be cleared. To prevent the other lender from defaulting, SBI had to step in to make the payment.

The payment system until the early 2000s was mostly paper-based and cheques were the dominant instrument. In the case of high-value payments, a representative from the bank branch would physically go to the clearing cell of the RBI, which would confirm the transaction with the counter-party bank, verify identities of those issuing the cheque and the ones receiving it, before approving the transaction.

The whole process of getting these funds cleared and transferred to the intended bank account would often take days, recalls Kannan. “The system was known for a number of delays in clearing as bank representatives would arrive around the clearing house’s deadline to process the transaction.”

But change had started to creep in starting the year 2000. With the passing of the Information Technology Act, electronic data became viable proof of a transaction, which was acceptable in court during a dispute.

This was a watershed moment for the RBI, a former RBI official said, speaking on condition on anonymity. Right after that The Institute for Development & Research In Banking or IDRBT, which is the RBI’s research and development wing, started studyng the implications of implementing electronic fund transfer systems, this person said.

By 2002, the regulator had contracted UK’s Logica Plc. and an Indian partner Tata Consultancy Services to prepare the RTGS framework in India, the RBI official quoted above said.

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