PRELIMINARYCentral

Section 2 of The Payment and Settlement Systems Act, 2007

(1)In this Act, unless the context otherwise requires,--
1. (a)"bank" means,--
  1. (i)a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
  2. (ii)a post office savings bank;
  3. (iii)a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
  4. (iv)a co-operative bank as defined in clause (cci) of section 5, as inserted by section 56 of the Banking Regulation Act, 1949 (10 of 1949); and
  5. (v)such other bank as the Reserve Bank may, by notification, specify for the purposes of this Act; (b)"derivative" means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or any other underlying or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency rupee swaps, foreign currency options, foreign currency rupee options or any other instrument, as may be specified by the Reserve Bank from time to time;
2. (c)"electronic funds transfer" means any transfer of funds which is initiated by a person by way of instruction, authorisation or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers, automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and card payment;
3. (d)"gross settlement system" means a payment system in which each settlement of funds or securities occurs on the basis of separate or individual instructions; 1[(da) "issuer" means a person who issues a legal entity identifier or such other unique identification (by whatever name called), as may be specified by the Reserve Bank from time to time;
4. (db)"legal entity identifier" means a unique identity code assigned to a person by an issuer for the purpose of identifying that person in such derivatives or financial transactions, as may be specified by the Reserve Bank from time to time;]
5. (e)"netting" means the determination by the system provider of the amount of money or securities, due or payable or deliverable, as a result of setting off or adjusting, the payment obligations or delivery 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 such other circumstances as the system provider may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned;
6. (f)"notification" means a notification published in the Official Gazette;
7. (g)"payment instruction" means any instrument, authorisation or order in any form, including electronic means, to effect a payment,--
  1. (i)by a person to a system participant; or
  2. (ii)by a system participant to another system participant;
8. (h)"payment obligation" means an indebtedness that is owned by one system participant to another system participant as a result of clearing or settlement of one or more payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions;
  1. (i)"payment system" means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. Explanation.--For the purposes of this clause, "payment system" includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations;
9. (j)"prescribed" means prescribed by regulations made under this Act;
10. (k)"regulation" means a regulation made under this Act;
11. (l)"Reserve Bank" means the Reserve Bank of India, constituted under the Reserve Bank of India Act, 1934 (2 of 1934);
12. (m)"securities" means the Government securities as defined in the Public Debt Act, 1944 (18 of 1944) or such other securities as may be notified by the Central Government from time to time under that Act;
13. (n)"settlement" means settlement of payment instructions and includes the settlement of securities, foreign exchange or derivatives or other transactions which involve payment obligations;
14. (o)"systemic risk" means the risk arising from--
  1. (i)the inability of a system participant to meet his payment obligations under the payment system as and when they become due; or
  2. (ii)any disruption in the system, which may cause other participants to fail to meet their obligations when due and is likely to have an impact on the stability of the system: Provided that if any doubt or difference arises as to whether a particular risk is likely to have an impact on the stability of the system, the decision of the Reserve Bank shall be final;
15. (p)"system participant" means a bank or any other person participating in a payment system and includes the system provider;
16. (q)"system provider" means a person who operates an authorised payment system; 3[(r) "trade repository" means a person who is engaged in the business of collecting, collating, storing, maintaining, processing or disseminating electronic records or data relating to such derivatives or financial transactions, as may be specified by the Reserve Bank from time to time.]
(2)Words and expressions used, but not defined in this Act and defined in the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking Regulation Act, 1949 (10 of 1949), shall have the meanings respectively assigned to them in those Acts.

Summary

A bank includes large scheduled banks, post office savings banks, and co-operative banks.
An electronic funds transfer is when a person tells a bank to move money using digital tools like ATMs, the internet, or cards.
A payment system is any setup that lets a payer send money to a receiver, such as credit card or money transfer operations, but it does not include stock exchanges.
A system provider is the person or company that runs a payment system that has been officially authorised.
A system participant is any person or bank that uses the payment system to move money, including the provider itself.
Netting is a process where the system provider calculates the final amount owed between participants by canceling out what they owe each other.

Practical examples

1Meera uses her debit card at a grocery store to pay 500 rupees. This is an electronic funds transfer because she used a card to instruct her bank to move money to the store's account.

2A new company called QuickPay wants to be a system provider. To fit the definition in Section 2, they must first get authorisation from the Reserve Bank, which involves the application process mentioned in Section 5.

FAQ

1. Is a stock exchange considered a payment system under this law?

No, Section 2(i) specifically excludes stock exchanges from the definition of a payment system.

2. What counts as an electronic funds transfer?

It includes point of sale (POS) transfers, ATM transactions, direct deposits, internet transfers, and card payments.

3. What is systemic risk?

It is the danger that one participant's failure to pay, or a general system breakdown, will cause other participants to fail and hurt the stability of the whole system.

4. Who has the final say if there is a disagreement about what counts as a systemic risk?

The Reserve Bank has the final decision on whether a risk is likely to impact the system's stability.

Test yourself

Q1.Under Section 2 of The Payment and Settlement Systems Act, 2007, which of the following is excluded from the definition of a payment system?

Q2.Based on Section 2 and Section 5 of The Payment and Settlement Systems Act, 2007, a person becomes a system provider only when they:

Q3.According to Section 2 of The Payment and Settlement Systems Act, 2007, what is the term for adjusting payment obligations between participants so only a net amount is owed?

Q4.In The Payment and Settlement Systems Act, 2007, Section 2 defines an electronic funds transfer as being initiated by:

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