Payment and Settlement Systems

The history of the payment system can be said to be virtually co-terminus with the evolution of money. The earliest form of payment system could perhaps be traced back to the pre-historic days of barter trade when the settlement of consideration took place through exchange of conch shells, goods, cattle and later commodities. Such a system, in the absence of money as a medium of exchange, was obviously very cumbersome due to highly improbable ‘coincidence of wants’ of the two parties to a barter transaction. Subsequently, more formalized payment instruments, such as coins, developed. The earliest payment instruments known to have been used in India were coins, which were either punch-marked or cast in silver and copper; even leather is known to have been used for making coins. Thus, with the advent of institutionalized forms of money, initially in the form of coins and later as paper money, the barter trade withered away and the usage of currency became the order of the day.

With the further advancement of monetary system and growth of economies the transactions grew complex and a need for replacement of currency by other payment instruments became the order of the day. In the eighties and nineties the emerging world economies started opening up to each other resulting in even more complex nature of financial settlement which cleared the way for electronic settlements to take over the manual ones. The enormity of transactions brought about the challenge of mitigating systemic risk which finally resulted in the birth of Real Time Gross Settlement and other payment and settlement Systems.

Evolution of Clearing Houses and MICR based Clearing

With the steady rise in volumes of trade and commerce and the growing confidence of the public in the usage of cheques, etc., there was also rapid growth in the payment transactions using these instruments. With the development of the banking system and higher volume of cheques used, the need for an organised cheque clearing process emerged amongst the banks. Clearing associations were formed by the banks in the Presidency towns and the final settlement between member banks was effected by means of cheques drawn upon the Presidency Banks. With the setting up of the Imperial Bank in 1921, settlement was done through cheques drawn on that bank. After the establishment of the RBI in 1935, the Clearing Houses in the Presidency towns were taken over by the RBI, and continued with it for more than five decades.

It is noteworthy that the volume of paper-based clearing we handle is the sixth largest in the world.


The payment and settlement system constitutes the backbone of the financial sector and enables conclusion and settlement of financial contracts. The country has made phenomenal progress in enhancing the reach and improving the efficiency of the national payment system – in which the RBI and the banking system have been equal partners. Creating a world-class payment system in the country is a long, arduous but an exciting journey in which a constant striving is needed to better the past achievements. The banking community would surely make dedicated and systematic efforts in this direction to meet the challenges ahead and actively contribute to realizing the vision for the payment system has been set for the country.

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  • Raj Janorkar

    Payment and Settlement Systems

    2 years ago