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Empowering India's Payment landscape

The Payment and Settlement Systems Act, 2007 and RBI’s Regulatory Powers

The Payment and Settlement Systems Act, 2007 (“PSS Act”) is a fundamental legislation in India, which governs and controls how payment and settlement systems are regulated and managed in the country. The PSS Act was outlined to improve the efficacy, stability and security of payment mechanisms, and grants the Reserve Bank of India (RBI) extensive regulatory authority to supervise these systems.

Purpose of the Payment and Settlement Systems Act 2007

The key purpose of the PSS Act is to grant legal recognition to various payment systems and to secure their compliant development. Additionally, it seeks to protect consumers’ interests and uphold economic stability in the payment and settlement system of our nation.

Prior to the ratification of the PSS Act, India lacked a unified framework with respect to the regulation and supervision of the payment and settlement systems. The PSS Act intended to address the challenges and established a strong legal framework to ensure effective functioning of the payment systems.

Regulatory Powers of Reserve Bank of India

Under the PSS Act, RBI, the apex financial authority is vested with extensive powers and responsibilities to regulate and exercise control over the payment and settlement systems in India which are highlighted below:

Issuance of Authorizations:

The RBI as the designated authority has the power to issue authorizations to carry out operations as a payment and settlement system in India. Any entity intending to establish a payment system cannot operate without authorization and prior approval from the RBI. The process of authorization ensures that only eligible and reliable entities are permitted to participate in the financial technology sector.

This authorization is granted considering the following essential factors: (i) need for the intended payment system or the services proposed by it; (ii) technical standards and design; (iii) terms and conditions of the operation including the security procedures; (iv) fund transfer mechanism; (v) netting procedure for payment instructions; (v) financial status, experience of management and integrity of the proposed payment system; (vi)  consumer interests and terms and conditions governing relationship between consumer and payment system; (vii) monetary and credit policies; and (viii) any other relevant factors as deemed fit by the RBI.

Prescribing Standards:

The RBI is empowered to prescribe standards pertaining to technical, operational and security aspects, that the payment system operators are required to adhere to. This is to ensure that there are uniform standards for each payment system, thereby promoting interoperability and consistency in the sector.

Inspection and Imposing Penalties:

The RBI is further authorized to impose penalties on operators who fail to comply with the provisions of the PSS Act and RBI’s guidelines. To deter non-compliance, RBI may conduct inspections and audits of payment systems to assess its compliance and also identify potential risks.

Consumer Protection and Redressal:

To encourage transparency and redress grievances pertaining to payment transactions, the RBI can issue directives to protect the consumers’ rights and can further establish mechanisms to redress complaints and disputes in accordance with the provisions of the Act.

The RBI is entrusted with a wide range of responsibilities and plays a pivotal role in ensuring financial stability while fostering innovation in the landscape of digital payments. The PSS Act is a systematic regulatory framework for supervisions and for RBI to actively monitor and address potential cyber risks and fraud.

Furthermore, RBI works with various other regulatory organizations to prevent financial fraud and maintain effective oversight. The RBI ardently undertakes periodic reviews and alterations to ensure that the regulations remain updated and adaptive. Ultimately, the PSS Act gives RBI authority to promote a secure and consumer-oriented payment system, strengthening India’s ever evolving financial industry.


The magnitude of the digital era necessitated the establishment of robust payment systems which can seamlessly process financial transactions. The PSS Act is introduced to provide comprehensive regulations, compliances and oversight of the payment and settlement systems in India. RBI’s array of responsibilities highlights its crucial position in the digital landscape, where the apex authority serves as the vanguard of security and innovation in India.

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