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The law that makes the RBI the designated authority for regulating and supervising all payment systems in India.
The Payment and Settlement Systems Act, 2007 (Act No. 51 of 2007) is the central law that governs payment systems in India. It designates the Reserve Bank of India as the authority for the regulation and supervision of payment systems, and makes it illegal for any person to operate or start a payment system in the country without prior authorisation from the RBI. The Act came into force on 12 August 2008. Before it, the RBI supervised payments largely through its general banking powers; the Act gave that supervision an explicit statutory basis and, importantly, gave legal certainty to netting and to settlement finality — the assurance that a settled payment cannot be unwound later. Every major system Indians use daily — RTGS, NEFT, cheque clearing, card networks, UPI, IMPS, prepaid instruments and ATM networks — operates under an authorisation granted under this Act.
Type: LawDesignated authority — the Act names the Reserve Bank of India as the authority to regulate and supervise payment systems in India; no other regulator holds this mandate.
Compulsory authorisation — no person, Indian or foreign, may commence or operate a payment system without prior authorisation from the RBI, which can also revoke an authorisation.
Board for regulation — the RBI exercises these powers through a committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired ex officio by the RBI Governor.
Legal recognition of netting — the Act gives statutory backing to netting arrangements, so that only the net obligation between participants has to be settled instead of every gross transaction.
Settlement finality — a settlement made under an authorised system is final and irrevocable, which protects the system if a participant later becomes insolvent.
Power to issue directions and call for information — the RBI can lay down standards, call for returns, inspect a system provider, and give binding directions in the public interest.
Penalties — operating a payment system without authorisation, or failing to comply with RBI directions, attracts penalties and offences under the Act.
Frequency: Recurring in banking and insurance general-awareness papers; appears in UPSC Prelims indirectly through digital-payment and RBI-function questions.
India's electronic payments grew rapidly through the 2000s, but the legal basis for clearing and settlement was thin: netting had no statutory recognition, and there was no explicit power to authorise or shut down a payment system. The Payment and Settlement Systems Act closed that gap, and the institutional architecture built on top of it — NPCI as a retail payments umbrella, then IMPS, RuPay and UPI — grew from the certainty it provided.
RBI constitutes the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a committee of its Central Board.
Parliament passes the Payment and Settlement Systems Act (Act No. 51 of 2007).
The Act comes into force, along with the Payment and Settlement Systems Regulations, 2008.
National Payments Corporation of India (NPCI) is incorporated as the umbrella organisation for retail payments, operating under RBI authorisation.
UPI is launched by NPCI, running as an authorised payment system under the Act.
The Act converts payment-system operation from an open activity into a licensed one, and then makes the settlement legally watertight.
Step 1: An entity wanting to run a payment system — a card network, a wallet issuer, a clearing house — applies to the RBI for authorisation.
Step 2: The RBI examines the applicant's capacity, systems and public interest considerations, and issues a certificate of authorisation, possibly with conditions.
Step 3: The authorised operator runs the system under RBI standards, files returns and submits to inspection; the RBI can issue binding directions.
Step 4: Transactions across the day are netted, so each participant settles only its net position rather than every individual payment.
Step 5: Once settlement occurs, it is final and irrevocable under the Act, and cannot be reversed even if a participant is later wound up.
Step 6: If an operator breaches the Act or its directions, the RBI can penalise it or revoke the authorisation, stopping the system.
Reserve Bank of India
Designated authority under the Act for regulating and supervising payment systems; grants and revokes authorisations
Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)
Committee of the RBI's Central Board through which the RBI exercises its powers under the Act; sets policy for authorisation and oversight
National Payments Corporation of India (NPCI)
Umbrella organisation for retail payments, operating UPI, IMPS, RuPay, NACH, AePS and FASTag — all as systems authorised under this Act
In a day's trading between banks, thousands of payments run in both directions. Netting means the system totals them and moves only the difference — if Bank A owes Bank B ₹100 crore and B owes A ₹95 crore, only ₹5 crore actually changes hands. This slashes the amount of money that has to be available at settlement time. Settlement finality means that once that ₹5 crore has been settled through the authorised system, it is legally done: even if Bank A collapses the next morning, a liquidator cannot claw the payment back and unravel the chain. Before the 2007 Act, neither had clear statutory protection in India, and that legal uncertainty was a real systemic risk.
Think of friends splitting many small expenses over a trip. Netting is settling one final balance at the end instead of paying each other back twenty times. Settlement finality is the rule that once the final balance is paid, nobody can reopen the account.
Payment and Settlement Systems Act, 2007 — Act No. 51 of 2007; in force from 12 August 2008.
Designates the Reserve Bank of India as the authority for regulating and supervising payment systems.
No payment system may be operated in India without prior RBI authorisation.
The RBI acts through the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired by the Governor.
Gives statutory recognition to netting and makes settlement final and irrevocable.
RTGS, NEFT, UPI, IMPS, RuPay, prepaid instruments and card networks all run under authorisations issued under this Act.
The Reserve Bank of India. The Payment and Settlement Systems Act, 2007 designates the RBI as the authority for the regulation and supervision of payment systems in the country.
The Act, passed in 2007 as Act No. 51 of 2007, came into force on 12 August 2008 along with the Payment and Settlement Systems Regulations, 2008.
No. The Act requires prior authorisation from the RBI before any person, Indian or foreign, may commence or operate a payment system, and operating without it is an offence.
It is the rule that a settlement made through an authorised payment system is final and irrevocable, so it cannot be reversed later — even if a participating institution subsequently becomes insolvent.
Yes. UPI is operated by the National Payments Corporation of India, which runs its systems under authorisations granted by the RBI under this Act.