Banking Sector Reforms

What is Positive Pay System?


From UPSC perspective, the following things are important :

Prelims level: Positive Pay System

Mains level: Positive Pay System

With the New Year, a new concept of Positive Pay System for Cheque Truncation System (CTS) will be introduced by the Banking regulator Reserve Bank of India (RBI) seeking to further augment customer safety in cheque payments.

Try this PYQ:

Q.Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?

(a) Mobile wallets will not be necessary for online payments.

(b) Digital currency will totally replace the physical currency in about two decades.

(c) FDI inflows will drastically increase.

(d) Direct transfer of subsidies to poor people will become very effective.

Positive Pay System

  • The concept of Positive Pay involves a process of reconfirming key details of large-value cheques.
  • Put simply, cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuance of the cheque.
  • When the beneficiary submits the cheque for encashment, the cheque details are compared with the details provided to the drawee bank through Positive Pay.
  • If the details match, the cheque is honoured. In case of mismatch in cheque details, the discrepancy is flagged by CTS to the drawee bank and the presenting bank, which would take redress measures.

For cheques above 50k

  • The banks are advised to enable it for all account-holders issuing cheques for amounts of ₹50,000 and above.
  • While availing of this facility is at the discretion of the account-holder, banks may consider making it mandatory in case of cheques for amounts of ₹5 lakh and above, the RBI had said.

Benefits of the system

  • Under the Positive Pay system, the drawee bank is already aware of the issuer the details of the high-value cheque (above ₹50,000) he has issued.
  • Without this intimation, if a cheque gets presented, then the drawee bank can reject payment and examine the case. Positive Pay is going to benefit both the issuer and the beneficiary.
  • For the issuer, the benefit from this concept is that there cannot be fraudulent cheques encashed out of issuer’s account.
  • For the beneficiary, the benefit is that the cheques handed out to him will mostly get honoured.

Is Positive Pay the same as ‘certified cheque’?

  • The concept of ‘certified cheque’ was there long back — about 30 years back, long before technology swept across the Indian banking landscape.
  • Whenever anybody issued a cheque, banks used to certify that money is there in their customer’s bank account and, therefore, the cheque will get honoured.
  • This provided comfort to a beneficiary that cheque payment will get honoured and therefore did not insist on a pay order or demand draft.
  • Drawee banks used to earmark the amount in the account of the issuer and then certify the cheque.
  • This was adopted in an era when the cheque instrument used to travel physically for clearing.

Why need such a system?

  • The RBI says the Positive Pay system is to augment customer safety in cheque payments and reduce instances of fraud occurring on account of tampering of cheque leaves.
  • Banks had recently witnessed a rise in frauds involving high-value cheques.

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