Settlement Risk Management

NPCI as a national retail payments system operator along with member participants is exposed to exigencies of settlement risk. The settlement risk is the risk that a counterparty, whether a participant or other entity, will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so at a future date. This risk could further lead to principal risk. (Principal Risk is the risk of losing the transaction value due to bankruptcy or default). Thus, both parties to the financial transaction are potentially exposed to settlement risk on the settlement date. Settlement related issues have the potential to create systemic problems, particularly in the cases of insolvency, failure of the financial market infrastructure or moratoriums issued by the central bank. NPCI has obligation of "Settlements" under the following Payment System statutes in India -

The Payment and Settlement Systems Act, 2007 (hereinafter referred to as The PSS Act, 2007)

  • Chapter V of The PSS Act, 2007 u/s 23 - The Rights & Duties of Payment System Provider with respect to Settlement and Netting
  • Chapter VI of The PSS Act, 2007 u/s 24 - The Settlement of Disputes

NPCI adheres to the legal basis and specific statutes as applicable. As an on-going process and under relevant laws NPCI demonstrates adequate affirmative position pertaining to the settlement process, perform risk-based approach thereby safeguarding the enterprise against the exigencies of settlement risk and report/communicate of any default situation to the RBI and member banks.

NPCI is cognizant of the settlement related risk to the payment systems viz. NFS/ATM, IMPS, UPI, AEPS, Bharat BillPay, NETC, & RuPay. In this regard, NPCI has constituted Settlement Guarantee Mechanism comprising of pledged cash collaterals and pooling of funds by way of committed line of credit for payment systems to address any adverse impact of liquidity/credit risk. Effective tools and techniques are in place to monitor and manage proactively any plausible stress scenarios which could lead to a systemic risk and thereby leading to a potential downside.

General loss sharing mechanism for payment systems:

Loss arises when an institution fails in its commitment to meet its payment obligations. In such an event the commitment not honoured by the failed member bank is guaranteed by NPCI. The failure of a member would not hinder the process of settlement as the Settlement Guarantee Fund [SGF] would instantly operate to meet the immediate liquidity funding requirement. In the event of a temporary failure, the amount is replenished by the defaulting member bank(s) itself. In the event of permanent failure of a member bank(s), the net obligation of the default member bank(s) shall be borne by the surviving member banks of the respective payment system who have participated on that day in that cycle. The recovered amount from the surviving member banks would be used to replenish the funds utilized from Settlement Guarantee Fund [SGF] to meet the settlement.