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Payment systems basics: clearing, settlement and the PSS Act, 2007
Understand
When you pay someone from your bank account, two separate jobs happen. Clearing is the exchange of payment messages between the banks and the calculation of who owes whom. Settlement is the actual, final movement of money between the banks — in India, mostly across their current accounts with RBI. A payment system is the set of rules, technology and institutions that does both jobs. Settlement can be gross or net. In gross settlement every payment is settled on its own, one by one (RTGS). In net settlement the system collects many payments, offsets what banks owe each other, and settles only the difference (NEFT, cheque clearing, IMPS, UPI). Gross settlement removes the risk that one bank's failure spreads to others, but each bank needs more liquidity; net settlement saves liquidity but concentrates risk at the settlement time. The Payment and Settlement Systems Act, 2007 (PSS Act) is the law that gives RBI power to regulate and supervise payment systems. It received assent on 20 December 2007 and came into force on 12 August 2008. Under it no one except RBI may run a payment system without RBI's authorisation, and netting and settlement finality get a legal basis — once settlement is final it cannot be undone even if a bank later fails.
Rule
RBI is the designated authority under the PSS Act and acts through its Payments Regulatory Board (earlier the Board for Regulation and Supervision of Payment and Settlement Systems, BPSS).
Section 4: no person other than RBI may start or operate a payment system without authorisation; Sections 5 and 7 deal with the application and its grant; Section 8 with revocation.
Section 9: an entity aggrieved by refusal or revocation can appeal to the Central Government within 30 days.
Section 25 makes dishonour of an electronic funds transfer for insufficient funds an offence, similar to cheque bounce under the NI Act.
The Act's definition of a payment system covers clearing, payment or settlement services and includes card schemes and money transfer operations, but excludes stock exchanges.
RBI itself owns and operates RTGS and NEFT; retail systems such as IMPS, UPI, NACH, RuPay and AePS are run by NPCI, an authorised entity.
Settlement finality: a settlement becomes final and irrevocable as soon as the amount payable is determined.
Current position
As of 2026-10-11, RBI's FAQ states that RBI exercises its PSS Act powers through the Payments Regulatory Board; the Payments Regulatory Board Regulations, 2025 came into force on 20 May 2025.
Effective: 20 May 2025Source (opens in a new tab)
Example
Suppose in one NEFT batch SBI customers send ₹500 crore to HDFC Bank customers and HDFC customers send ₹420 crore to SBI customers. Under net settlement only ₹80 crore moves from SBI's RBI account to HDFC's. Under RTGS each of those thousands of payments would settle separately in full, the moment it is sent.
| Point | Gross settlement | Net settlement |
|---|---|---|
| How | Each payment settled individually | Payments offset; only the difference settled |
| Timing | Real time, continuous | In batches / cycles |
| Liquidity needed | High | Low |
| Settlement risk | Low (no knock-on effect) | Higher at settlement time |
| Indian examples | RTGS | NEFT, IMPS, UPI, cheque clearing |
Common mistake
Clearing is not settlement: clearing calculates obligations; settlement actually moves the money.
NEFT is a net (deferred net settlement) system even though it now runs 24x7 — 'round the clock' does not make it gross.
The PSS Act is of 2007 but came into force only on 12 August 2008.
RBI does not need authorisation to run RTGS/NEFT; the authorisation rule in Section 4 applies to everyone other than RBI.