This detailed article explains the Laws for Regulation of Banks under the IIBF Compliance in Banks syllabus. Whether you’re preparing for the IIBF Compliance Exam or strengthening your banking compliance knowledge, this guide will help you build conceptual clarity.
1. Overview of the Payment and Settlement Systems Act, 2007 (PSS Act)
The PSS Act, 2007 provides the legal framework for regulation and supervision of payment systems in India.
It designates the Reserve Bank of India (RBI) as the authority for payment system regulation.
The Act ensures secure, efficient, and accessible payment systems, protects consumer interests, and minimizes systemic risks.
It applies to all electronic payment systems such as NEFT, RTGS, UPI, and card networks.
2. Role of the RBI as Regulator
The RBI regulates and authorizes entities to operate payment systems.
It issues directions, sets operational standards, and conducts audits and inspections to ensure compliance.
The RBI can revoke authorizations, call for returns, and impose corrective actions to maintain the integrity of the financial system.
In 2025, the Payments Regulatory Board (PRB) was formed to strengthen governance of India’s payment ecosystem under RBI’s oversight.
3. Constitution of the Payment Regulatory Board (PRB)
The PRB oversees payment and settlement operations in India.
It includes the RBI Governor as Chairperson, a Deputy Governor, Executive Director (Payments), and government nominees.
This board ensures transparency, accountability, and continuous innovation in the payments landscape.
4. Authorisation of Payment Systems
Under Section 4 of the PSS Act, no person or organization can operate a payment system without prior authorization from the RBI.
Banks, fintechs, and payment operators must submit detailed applications that comply with RBI’s technological and operational standards.
Failure to obtain authorization may result in penalties and revocation of licenses.
5. Rejection & Revocation Process
The RBI can reject or revoke authorisation if the operator fails to meet prescribed conditions.
Entities have the right to appeal to the Central Government in case of rejection.
It is vital for compliance professionals to understand the revocation and appeal mechanisms under the Act.
6. Rules, Standards & Returns
The RBI sets operational standards and requires periodic returns from system providers to ensure efficiency and safety.
Banks must maintain strict internal controls and data confidentiality in all payment system activities.
Adherence to these standards ensures stability and consumer trust.
7. Audit & Inspection by RBI
RBI officers are empowered to inspect payment system operations, infrastructure, and related documents.
Regular inspections help identify compliance gaps and ensure corrective measures are implemented promptly.
Banks should always be audit-ready with proper documentation and reports.
8. Duties of System Providers
System providers must operate in accordance with the Act, RBI directions, and their contractual terms.
They must disclose charges, maintain confidentiality of participant information, and ensure smooth functioning of payment systems.
For banks, this translates into robust compliance, IT security, and fair disclosure practices.
9. Gross Settlement vs Net Settlement
In Gross Settlement, each transaction is settled individually and instantly, as in the RTGS system.
In Net Settlement, multiple transactions are aggregated and settled at specific intervals after offsetting obligations.
Both mechanisms aim to ensure settlement finality, reducing risks in the payment ecosystem.
10. Escrow Accounts & Liquidation
Funds collected from customers by payment system operators must be maintained in escrow or trust accounts.
These funds are protected even in case of insolvency of a participant.
Proper escrow management ensures liquidity and safeguards customer interests.
11. Dispute Resolution Mechanism
Payment system rules must include a dispute resolution panel to address conflicts between participants and system providers.
If disputes remain unresolved, they can be referred to the RBI, whose decision is final and binding.
A strong dispute mechanism reinforces confidence in the payment system.
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12. Penalties & Offences
Operating a payment system without RBI authorization or violating the conditions of authorization constitutes an offence under the PSS Act.
RBI may impose monetary penalties, suspend operations, or take legal action.
Compliance teams must remain vigilant to avoid breaches that may attract severe consequences.
13. Compounding of Offences
Certain offences under the PSS Act are compoundable — meaning they can be settled by paying penalties without court proceedings.
This provision encourages prompt compliance and regulatory settlement while reducing litigation.
14. Other Laws for Regulation of Banks
In addition to the PSS Act, several other laws govern banking operations such as the Banking Regulation Act, 1949, the Negotiable Instruments Act, 1881, and RBI guidelines on digital banking and fintech.
Together, they create a robust legal and compliance framework for the Indian banking system.
15. Revision Summary & Key Points
- Understand objectives and structure of the PSS Act, 2007.
- Know RBI’s regulatory powers and the constitution of PRB.
- Learn authorization, revocation, and audit processes.
- Differentiate between Gross and Net Settlement systems.
- Memorize duties of system providers and dispute resolution procedures.
- Review penalties, offences, and compounding provisions.
- Download the summary PDF for quick revision and MCQs.
- Watch the complete video on Laws for Regulation of Banks for conceptual clarity.
Download PDF Here
16. Call to Action
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Conclusion
Understanding the Laws for Regulation of Banks is essential for every compliance professional and IIBF aspirant. The Payment and Settlement Systems Act, 2007 establishes a solid legal foundation ensuring safety, reliability, and trust in India’s payment ecosystem.
Use this article, the accompanying video, and PDF notes for a complete and effective exam preparation strategy.
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