“BANKING PAYMENT AND SETTLEMENT SYSTEM”

A Project Submitted to

University of Mumbai for partial completion of

the degree of

Master in commerce

Under the Faculty of Commerce

By
VAIBHAV S. SAWANT

Under the Guiding Teacher

Mandira.P.Kamble

L.S.Raheja College of Arts and Commerce

Relief Rd, Juhu, Santacruz (W), Mumbai,
Maharashtra 400054
(2017-2018)

1
“BANKING PAYMENT AND SETTLEMENT SYSTEM”

A Project Submitted to

University of Mumbai for partial completion of

the degree of

Master in commerce

Under the Faculty of Commerce

By
VAIBHAV S. SAWANT

Under the Guiding Teacher

Mandira.P.Kamble

L.S.Raheja College of Arts and Commerce

Relief Rd, Juhu, Santacruz (W), Mumbai,
Maharashtra 400054
(2017-2018)

2
EXECUTIVE SUMMARY
A Payment System is a mechanism that facilitates transfer of value between a
payer and a beneficiary by which the payer discharges the payment obligations to the
beneficiary. Payment system enables two-way flow of payments in exchange of goods
and services in the economy.
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to
make payment to another person / company etc. can approach his bank and make cash
payment or give instructions / authorization to transfer funds directly from his own
account to the bank account of the receiver / beneficiary.
Electronic Clearing Service (ECS) is a retail payment system that can be used
to make bulk payments / receipts of a similar nature especially where each individual
payment is of a repetitive nature and of relatively smaller amount. This facility is
meant for companies and government departments to make/receive large volumes of
payments rather than for funds transfers by individuals. The ECS facility is available
in 47 centers across India operated by RBI at places where it manages the clearing
houses and by SBI and its associates in other centers.
Real Time Gross Settlement (RTGS) system, introduced in India since March
2004, is a system through which electronic instructions can be given by banks to
transfer funds from their account to the account of another bank. The RTGS system is
maintained and operated by the RBI and provides a means of efficient and faster
funds transfer among banks facilitating their financial operations. As the name
suggests, funds transfer between banks takes place on a ‘real time’ basis.
Cheque Truncation is a system of cheque clearing and settlement between
banks based on electronic data/images or both without physical exchange of
instrument.

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 INDEX

SR. TOPIC NAME PAGE

NO. NO.
1. INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKS

2. EVOLUTION OF PAYMENT SYSTEM IN INDIA

3.
OBJECTIVES OF THE PAYMENT SYSTEM
4.
THE ROLE OF THE RBI
5. CHEQUE

6.
CHEQUE TRUNCATION SYSTEM (CTS)
7. CHEQUE TRUNCATION MODEL FOR INDIA

8. NATIONAL ELECTRONIC FUND TRANSFER

9. OPERATION OF ELECTRONIC FUND TRANSFER

10. EFTPOS

11. REAL TIME GROSS SETTLEMENT SYSTEM

12. RTGS IN INDIA

13. ELECTRONIC CLEARING HOUSE

14.
THE CHALLENGES AHEAD
15.
QUESTIONS ASKED TO BANK
16.
SURVEY REPORT
17.
CONCLUSION

4
INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKS
The payment and settlement systems are part of the basic infrastructure needed
for the proper functioning of market-oriented economies. They are indispensable for
the efficient flow of payments for goods, services and financial assets and their
smooth functioning is crucial for the effective implementation of the central bank’s
monetary policy and for maintaining the financial and monetary stability in the
economy. The RBI has recognized the payment and settlement systems to be
critically important for the broadening and deepening of the financial markets, as also
for maintaining confidence in the financial system by enhancing the safety, soundness
and efficiency of the market infrastructure.
payment system in India, is an important element of the financial sector
infrastructure. Today, I would like to briefly touch upon the evolution and objectives
of the Indian payment system – as a public good, various milestones crossed by us in
the past few decades, the major initiatives that the RBI has taken to upgrade and
modernise the payment system in India to benchmark it with the best in the world, and
the various technological developments that can be leveraged to further deepen the
penetration of the payment system services in the country to promote greater financial
inclusion.
The central bank of any country is usually the driving force in the
development of the national payment system. The Reserve Bank of India (RBI) as the
central bank of the country has been playing this developmental role and has taken
several initiatives for a safe, secure, sound and efficient payment system.
Payments can be made in India in the form of cash, cheque, demand drafts,
credit cards, debit cards and also by means of giving electronic instructions to the
banker who will make such a payment on behalf of his customers. Electronic
payments can be made in the form of Electronic Funds Transfer (EFT), Electronic
Clearing Service (ECS) for small value repetitive payments and through Real Time
Gross Settlement (RTGS) System for large value payments. A few banks in India have
begun to offer certain banking services through Internet that facilitate transfer of
funds electronically.

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EVOLUTION OF PAYMENT SYSTEM IN INDIA

The history of the payment system can be said to be virtually co-terminus

with the evolution of money. The earliest form of payment system could perhaps be
traced back to the pre-historic days of barter trade when the settlement of
consideration took place through exchange of conch shells, goods, cattle and later
commodities. Such a system, in the absence of money as a medium of exchange, was
obviously very cumbersome due to highly improbable ‘coincidence of wants’ of the
two parties to a barter transaction. Subsequently, more formalised payment
instruments, such as coins, developed. The earliest payment instruments known to
have been used in India were coins, which were either punch-marked or cast in silver
and copper; even leather is known to have been used for making coins. Thus, with the
advent of institutionalised forms of money, initially in the form of coins and later as
paper money, the barter trade withered away and the usage of currency became the
order of the day.

Paper money, in the modern sense, has its origin in India in the late 18th
century with the note issues of private banks as well as semi-government banks.
Amongst the earliest issues were those by the Bank of Hindoostan, which was the first
joint stock bank established in 1770, the General Bank in Bengal and Behar, and the
Bengal Bank. Later, with the establishment of three Presidency Banks since 1809, the
work of issuing notes was taken over by them and each Presidency Bank had the right
to issue notes within certain limits. The private banks and the Presidency Banks
introduced other payment instruments in the Indian money market and cheques were
introduced by the Bank of Hindoostan. Buying and selling bills of exchange became
one of the items of business to be conducted by the Bank of Bengal from 1839. The
Paper Currency Act of 1861 conferred upon the Government of India the monopoly of
Note Issue, thus, bringing to an end the note issues of private and Presidency Banks.
In 1881, the Negotiable Instruments Act (NI Act) was enacted, formalising the usage
and characteristics of instruments like the cheque, the bill of exchange and promissory
note. The NI Act provided a legal framework for non-cash, paper payment
instruments in India and continues to be an operative legislation even today

6
 While the modern cheques came into being in India only in the 19th century, it
is noteworthy that India had pioneered the use of non-cash based payment systems
long ago, which established themselves as strong mechanism for the conduct of trade
and business. The most important form of credit instrument that evolved in India was
termed as ‘Hundis’ and their use was reportedly known since the twelfth century.
Hundis were used as instruments of remittance, credit and trade transactions, and were
of various types, each type with its own unique features. However, with the steady
rise in volumes of trade and commerce and the growing confidence of the public in
the usage of cheques, etc., there was also rapid growth in the payment transactions

Using these instruments. With the development of the banking system and higher
volume of cheques used, the need for an organised cheque clearing process emerged
amongst the banks. Clearing associations were formed by the banks in the Presidency
towns and the final settlement between member banks was effected by means of
cheques drawn upon the Presidency Banks. With the setting up of the Imperial Bank
in 1921, settlement was done through cheques drawn on that bank. After the
establishment of the RBI in 1935, the Clearing Houses in the Presidency towns were
taken over by the RBI, and continued with it for more than five decades.

It is noteworthy that the volume of paper-based clearing we handle is the sixth

largest in the world and during the year April 2007 to March 2008 about 1.46 billion
cheques were cleared in the country. The total number of cheques cleared and the
value during the last three years in India are as follows:

7
Type Volume (in billion) Value (Rupees in lakh
(April – March) crore)

2005- 2006- 2007- 2005- 2006- 2007-

06 07 08 06 07 08

Total Cheques 1.29 1.37 1.46 113.29 120.42 133.96

Of these: a) MICR 1.03 1.14 1.22 94.74 104.35 115.29

b) Non MICR 0.026 0.023 0.024 18.55 16.07 18.67

OBJECTIVES OF THE PAYMENT SYSTEM

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 As some of you might recollect, a monograph on Payment Systems in India
was prepared by the RBI in 1998 to increase the awareness, both within the country
and abroad, of the payment systems existing in India. The monograph also detailed
the objectives that needed to be achieved. To that end, a Payment System Vision
Document for 2001-04 was prepared to draw up the roadmap for consolidation,
development and integration of payment systems in the country. Once these objectives
were achieved, a Vision Document for 2005–08 was published in May 2005,
articulating the Reserve Bank’s vision for the coming four years for the payment and
settlement area. The mission enshrined in the Vision Document is the establishment of
safe, secure, sound and efficient payment and settlement systems for the country,
towards which all the upgradation efforts are focused. Whereas safety in payment and
settlement systems relates to risk reduction measures, security pertains to confidence
in the integrity of the payment systems. All payment systems are envisaged to be on
sound footing with adequate legal backing for operational procedures and
transparency norms. Efficiency enhancements are envisaged by leveraging the
benefits of technology for cost-effective solutions. Thus, as part of its public policy
objectives, the Reserve Bank has played a major role in the design, development and
functioning of payment and settlement systems, and the multi-dimensional efforts of
the RBI over the years have been geared to realise this vision.

THE ROLE OF THE RBI

The development of a payment system is one developmental role that is

common to most of the central banks. It is well recognised that an efficient payment
and settlement system is essential for efficient functioning of the modern financial

9
system. The Reserve Bank has, therefore, played a catalytic role, over the years, in
creating an institutional framework for development of a safe, secure, sound and
efficient payment system for the country. It has also initiated a variety of institutional,
procedural and operational measures to strengthen and refine the payment system. In
order to place the efforts of the RBI in a proper perspective, allow me to briefly trace
some of the salient developments, chronologically.

RBI reconstitutes Board for Payment and Settlement Systems

The Reserve Bank of India has reconstituted the Board for Regulation and
Supervision of Payment and Settlement Systems (BPSS) in accordance with the
provisions of the Board for Regulation and Supervision of Payment and Settlement
Systems Regulations, 2008. The composition of the reconstituted Board for
Regulation and Supervision of the Payment and Settlement Systems is:

1. Dr. Y.V. Reddy, Governor Chairperson

2. Shri V. Leeladhar, Deputy Governor Vice-Chairperson

3. Dr Rakesh Mohan, Deputy Governor Member

4. Smt. Shymala Gopinath, Deputy Governor Member

5. Smt. Usha Thorat, Deputy Governor Member

6. Prof U.R. Rao Member

7. Shri H.P. Ranina Member

8. Prof. Man Mohan Sharma Member

The Board so far functioned under the Reserve Bank of India (Board for
Regulation and Supervision of Payment and Settlement Systems) Regulation, 2005.

10
 It may be noted that the Payment and Settlement Systems Act 2007 (51 of
2007) and the Regulations framed under it, that is, the Board for Regulation and
Supervision of Payment and Settlement Systems Regulations 2008 and Payment and
Settlement Systems Regulations 2008, have been notified and have come into effect
from August 12, 2008.

The Payment and Settlement Systems Act 2007 empowers the Reserve Bank
of India to regulate and supervise the payment and settlement systems in the country.
The Act also empowers the Reserve Bank to authorise the setting up/continuance of
payment and settlement systems, to set standards, to call for returns/ information, to
audit and inspect, to issue directions, and to impose penalties and initiate prosecution
for violations of the Act, the Regulations and the directions issued by it. The Act
provides legal recognition to netting and settlement finality and their irrevocability in
the event of insolvency.

CHEQUE-

11
 The process of cheque payment starts when a payer gives his personal cheque to
the beneficiary. In order to get the actual payment of funds, the receiver of the cheque
has to deposit the cheque in his bank account. If the beneficiary has an account in the
same bank in the same city then the funds are credited into his account through
internal arrangement of the bank. If the beneficiary has an account with any other
bank in the same or in any other city, then his banker would ensure that funds are
collected from the payer’s banker through the means of a clearing house.

CLEARING HOUSE-
A clearing house is an association of banks that facilitates payments through
cheques between different bank branches within a city / place. It acts as a central
meeting place for bankers to exchange the cheques drawn on one another and claim
funds for the same. Such operations are called as clearing operations. Generally one
bank is appointed as in-charge of the clearing operations. In the four metros and a few
other major cities, the Reserve Bank of India is looking after the operations of the
clearing house. Each clearing house has uniform regulations and rules for the conduct
of its operations as prescribed by RBI. There are more than 1000 clearing houses
operating all over the country facilitating cheque payments. These are managed by the
RBI, State Bank of India and other public sector banks.
Generally, if a cheque is to be paid within the same city (local cheque), it
would take 2-3 days. In some large cities, there is a system called High Value Clearing
which facilitates completion of cheque clearing cycle on the same day and the
customer depositing the cheque is permitted to utilize the proceeds next day morning.
However, coverage of this High Value Clearing is very limited and usually available
at the branches in the main business area; say Fort and Nariman Point area in Mumbai
and Connaught Place in New Delhi.
In the case of outstation cheques, the time taken would vary from three to ten
days. RBI has advised all the banks to publicise their cheque collection policy so that
customers have an idea as to when the proceeds would be available for utilization by
the customer. For delay beyond the normal period, the banks are required to
compensate the customer (even without customer asking for the same)
Charges charged by bank for cheque payment.
CHEQUE TRUNCATION SYSTEM (CTS)

12
 Cheque Truncation is a system of cheque clearing and settlement between banks
based on electronic data/images or both without physical exchange of instrument.

The latest electronic payment product introduced by the RBI is the Cheque
Truncation System, which was launched, on a pilot basis, in the National Capital
Region of New Delhi on February 1, 2008, with the participation of 10 banks. At
present all the banks are participating in the system through 53 direct member banks.
The main objective of the CTS is to improve the efficiency and substantially reduce
the cheque processing time in the system. The traditional clearing system requiring
the physical presentation of cheques in the clearing house for payment and settlement,
inevitably entails consequential inefficiencies in terms of clearing time and
infrastructure required. The enormity of the logistics needed for physical cheque
clearance can be gauged from the fact that we cleared about 1.46 billion cheques in
the country during the year April 2007 to March 2008. In contrast, the main advantage
of cheque truncation is that it obviates the physical presentation of the cheque to the
clearing house; instead, the electronic image of the cheque would be sent to the
clearing house. The CTS would enable the realisation of cheques on the same day, and
provide a more cost-effective mode of settlement than manual and MICR clearing.
Smaller banks, which may find it unviable to set up the infrastructure, could utilise the
services of service bureaus set up for this purpose by a few larger banks.

Once the CTS become fully operational, the system would be the largest in the
world and would leapfrog the country from the paper-based instruments to a fully
electronic mode of payment and settlement. Necessary amendments have been made
to the Negotiable Instruments Act, 1881, which provides legal recognition to the
electronic image of the truncated cheque. These amendments provide a legal basis for
the cheque truncateon system.
The process of cheque payment starts when a payer gives his personal
cheque to the beneficiary. In order to get the actual payment of funds, the receiver of
the cheque has to deposit the cheque in his bank account. If the beneficiary has an
account in the same bank in the same city then the funds are credited into his account
through internal arrangement of the bank. If the beneficiary has an account with any

13
other bank in the same or in any other city, then his banker would ensure that funds
are collected from the payer’s banker through the means of a clearing house.

CHRGES INCURED BY BANK FOR CHEQUE PAYMENT-

The person receiving payment by means of cheques would incur some charges
to realize the funds through this bank. In case of local cheques, no charges are levied.
In case of outstation cheques, the bank would take some processing / collection
charges depending upon the amount of the cheque and the place from where it has to
be realized. The charges levied by the banks are generally decided by the Indian
Banks’ Association or the banks themselves. Banks are also required to publicise the
schedule of service charges.
Payments can be made between two or more parties by means of electronic
instructions without the use of cheques. Retail payment mechanisms available to
facilitate such payments are the Electronic Funds Transfer, Electronic Clearing
Service, credit / debit cards etc.

BENEFITS AVAILABLE TO BANKS, WHICH WOULD LOSE

THE FLOATING TIME-

14
 The move will reduce the floating time available to banks. But, from
the banks' prospective, it will bring efficiency to their system. You can reduce frauds,
though not eliminate them completely, with the help of truncation. It will also reduce
the work time and manpower required at a service branch or a branch manning these
activities through human interface. Automation will bring down the operating costs.

CHEQUE TRUNCATION MODEL FOR INDIA

The Working Group on Cheque Truncation and E-cheques recommended an

image based cheque truncation at the presenting bank for all cheques, irrespective of
value, beginning with the four metro centres. The physical cheques will be truncated
within the presenting bank to derive maximum efficiency and settlement will be
generated on the basis of the current structure of the MICR fields. Electronic images
will be used for payment processing. Grey Scale technology for image capture will be
used for imaging. The preservation period of paper instruments will be one year and
that of the electronic images will be eight years. A centralised agency per clearing
location will act as an image warehouse for banks. Minimum entry norms for the
warehouse agency such as technical competency, efficiency orientation and size of
resources have been recommended.

Deployment of Public Key Infrastructure (PKI) to protect data and image

flow over the network and to establish authenticity, non-repudiation and integrity and
use of digital signatures is another recommendation of the group.
Certification process based on Information Security Audit guidelines of the
Reserve Bank for participants has been recommended. Countermanding payments
and recording stops will be allowed till the time of payment, as is the existing
practice. The implementation of cheque truncation will result in accelerated cheque
clearing and settlement process, especially for the outstation cheques.
A pilot cheque truncation project is to be undertaken in the National Capital
Region of Delhi and nearby areas. Tenders for the procurement of the central system
for the Clearing House at Delhi were floated and the process of evaluation of the
technical bids received from vendors is currently under progress.

15
NATIONAL ELECTRONIC FUND TRANSFER

National Electronic Fund Transfer (NEFT): This is a message-based fund transfer

facility provided to bank customers to ensure secure one-toone fund transfer. There
are six settlements during the day to speed up
availability of funds to its customers. Unlike RTGS, which transfers in
real time, NEFT works on a batch mode. NEFT facility is available at
over 30,000 bank branches at more than 3,000 centers.
NEFT has gained popularity due to its convenience and quick realization
of transactions. NEFT has been growing at a CAGR of over 200% in
terms of both value and volume of transactions during 2004 and 2007.
NEFT accounts for 42% of the total electronic transactions in the financial
year 2008.
another product innovation by the RBI was the National Electronic Funds
Transfer System, which was introduced in November 2005 as a more secure, nation-
wide retail electronic payment system to facilitate funds transfer by the bank
customers, between the networked bank branches in the country. It is a deferred net
settlement system and is an improvement over other modes in terms of security and
processing efficiency. This facility is currently available at over 46,300 bank branches
throughout the country. The daily average of the transactions is over 80,000 by
volume and over Rs.500 crore by value. It is envisaged that all the RTGS-enabled
bank branches would also be NEFT-enabled and the customer would have a choice
between the RTGS or the NEFT systems, based on time criticality, value of the
transaction and willingness of the customer to pay different charges for the two
systems. With the introduction of NEFT, the Electronic Funds Transfer system,
introduced in 1994 for retail funds transfer, is now available only for Government
payments. Let me also mention that using the NEFT infrastructure, the system of one-
way remittance from India to Nepal has been implemented by the RBI since 15th May
2008.
EFT is a Scheme introduced by Reserve Bank of India (RBI) to help banks
offering their customers money transfer service from account to account of any bank
branch to any other bank branch in places where EFT services are offered.The EFT

16
system presently covers all the branches of the 27 public sector banks and 55
scheduled commercial banks at the 15 centres (viz., Ahmedabad, Bangalore,
Bhubneshwar, Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur,
Mumbai, Nagpur, New Delhi, Patna and Thiruvananthpuram). Funds transfer is
possible from any branch of these banks at these centres to other branch of any bank
at these centres both inter-city and intra-city.
If the remitting bank transmits the funds transfer message to RBI so as to hit
the first settlement at 12 noon, the receiving bank’s account is credited by RBI at the
destination centre and beneficiary gets the credit on Day 1 itself. If the same is
included in subsequent settlements i.e., for 2 pm and 4 pm, the beneficiary gets credit
on Day 2. Electronic Funds Transfer (EFT) is a system whereby anyone who wants to
make payment to another person / company etc. can approach his bank and make cash
payment or give instructions / authorisation to transfer funds directly from his own
account to the bank account of the receiver / beneficiary. Complete details such as the
receiver’s name, bank account number, account type (savings or current account),
bank name, city, branch name etc should be furnished to the bank at the time of
requesting for such transfers so that the amount reaches the beneficiaries’ account
correctly and faster. RBI is the service provider for EFT.
As of now, EFT facility is available for transfer of funds between bank
branches in about 15 major cities and towns across the country . Under another
special scheme called as Special EFT, many more select branches (which are on the
computer network of the banks) in over 200 cities have been brought into the fold of
funds transfer electronically. The details of the cities and branches can be had from
the respective banks as also from the RBI website.

TIME FOR ELECTRONIC FUND TRANSFER-

Funds transfer normally takes place on the same day or at the most the
next working day depending upon the time of requesting / effecting such funds

17
transfers. The customer should confirm this aspect from his bank at the time of
requesting the funds transfer.

CHARGES FOR TRANSFERRING FUNDS –

The banks generally charge some processing charges for EFT just as in the
case of other services like demand drafts, pay orders, etc. The actual charges depend
upon the amount and the banker-customer relationship. However, for the present, the
RBI has waived all its charges on EFT that were being recovered from the banks for
processing such funds transfer transactions at the clearing houses run by RBI. This
has certainly reduced the processing cost for the banks also.

FACILITY PROVIDED BY RBI TO THE EFT-

The primary modes of funds transfer at present are demand draft, mail transfer
and telegraphic transfer. The demand draft facility is paper based. The remitter, after
purchasing demand draft from a bank branch, dispatches the same by post/courier to
the beneficiary. The beneficiary, in turn, lodges the draft to his/her bank for collection
and clearing. The time taken for completing the process is about 10 days. In the case
of telegraphic transfer, fund reaches the beneficiary either on the same day or the
next; but both the remitter and the beneficiary would have to be account holders of the
same bank. If they are customers of different banks, a good deal of paper processing is
required. On the other hand, RBI EFT system is an inter-bank oriented system. RBI
acts as an intermediary between the remitting bank and the receiving bank and effects
inter-bank funds transfer. The customers of banks can request their respective
branches to remit funds to the designated customers irrespective of bank affiliation of
the beneficiary.

PROCEDURE FOR ACKNOWLEDGMENT-:

The receiving branch acknowledges every transaction it receives after
crediting the beneficiary’s account. The acknowledgment particulars reach the

18
remitting branch as an inward message on Day 3 of the EFT processing cycle. The
remitting branch will, therefore, have precise information as to when the beneficiary’s
account was credited.

ADDITIONAL ORGANISATIONAL STRUCTURE FOR BANKS-

Each participating bank has to identify a branch at the respective centre to act
as the link point for transmitting all outward messages and receiving all inward
messages. The Service Branches/Main Branches of banks who have been coordinating
the cheque-clearing work are in the best position to discharge this role. So no
additional organisational infrastructure is required to be created.

OPERATION OF ELECTRONIC FUND TRANSFER

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 Step-1: The remitter fills in the EFT Application form giving the particulars of the
beneficiary (city, bank, branch, beneficiary’s name, account type and account number)
and authorises the branch to remit a specified amount to the beneficiary by raising a
debit to the remitter’s account.
Step-2: The remitting branch prepares a schedule and sends the duplicate of the EFT
application form to its Service branch for EFT data preparation. If the branch is
equipped with a computer system, data preparation can be done at the branch level in
the specified format.
Step-3: The Service branch prepares the EFT data file by using a software package
supplied by RBI and transmits the same to the local RBI (National Clearing Cell) to
be included for the settlement of 12 noon, 2 pm and 4 pm.
Step-4: The RBI at the remitting centre consolidates the files received from all banks,
sorts the transactions city-wise and prepares vouchers for debiting the remitting banks
on Day-1 itself. City-wise files are transmitted to the RBI offices at the respective
destination centres.
Step-5: RBI at the destination centre receives the files from the originating centres,
consolidates them and sorts them bank-wise. Thereafter, bank-wise remittance data
files are transmitted to banks on Day 1 itself. Bank-wise vouchers are prepared for
crediting the receiving banks’ accounts the same day or next day.
Step-6: On Day 1/2 morning the receiving banks at the destination centres process the
remittance files transmitted by RBI and forward credit reports to the destination
branches for crediting the beneficiaries’ accounts.

ELECTRONIC BENEFIT TRANSFER-

20
 India has been one of the fastest growing countries for payment cards
in the Asia-Pacific region. About 35–40% of India’s population is working, with
increasing disposable income year on year. Consumerism is set to add impetus to
growth in the card base. India currently has approximately 130 million cards (both
debit and credit) in circulation. Its card market is growing at over 30% in the last three
to five years.
Card payments are becoming vital in e-payments growth. Banking customers
now hold multiple cards for day-to-day activities like bill payments, fund transfers,
shopping, dining, traveling. etc.

EFTPOS

EFTPOS (short for Electronic Funds Transfer at Point of Sale), called

cashback in other countries, is an Australian and New Zealand electronic processing
system for credit cards, debit cards and charge cards. It also allows users of the
system to withdraw cash at the time of purchasing a product or service through the
merchant's EFTPOS terminal. The name and logo for EFTPOS in Australia were
originally owned by the National Australia Bank and were trade marks from 1986
until 1991. There are over 60,000 participating EFTPOS outlets in Australia.

DEBIT CARDS:

21
 Debit cards entered India about a decade ago, in 1998. The
debit card market is growing faster than credit cards. Today almost 70%
of cards in circulation are debit cards; there are about 102.4 million
debit cards in circulation, amounting to US$31.3 billion by value of
transactions.

Celent estimates that debit card circulation will hit 169 million by the
end of 2010.

CREDIT CARDS:

22
 Though credit cards have been in India for over two decades now, only the
last five years saw a real upswing in the market. Credit card market has grown at a
CAGR of 128.7% from 2004 up till 2008, currently there are 27.5 million credit cards
in circulation amounting to USD 14.5 billion by transaction value. Considering the
employment level and growing disposable income of the Indian population, a nominal
growth rate of 60% would stretch the Indian credit card market to 40 million cards by
2010. Figure 5 gives a clearer picture of credit card market in India.

A majority of credit card purchases come from shopping, jewelry, dining, and
traveling, which contributed nearly 70% of credit card payments. Fiscal year 2008
saw as much as 288 million transactions being processed through card payments.

Credit cards

23
 EFT may be initiated by a cardholder when a
payment card such as a credit card or debit card is used. This may take place at an
automated teller machine (ATM) or point of sale (POS), or when the card is not
present, which covers cards used for mail order, telephone order and internet
purchases.
Card-based EFT transactions are often covered by the ISO 8583 standard.
The ever-increasing population of cardholders have made it easy for the domestic and
foreign banks to replicate international trends in Indian market. One recent innovation
is cobranded credit cards, wherein the banks partner with airlines, petroleum
companies, telecom companies, and other major retail stores to enhance the
usefulness. These cards, apart from being used at ATMs, are used at point of sale
(POS) terminals and on the Internet for making payments.
Similarly there are e-cards for online shopping customers; these are the first
virtual plastic card issued by CitiBank for online shopping customers. Contactless
cards are recent entrants in the card market, which uses radio frequency waves for
transacting. Various other customized cards are design ed to target customer segments
like women, young people, and senior citizens.
On one hand are banks, which are coming out with innovative products
and services; and on the other hand are third party card processing companies, which
help these banks process applications,scrutinize and do background checks, issue
cards, later processing the payments, reminding customers about late payments, and
issuing bonus points or such other rewards for timely payments.
Companies like Venture Infotek, CC Avenue, Paysignet, transecute India Pvt.
ltd. are some of the players actively involved in card payment processing and related
activities.

Smart card-

24
 Smart cards are the recent entrants. A smart card is similar to a credit/ debit
ATM card. The distinguishing feature is the presence of a chip as opposed to a
magnetic stripe. The greatest advantage of the smart card technology is its ability to
store much more information, increasing the ability to store multiple applications on a
single, dynamic card. These cards are capable of replacing two to three cards and thus
act as an identity card, driver’s license, or health card as well as serving other
purposes. Smart cards are particularly suited for rural India.
At the same time, managing multiple smart card applications along with their
associated scripts, data streams pose several challenges. Currently there are pilot
projects in various parts of the country to better understand the pros and cons of smart
cards.

Transaction types
A number of transaction types may be performed, including the following:
 Sale: where the cardholder pays for goods or service
 Refund: where a merchant refunds an earlier payment made by a cardholder
 Withdrawal: the cardholder withdraws funds from their account, e.g. from an
ATM. The term Cash Advance may also be used, typically when the funds are
advanced by a merchant rather than at an ATM
 Deposit: where a cardholder deposits funds to their own account (typically at
an ATM)
 Cashback: where a cardholder withdraws funds from their own account at the
same time as making a purchase
 Inter-account transfer: transferring funds between linked accounts belonging
to the same cardholder
 Payment: transferring funds to a third party account
 Enquiry: a transaction without financial impact, for instance balance enquiry,
available funds enquiry, linked accounts enquiry, or request for a statement of
recent transactions on the account
 E top-up: where a cardholder can use a device (typically POS or ATM) to add
funds (top-up) their pre-pay mobile phone
 Mini-statement: where a cardholder uses a device (typically an ATM) to
obtain details of recent transactions on their account.

25
  Administrative: this covers a variety of non-financial transactions including
PIN change
The transaction types offered depend on the terminal. An ATM would offer
different transactions from a POS terminal, for instance.

REAL TIME GROSS SETTLEMENT SYSTEM

Real Time Gross Settlement (RTGS) system, introduced in India since March
2004, is a system through which electronic instructions can be given by banks to
transfer funds from their account to the account of another bank. The RTGS system is
maintained and operated by the RBI and provides a means of efficient and faster
funds transfer among banks facilitating their financial operations. As the name
suggests, funds transfer between banks takes place on a ‘real time’ basis. Therefore,
money can reach the beneficiary instantaneously and the beneficiary’s bank has the
responsibility to credit the beneficiary’s account within two hours.
individuals can transfer funds through RTGS system through their banks.
Though the system is primarily designed for large value payments, bank customers
have the choice of availing of the RTGS facility for their time critical low value
payments as well. There is no definition of "low value" or "large value" for the
purpose of RTGS transaction. As on 31 July 2005, RTGS facility was available at
more than 7500 bank branches at 401 cities and towns in India. RBI plans to make the
facility available at a minimum of 10,000 branches by March 2006. At present, not all
bank branches are enabled to process RTGS system funds transfer. A customer who
desires to use this facility should approach his bank to find out whether his own bank
branch as well as the beneficiary’s bank branch is enabled to transfer funds through
RTGS system. Banks may levy charges for such funds transfers at their discretion and
based on the customer-bank relationship. The customer, in turn, is entitled to claim
interest for delay in credit of funds into the beneficiary’s account.
The acronym "RTGS" stands for Real Time Gross Settlement. RTGS system
is a funds transfer mechanism where transfer of money takes place from one bank to
another on a "real time" and on "gross" basis. This is the fastest possible money
transfer system through the banking channel. Settlement in "real time" means

26
payment transaction is not subjected to any waiting period. The transactions are
settled as soon as they are processed. "Gross settlement" means the transaction is
settled on one to one basis without bunching with any other transaction. Considering
that money transfer takes place in the books of the Reserve Bank of India, the
payment is taken as final and irrevocable.
Real Time Gross Settlement (RTGS) System is set up, operated and
maintained by Reserve Bank of India to enable funds settlement on real-time basis
across banks in the country. Indian Overseas Bank is a member
of RTGS.
Real Time Gross Settlement (RTGS) is an online system for settling
transactions of financial institutions, especially banks. RTGS systems are "push
payment" systems with transactions initiated by the paying bank. If Bank A or one of
its customers needs to pay $1000 to Bank B or one of its customers, Bank A initates
the transaction and Bank B is immediately paid $1000 "eletronically" by Bank A.
Examples of RTGS systems include CHAPS in the UK and Fedwire in the United
States.
This "electronic" payment system is normally maintained or controlled by the
Central Bank of a country. There is no physical exchange of money; the Central Bank
makes adjustments in the electronic accounts of Bank A and Bank B, reducing the
amount in Bank A's account by $1000 and increasing the amount of Bank B's account
by the same.

Minimum / maximum amount stipulation for RTGS transactions-

The RTGS system is primarily for large value transactions. The minimum
amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS
transactions. No minimum or maximum stipulation has been fixed for EFT and NEFT
transactions.

Time taken for effecting funds transfer from one account to another
under RTGS-

27
 Under normal circumstances the beneficiary branches are expected
to receive the funds in real time as soon as funds are transferred by the
remitting bank. The beneficiary bank has to credit the beneficiary's
account within two hours of receiving the funds transfer message.

Remitting customer receive an acknowledgement of money credited

to the beneficiary's account-

The remitting bank receives a message from the Reserve Bank that money has
been credited to the receiving bank. Based on this the remitting bank can advise the
remitting customer that money has been delivered to the receiving bank.

Remitting customer get back the money-

It is expected that the receiving bank will credit the account of the beneficiary
instantly. If the money cannot be credited for any reason, the receiving bank would
have to return the money to the remitting bank within 2 hours. Once the money is
received back by the remitting bank, the original debit entry in the customer's account
is reversed.

TIME RTGS SERVICE WINDOW IS AVAILABLE –

28
 The RTGS service window for customer's transactions is available from 9.00
hours to 16.30 hours on week days and from 9.00 hours to 12.30 noon on Saturdays
for settlement at the RBI end. However, the timings that the banks follow may vary
depending on the customer timings of the bank branches.

CHARGES/SERVICE CHARGES FOR RTGS TRANSACTIONS-

With a view to rationalize the service charges levied by banks for offering
various electronic products, a broad framework has been mandated as under:

a) Inward transactions – Free, no charge to be levied

b) Outward transactions –

Rs. 1 lakh to Rs. 5 lakh - not exceeding Rs. 25 per transaction.

Rs. 5 lakh and above – not exceeding Rs. 50 per transaction.

BANK BRANCHES IN INDIA WHICH PROVIDE RTGS

SERVICE-

29
 All bank are not providing branches in India are not RTGS enabled. As on
December 31, 2008 more than 52,000 bank branches are RTGS enabled. For eg.state
bank of India,icici bank.

MAINTAINS OF RTGS SYSTEM-

The RTGS system is maintained and operated by the RBI and provides a
means of efficient and faster funds transfer among banks facilitating their financial
operations.

TIME TO TRANSFER FUNDS THROUGH RTGS-

As the name suggests, funds transfer between banks takes place on a ‘real time’
basis. Therefore, money can reach the beneficiary instantaneously and the
beneficiary’s bank has the responsibility to credit the beneficiary’s account within two
hours.

RTGS SYSTEM FOR AN INDIVIDUAL-

30
 Funds through RTGS system through their banks. Though the system is primarily
designed for large value payments, bank customers have the choice of availing of the
RTGS facility for their time critical low value payments as well. A customer who
desires to use this facility should approach his bank to find out whether his own bank
branch as well as the beneficiary’s bank branch is enabled to transfer funds through
RTGS system.for a funds transfer to go through RTGS,both the sending bank branch
and the receving bank would have3 to be RTGS enable.

CHARGES FOR USING RTGS-

Banks may levy charges for such funds transfers at their discretion and based on
the customer-bank relationship. The customer, in turn, is entitled to claim interest for
delay in credit of funds into the beneficiary’s account.

RTGS IN INDIA
In India, this is initiated by Reserve Bank of India (Central Bank of India) and
is available on weekdays only from 10:00am to 13:30pm. Fees for RTGS vary from
bank to bank, but as mentioned earlier, both participating banks must have Core
Banking in place to enter into such transactions. Core Banking enabled banks and
branches have assigned RTGS 11-character alphanumeric codes, which are required
for transactions along with recipient's account number.
RTGS is a large value funds transfer system whereby financial intermediaries
can settle interbank transfers for their own account as well as for their customers. The
system effects final settlement of interbank funds transfers on a continuous,
transaction- by-transaction basis throughout the processing day.
The statistics of transactions for the month of March 2004 shows that in the
interbank market transactions involving 45000 instruments and aggregating Rs
1,79,000 crore were settled. High value instruments (3,17,000) settlement aggregated
Rs 2,74,000 crore. However, settlement of MICR instruments (145 lakhs) accounted
for only Rs 54,000 crore. RTGS will eliminate settlement risk in the case of interbank
and high value transactions.
The system went ‘live’ on March 26 with State Bank of India, HDFC Bank,
Standard Chartered Bank, and Saraswat Co-operative bank. The Reserve Bank of

31
India expects 120 scheduled commercial banks and primary dealers to become part of
the real time gross settlement system (RTGS) by June 2004. ICICI Bank, IndusInd
Bank, BNP Paribas, Bank of Baroda, Bank of India, Canara Bank, Central Bank of
India, Corporation Bank and Union Bank of India are likely to join shortly.
Banks could use balances maintained under the cash reserve ratio (CRR)
instead of the intra-day liquidity (IDL) to be supplied by the central bank for meeting
any eventuality arising out of the real time gross settlement (RTGS). The RBI has
fixed the IDL limit for banks to three times their net owned fund (NOF).
The IDL will be charged at Rs 25 per transaction entered into by the bank on
the RTGS platform. The marketable securities and treasury bills will have to be placed
as collateral with a margin of five per cent. However, the apex bank will also impose
severe penalties if the IDL is not paid back at the end of the day.

DIFFERENCE BETWEEN RTGS AND OTHER ELECTRONIC

TRANSFER MODES

32
 EFT and NEFT are electronic fund transfer modes that operate on a deferred
net settlement (DNS) basis which settles transactions in batches. In DNS, the
settlement takes place at a particular point of time. All transactions are held up till that
time. For example, NEFT settlement takes place 6 times a day during the week days
(9.30 am, 10.30 am, 12.00 noon. 1.00 pm, 3.00 pm and 4.00 pm) and 3 times during
Saturdays (9.30 am, 10.30 am and 12.00 noon). Any transaction initiated after a
designated settlement time would have to wait till the next designated settlement time.
Contrary to this, in RTGS, transactions are processed continuously throughout the
RTGS business hours.
The RTGS system is primarily for large value transactions. The minimum
amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS
transactions. No minimum or maximum stipulation has been fixed for EFT and NEFT
transactions.
Under normal circumstances the beneficiary branches are expected to receive
the funds in real time as soon as funds are transferred by the remitting bank. The
beneficiary bank has to credit the beneficiary's account within two hours of receiving
the funds transfer message.
The remitting bank receives a message from the Reserve Bank that money has
been credited to the receiving bank. Based on this the remitting bank can advise the
remitting customer that money has been delivered to the receiving bank.
It is expected that the receiving bank will credit the account of the beneficiary
instantly. If the money cannot be credited for any reason, the receiving bank would
have to return the money to the remitting bank within 2 hours. Once the money is
received back by the remitting bank, the original debit entry in the customer's account
is reversed.
The RTGS service window for customer's transactions is available from 9.00
hours to 15.00 hours on week days and from 9.00 hours to 12.00 noon on Saturdays
i.e. to accept the customer transactions for settlement at the RBI during 9.00 hours to
15.00 hours on week days and between 9.00 hours and 12.00 noon on Saturday.
However, the timings between these hours would vary depending on the customer
timings the branches have. For inter-bank transactions, the service window is
available from 9.00 hours to 17.00 hours on week days and from 9.00 hours to 14.00
hours on Saturdays.

33
 While RBI has waived its processing charges for all electronic payment
products till March 31, 2008, levy of service charges by banks is left to the discretion
of the respective banks.

The remitting customer has to furnish the following information to a bank for
effecting a RTGS remittance:

1.Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC code of the receiving branch

The beneficiary customer can obtain the IFSC code from his branch. The IFSC
code is also available in the cheque leaf. This code number and bank branch details
can be communicated by the beneficiary to the remitting customer.

ELECTRONIC CLEARING HOUSE

34
 ECS (Debit)
ECS (Debit) is mostly used by utility companies like telephone companies,
electricity companies etc. to receive the bill payments directly from the bank account
of their customers. Instead of making electricity bill payment through cash or by
means of cheque, a consumer (individuals as well as companies) can opt to make bill
payments directly into the account of the electricity provider / company / board from
his own bank account. For this purpose, the consumer has to give an application to the
utility company (provided the company has opted for the ECS (Debit) scheme),
providing details of bank account from which the monthly / bi-monthly bill amount
can be directly deducted. Such details have to be authenticated by the bank of the
customer who opts for making payments through this mode. Once this option is given,
the utility company would advise the consumer’s bank to debit the bill amount to his
account on the due date of the bill and transfer the amount to the company’s own
account. This is done by crediting the account of the sponsor bank which again is
generally the bank with whom the company receiving the payments maintains the
account with. The actual bill would be sent to the consumer as usual at his address as
before.

With a view to upgrading our payment system to the international standards,

the Reserve Bank took the initiative and set up Electronic Clearing Service in India, in
the mid 1990s, which is the counterpart of the automated clearing house (ACH)
system in certain other countries. It has two variants – ECS - Credit Clearing and ECS
- Debit Clearing. While the Credit Clearing operates on the principle of ‘single debit-
multiple credits’ and is used for making payment of salary, pension, dividend and
interest, etc., the Debit Clearing functions on the principle of ‘single credit-multiple
debits’ and is used for collecting payments by utility service providers like electricity,
telephone bills as well by banks for receiving principal / interest repayments for
housing and personal loans from the borrowers. At present, about 18 million
transactions flow through the ECS system every month. This facility is currently
available at 70 centers in the country. Settlement takes place on T+1 basis and the
cycle gets completed on T+1. RBI is also in the process of developing a National ECS
system – about which I will talk a little later.

35
 The Reserve Bank of India has introduced the Electronic Clearing Service
(Debit) scheme to provide faster method of effecting periodic and repetitive payments
by 'direct debit' to customers' accounts (duly authorized) thereby minimizing paper
transactions and increasing customer satisfaction. Electronic Clearing Service (Debit)
envisages "a large number of debits and one credit" in the case of collection of
electricity bills, telephone bills, loan installments, insurance premia, Club fees, etc by
the Utility Service Providers. As per the existing system for collection of electricity
bills and telephone bills, the customers/subscribers are required to go to the collection
centers /designated banks and stand in long queues for payment of bills/dues. There
would not be any cash transaction or payment through cheques in the new system.

This is a facility of making payments wherein the account of the institution

remitting the payments is debited to pay the beneficiaries account. This is also known
as “One to many” or “Credit push” facility and mostly used for bulk payment
transactions on a timely basis (monthly/quarterly/half-yearly or yearly) and
payments like interest, salary, dividend, commission from corporations, government
agencies, and any other organizations. Fiscal yearn 2007 saw a 250% increase over
2006.
National Clearing Cell (NCC) or the Clearing House (CH) is responsible for
processing transaction information to sponsor bank, destination bank as well as the
RBI’s clearing agency. Banks that are willing to avail this facility should apply to
NCC /CH for approval. ECS (Credit) has become one of the most convenient
instruments to make bulk payments and is growing at a CAGR of over 100% from
2004 to 2008.

CHARGES FOR USING THE ECS-

As in the case of EFT, RBI has waived all its processing charges to the banks
for the present. The banks, however, are free to charge a fee from their corporate
customers for use of this facility.

USE OF ELECTRONIC CLEARING SERVICE FOR

RECEIVING FUNDS / MAKING PAYMENTS

36
 Electronic Clearing Service (ECS) is a retail payment system that can be used to
make bulk payments / receipts of a similar nature especially where each individual
payment is of a repetitive nature and of relatively smaller amount. This facility is
meant for companies and government departments to make/receive large volumes of
payments rather than for funds transfers by individuals. The ECS facility is available
in 47 centres across India operated by RBI at places where it manages the clearing
houses and by SBI and its associates in other centres. The ECS is further divided into
two types – ECS (Credit) to make bulk payments to individuals/vendors and ECS
(Debit) to receive bulk utility payments from individuals.

Working of ECS (Debit) –

Utility Companies, banks/institutions receiving periodic/repetitive
payments towards electricity bills/telephone bills/loan installments/insurance premia
initially collect mandates from their customers / subscribers for collection of amounts
due from them by direct debit to their accounts with banks. The mandate provides
details such as the name, account number, name of bank/branch etc. duly certified by
the bank concerned.
Based on the details furnished in the mandates, the user company prepares
transaction data on electronic media and submits the encrypted data to the local
Clearing House, through its Sponsor bank.
After due validation of the data, the local clearing house processes the same and
arrives at the inter-bank settlement as also generates bank-wise/branch-wise reports
(hard copies) NCC debits the destination banks’ accounts with clearing house and
simultaneously affords a consolidated credit to the sponsor bank’s account and
furnishes the bank-wise and branch-wise reports to the service branches of destination
banks.
Service branches forward the branch-wise reports to the respective branches
for debiting the accounts of customers with the indicated amounts.

THE BENEFITS UNDER ECS (DEBIT)

37
 Faster Collection of bills by the companies and better cash management by
them eliminates the need to go to the collection centres/banks by the customers and no
need to stand in long ‘Q’s for payment automatic debiting to the accounts once the
mandates are given by the customers, to that effect cuts down the procedural delay.

PRESENT COVERAGE OF THE SCHEME

At present the scheme is in operation at 15 RBI centers (where
Clearing Houses are managed by Reserve Bank of India) and other
centre’s managed by various Public Sector Banks managing the clearing
houses. The list of centers managed by RBI and other banks is as under-

Sr No. Name of the Sr. No. Name of the Centre Remarks

Centre
Managed by RBI* Managed by State Bank of India
1. Ahmedabad 1. Baroda
2. Bangalore 2. Dehradun
3. Bhubneshwar 3. Nashik
4. Kolkata 4. Panaji
5. Chandigarh 5. Surat
6. Chennai 6. Trichy
7. Guwahati 7. Trichur
8. Hyderabad 8. Jodhpur
9. Jaipur 9. Gwalior
10. Kanpur 10. Jabalpur
11. Mumbai 11. Raipur
12. Nagpur 12. Calicut
13. New Delhi 13. Siliguri (non-MICR)
14. Patna 14. Pondicherry
15. Thiru’puram 15. Hubli

PROCESSING CHARGES / SERVICE CHARGES

38
 RBI has since deregulated Service Charges to be levied by sponsor banks. As
regards Processing Charges levied by RBI and other banks managing the clearing
houses, the same has been waived till March 31, 2007.

Type of institutions using the ECS (Debit) scheme:

Utility service providers like MTNL, Telephone/Mobile companies, Telecom
Departments, State Electricity Boards, Banks (for collection of credit cards dues) LIC,
Housing Finance Companies, Intermediaries and Clubs etc.

ECS (Credit)-
Under ECS (Credit) one entity / company would make payments from its bank
account to a number of recipients by direct credit to their bank accounts. For instance,
companies make use of ECS (Credit) to make periodic dividend / interest payments to
their investors. Similarly, employers like banks, government departments, etc make
monthly salary payments to their employees through ECS (Credit).Payments of
repetitive nature to be made to vendors can also be made through this mode. For this
purpose, the company or entity making the payment has to have the bank account
details of the individual beneficiaries. The payments are affected through a sponsor
bank of the Company making the payment and such bank has to ensure that there are
enough funds in its accounts on the settlement day to offset the total amount for which
the payment is being made for that particular settlement. Sponsor bank is generally
the bank with whom the company maintains its account.

ELECTRONIC CLEARING SERVICE (CREDIT)

This is a method of payment whereby the institutions having to make a large
number of payments (such as interest / dividend) can directly credit the amount
electronically into the bank accounts of the share-holders/ depositors/ investors
without having to issue paper instruments.
Electronic Clearing Services (Debit): This facilitates the collection of
payments from customers on behalf of utility companies. This electronic

39
service will eliminate handling paper instruments and ensures payment of utility-bills
such as telephone bills, electricity bills, insurance premiums, online payments and
card payments from banks/ government departments/corporate etc. This facility is also
known as “Many to one” or “debit pull.”
Though ECS debit is a very convenient method of making utility bill
payments electronically, lack of awareness among account holders can
be cited as one of the main reasons for it not gaining much popularity.
ECS debit accounted for 15% of electronic transactions by value in 2008.

EXISTING SYSTEM AND ITS DIFFICULTIES-

Bulk and repetitive payments like interest/dividend are mostly paper based
involving printing of warrants ( in costly MICR format) , dispatching them by post
(most often by Regd. post) and reconciliation thereof after payment by the agency
banks. The difficulties are:

It requires an expensive administrative machinery for printing, dispatch and

reconciliation

40
 Bunching of a large number of instruments in clearing results in operational
bottlenecks and pressures on the cheque processing system

Chances of loss of instruments in transit and their fraudulent encashment. The

customer has also to keep track of the receipt/non-receipt of the instrument and take
efforts in depositing the instrument to the bank on receipt of the same.

Banks find processing of such a large volume of instruments not only error
prone and monotonous, but also a strain on the cheque clearing system.

WORKING OF ECS (CREDIT CLEARING)-

Step-1: The corporate body institution (called "User”) which has to make payments to
a large number of customers/investors would prepare the payment data on a magnetic
media (i.e., tape or floppy) and submit the same to its banker (Sponsor Bank).
Step -2: The Sponsor Bank would present the payment data to the local Bankers’
Clearing House (managed by Reserve Bank of India at 15 centres and by State Bank
of India or Associate banks at other 31 centres) authorising the Manager of the
Clearing House to debit the Sponsor Bank’s account and credit the accounts
(Destination Bank) of the banks where the beneficiaries of the transactions maintain
their accounts.
Step -3: On receiving this authorisation, the Clearing House will process the data and
work out an inter-bank funds settlement.
Step - 4: The Clearing House will furnish to the service branches of the destination
banks branch-wise credit reports indicating the beneficiary details such as the names
of the branches where the accounts are maintained, the names of the beneficiaries,
account type, account numbers and the respective amounts.
Step - 5: The service branches will in turn pass on the advices to the concerned
branches of their bank, which will credit the beneficiaries’ accounts on the appointed
date.

SCHEME BENEFIT A CORPORATE BODY /

INSTITUTION-
Savings in administrative cost presently being incurred for printing of paper

41
instruments in MICR format and dispatching them by Registered Post.

Loss of instruments in transit or fraudulent encashment thereof totally

eliminated.

Reconciliation of transactions is made automatic. By the time the ECS cycle is

completed, the user institution gets an electronic data file from its bank with the date
of payment and banker’s confirmation thereon.

Cash management becomes easier as arrangement for funds is required to be

made only on the specified date.

Ensuring better customer/investor service.

Paying the way the best companies in the world pay to their share holders/
investors, customers

SCHEME BENEFIT THE BENEFICIARY FOR THE CUSTOMER-

Payment on the due date

Effortless receipt - No need for visiting the bank for depositing the
dividend/interest warrant.

Loss of instrument in transit or fraudulent encashment thereof and consequent

correspondence with the company are completely eliminated

WE CAN TAKE INFORMATION FROM-

The responsibility of advising the Investor / Customer about the
amount and due date of payment rests with the ‘User’ Institution. On crediting the
Investor / Customer’s account the destination bank-branch would indicate the
source of credit in the Statement of account / pass book (eg. ECS-UTI; ECS-Tata
Finance; ECS-ICICI; etc.)

42
Centres this service is available-
At present the scheme is in operation at 15 RBI centers (where Clearing
Houses are managed by Reserve Bank of India) and other centres managed by various
Public Sector Banks managing the clearing houses. The list of centers managed by
RBI and other banks is as under-

Sr No. Name of the Sr. No. Name of the Centre Remarks

Centre
Managed by RBI* Managed by State Bank of India
1. Ahmedabad 1. Baroda
2. Bangalore 2. Dehradun
3. Bhubneshwar 3. Nashik
4. Kolkata 4. Panaji
5. Chandigarh 5. Surat
6. Chennai 6. Trichy
7. Guwahati 7. Trichur
8. Hyderabad 8. Jodhpur
9. Jaipur 9. Gwalior
10. Kanpur 10. Jabalpur
11. Mumbai 11. Raipur
12. Nagpur 12. Calicut
13. New Delhi 13. Siliguri (non-MICR)
14. Patna 14. Pondicherry
15. Thiru’puram 15. Hubli

LARGE VOLUME TRANSACTIONS-

The system is primarily designed for large volume payments transactions
per settlement. The stipulation on the minimum number may, however, be waived by
the Clearing House concerned.

AMOUNT OF INDIVIDUAL TRANSACTIONS-

43
 There is no value limit on the amount of individual transactions.

Service charges-
RBI has since deregulated Service Charges to be levied by sponsor banks.
As regards Processing Charges levied by RBI and other banks managing the clearing
houses, the same has been waived till March 31, 2007. No charges would be levied by
the destination bank-branch for crediting the Investor / Customer’s account.

FOR THE ECS (CREDIT CLEARING) FACILITY-

If the corporate institution is making a large number of repetitive payments
in a year and most of the beneficiaries are located at the major cities in India.

Corporates / institutions bodies interested to avail of the opportunity may

contact their bankers for details. In case of any difficulty, Department of Payment and
Settlement Systems, RBI, Central Office,

THE CHALLENGES AHEAD

We have no doubt covered considerable ground in modernising our payment

and settlement system. The banking system too has made considerable investment in
the related infrastructure to upgrade the payment system. However, there are several
challenges that need to be effectively addressed if the full benefits of the
achievements so far are to be reaped.

One of the main challenges in the payment system area is to promote large-
scale use of the electronic modes of payment across the country and requires
addressing the constraints that impede the adoption of this mechanism. To my mind,
the primary reason for slow pace of adoption of the electronic modes of funds
transfer, particularly in the retail segment, is the lack of education – particularly on
the part of the bank staff at the branch level that have interface with the public. A
survey conducted by one of the Regional Offices of the RBI in the recent past

44
revealed that in the limited sample covered, there were several bank branches in the
State which were not even aware of the National Electronic Fund Transfer system.
The banks, therefore, need to make concerted efforts to increase the degree of
awareness at the level of the branch staff so that the electronic fund transfer services
percolate down to the level of the public .
The other side of the coin is the lack of customer education and awareness
about the features and benefits of the EFT, which precludes wider adoption of this
product and leads to carrying on with the traditional modes of payment. I would,
therefore, like to urge upon the banks to launch a systematic educational campaign for
their clients to educate them of the suite of electronic products offered by them. This
would not only reduce the avoidable paper work in the operation of the banks but
would also improve the quality of customer service and eventually, business volume.

In so far as the RBI is concerned, with a view to promoting the electronic

payment culture and to make it more user-friendly, the RBI has intervened and
mandated reasonability in pricing of transactions effected through ATMs and
compulsory use of electronic mode for transactions above a specified threshold. The
service charge levied on banks by the RBI for ECS, EFT / NEFT and RTGS
transactions has been waived until March 2009, so that this benefit of reduced costs is
passed on to customers, and the right incentive framework is created for the use of
electronic retail payment products. Similarly, the limits set for ECS and EFT / NEFT
transactions were also dispensed with in November 2004 with a view to expanding
the user base. This, of course, is apart from various measures taken by the RBI for
strengthening the payment systems infrastructure in a variety of ways

QUESTIONS ASKED TO BANK

1) Which bank setting the constition for the payment and settlement?
Ans- The central bank of any country is usually the driving force in the
development of the national payment system. The Reserve Bank of India (RBI) as the

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central bank of the country has been playing this developmental role and has taken
several initiatives for a safe, secure, sound and efficient payment system.

2)Which are the payment type in Indian bank?

Ans- There are main four type of payment and settlement that is cheque,
electronic fund transfer, electronic clearing services, real time gross settlement, draft,
card payment that is debit card credit card.tis payment settlement mostly use in all
banks which is more fast.

3)What is the charges incurred for cheque payment?

Ans-The person receiving payment by means of cheques would incur some
charges to realize the funds through this bank. In case of local cheques, no charges are
levied. In case of outstation cheques, the bank would take some processing /
collection charges depending upon the amount of the cheque and the place from
where it has to be realized.

4)What is special EFT?

Ans- EFT facility is available for transfer of funds between bank branches in
about 15 major cities and towns across the country.
Under another special scheme called as Special EFT. This is also provided by all
banks and it’s a very safe mode of payment and settlement.

5)What is smart card?

Ans-smart card is a new system available in banks but it is not yet available in
every bank the national bank is using this facality. Smart cards are the recent entrants.
A smart card is similar to a credit/ debit ATM card. The distinguishing feature is the
presence of a chip as opposed to a magnetic stripe. The greatest advantage of the

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smart card technology is its ability to store much more information, increasing the
ability to store multiple applications on a single, dynamic card.

CUSTOMER SURVEY

1) What is the fastest mode of payment of settlement?

RTGS EFT ECS CHEQUE

2) Which payment and settlement is more popular?

RTGS EFT ECS CHEQUE

3) Which payment settlement payment use for companies?

RTGS EFT ECS CHEQUE

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4) What system of payment and settlement is more affordable?

RTGS EFT ECS CHEQUE

Comment for improvement:-

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Project guide Submitted by

1) What is the fastest mode of payment of settlement?

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-

In above chart indicate that 80% of the people think that the fastest mode of
payment is RTGS. but the 10% of people think that the fastest mode of payment is
EFT.8%people think that the fastest mode of payment is ECS. and 2% people think
that the fastest mode of payment is cheque because it’s very easy and popular.

2) Which payment and settlement is more popular?

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 _

In above digram indicate that the 85% of payment and settlement is done by
cheque is more popular. and the rest RTGS is popular amongst the bank but not
amongst the comman people it’s a 6%,the EFT is only4% people is using this system.
And rest the5%people is using ECS.

3) Which payment settlement payment use for companies?

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_

In above diagram indicate that the Ecs is more popular amongs the
businessman that is 89%.it is very safe mode of payment and settlement .and the3% of
people using the EFT,3%is using in RTGS, and the remaning 5% of businessmen is
using the cheque system because the business with the comman people is more
popular in cheque.

4) What system of payment and settlement is more affordable?

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_

In above digram indicate that the according to the 78%people that cheque
system is more affordable though it is time consuming.9% of people thing that RTGS
is more affordable because it is less time consuming.7% of people think that ECS is
more affordable because it include the plastic card and we can kept money from
anywhere and any time and settlement is done. According 6% of people EFT is
affordable.

CONCLUSION

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 The payment and settlement system constitutes the backbone of the financial
sector and enables conclusion and settlement of financial contracts. The country has
made phenomenal progress in enhancing the reach and improving the efficiency of the
national payment system – in which the RBI and the banking system have been equal
partners. Creating a world-class payment system in the country is a long, arduous but
an exciting journey in which we have to constantly keep striving to better our past
achievements. I am sure the banking community present here would make dedicated
and systematic efforts in this direction to meet the challenges ahead and actively
contribute to realising our vision for the payment system that we have set for
ourselves.

0The RBI, apart from the role of regulator and supervisor of payment systems,
plays the role of a Settlement Bank apart from being a catalyst, an operator and a user.
The RBI has been taking initiatives in introducing new modes of more efficient and
safe means of effecting payments in the country on a continuous basis. The RBI
introduced the system of Magnetic Ink Character Recognition (MICR) based cheque
clearing during late 80's for four metropolitan cities (Mumbai, New Delhi, Chennai
and Kolkata). During mid 90s, electronic payment systems like ECS and EFT were
introduced. During 2004-05, RTGS was introduced. Besides introducing these newer
mechanisms or systems, the RBI has also been constantly ensuring that the existing
systems are upgraded / refined to increase their efficiency and to meet the
requirements of customers. Taking advantage of advancements in technology, the RBI
has brought in additional safety measures in these systems to make them secure and
also to maintain the integrity of such transactions.
Besides operating the various components of payments systems, RBI also
participates in these systems as a user. RBI acts as a service provider and after the
system stabilises, the responsibility is handed over to other banks / institutions for
further development. RBI also has the role of regulating and supervising the various
payment systems.

BIBLIOGRAPHY

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Books
The Indian banking system.
Banking theory and practices

Magazine
Business India

Websites
 http://www.dgftcom.nic.in/ecommerce/faqeft.htm
 http://en.wikipedia.org/wiki/guide_to_e-payments
 http://www.efta.org
 http://www.rbidocs.rbi.org.in/rdocs/rtgs/
 http://www.en.wikipedia.org/wiki/rtgs
 http://www.rbi.org.in/scripts
 http://www.rbidocs.rbi.org.in/rdocs/content/

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