Rbi Payment System 67

RBIs Payment Systems
1. INTRODUCTION
Central Banks
Central bank of a country is usually a government owned and operated institution that controls the banking system and money supply in the economy. It has the following responsibilities.
I. II. III. IV. V. VI.
Issuing currency. Managing money supply. Administering rate of interest. Monitoring borrowing and lending policies of commercial banks. Undertaking governmental banking activities. Maintaining foreign exchange reserves, external value of money and a country's balance of payments.
Central banks of the leading Western nations (Federal Reserve System in the United States, Deutsche Bundesbank in West Germany, Bank of Japan, and Bank of England) generally work closely to improve the global monetary system and to conduct varying degrees of coordinated currency support actions in times of severe exchange or other financial problems.
Usually a federal government-related institution that is entrusted with control of the commercial banking system and with the issuance of the currency. Responsible for setting the level of credit and money supply in an economy and serving as the bank of last resort for other banks. Also has a major impact on interest rates, inflation, and economic output.
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1.1 RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.
First RBI Building 1935, Kolkata
The Bank was constituted to : 1. Regulate the issue of banknotes 2. Maintain reserves with a view to securing monetary stability and 3. To operate the credit and currency system of the country to its advantage. Established in 1935, its functions and focus have evolved in response to the changing economic environment. Its history is not only intrinsically interwoven with the economic and financial history of the country, but also gives insights into the thought processes that have helped shape the country's economic policies.
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1.2 HISTORY OF RBI:

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalized in 1949. An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavors, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practice of using finance to catalyze development. The Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the
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Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalization, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.
1.3 HOW IT WENT

Date Event Royal Commission on Indian Currency (Hilton Young Commission) 1926 recommends the establishment of a central bank to be called the 'Reserve Bank of India'. Indian Central Banking Enquiry Committee revives the issue of the 1931 establishment of the Reserve Bank of India as the Central Bank for India. 5 March Reserve Bank of India Act, 1934, (II of 1934) constitutes the statutory basis on which the Bank is established.
1934
An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavors, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practice of using finance to catalyze development.
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2. STRUCTURE and FUNCTIONS
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2.1 FUNCTIONS OF RESERVE BANK OF INDIA Central bank functions have evolved over time, especially after the economies encountered difficult periods or crises. These functions vary in nature and with the stage of economic development of the country where the central bank is situated.
The functions of a central bank can be broadly categorized as follow
MONETARY
BANKER (BANK)
(GOVT.)
OTHER
Preamble:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
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2.1.1 Monetary Policy Functions:

Monetary policy functions form the core of central banking operations and constitute the key functions of almost all central banks. Of these functions, currency management and maintenance of value of currency were the predominant concerns of central banks in the early years of central banking. The explicit concern for price stability is of relatively later origin.
1. Currency Issue and Management: Currency management is one of the most important traditional functions of central banks in most countries. Until the evolution of central banks, private banks issued their own currency and there were often numerous currencies with varying degrees of acceptability.
RBIS APPROACH
I.
The Department of Currency Management in Mumbai, in cooperation with the Issue Departments in the Reserve Banks regional offices, oversees the production and manages the distribution of currency.
II.
Currency chests at more than 4,000 bank branches typically commercial banks contain adequate quantity of notes and coins so that currency is accessible to the public in all parts of the country.
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2.1.2 Maintaining Internal Value of the Currency:

Instituting a medium of exchange is one of the oldest functions assigned to central banks. Arising from this core function is the monetary policy function of keeping inflation low in order to maintain the value of the medium of exchange over time. This function is still very relevant to modern central banks as can be seen from the widespread adoption of inflation targeting framework.
Domestic policy objectives have been centered on price stability goals for years and even today have remained the main preoccupation of central banks. In the developing
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world, central banks have had an additional task as the governments expected central banks to use their seignorage to garner resources for faster development. There was often a conflict between functions of central banks, for instance, maintaining the value of currency conflicted with its function of being a banker to the government, especially in developing countries.
Reserve bank of India uses various instruments to control and regulate the supply of money and credit in the economy in order to maintain price stability:
A. Bank Rate Policy: As lender of the last resort, the central bank helps the commercial banks in temporary need of cash when other sources of raising cash are exhausted. An increase in the bank rate would discourage commercial banks to borrow from the central bank and a corresponding increase in the lending rate of commercial banks to general public would decrease public borrowings from the banks.
B. Variable Cash Reserve Ratio: In most countries, commercial banks are required statutorily to hold cash reserves with the central bank. Apart from required reserves, the banks also hold excess reserves of cash. A large proportion of these excess reserves are held in the form of cash-in-hand or vault cash to meet the withdrawal needs of the depositors and the remaining part with the central bank to meet the net loss of cash due to the cross-clearing of cheques among the banks.
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C. Open Market Operations: The central bank can enter the money market for the purpose of purchase or sale of government securities on its own account. Every open market purchase by the central bank increases primary money by equal amount while every sale decreases it. As regards their advantages, open market operations are highly flexible, easily reversible in time, their effect on money supply is immediate, and they do not carry announcement effects as in the case of changes in the bank rate.
D. Moral Suasions: Through moral suasions, the central bank can influence the investment and credit policies of the commercial banks. For example, it can ask the commercial banks to invest a larger proportion, than required, of their assets in government securities. Similarly, it can advise them regarding the allocation of credit to the private sector.
2.1.3 Maintaining External Value of the Currency:

Central banks in many economies consider exchange rate management as a crucial function.
Exchange rate management was the core concern for traditional central banks even in the 17th century. During the gold standard, the exchange rate was
determined more or less automatically by the mechanism of specie flow. It ensured that the value of the currency rose with an increase in gold reserves and decreased with a decrease in the reserves.
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Such movements along with gold reserves were not necessarily conducive to output growth. Considerable efforts were required to maintain the parity.
2.2 Banker to the Government:

Managing the governments banking transactions is a key RBI role. Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public. As a banker to the central government, the Reserve Bank maintains its accounts, receives money into and makes payments out of these accounts and facilitates the transfer of government funds. RBI also acts as the banker to those state governments that have entered into an agreement with RBI.
RBIs APPROACH :
The Role as banker and debt manager to government includes several distinct functions: Undertaking banking transactions for the central and state governments to facilitate receipts and payments and maintaining their accounts. Managing the governments domestic debt with the objective of raising the required amount of public debt in a cost-effective and timely manner.
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2.3 Banker to the Banks:

Central banks were set up in many countries to perform the function of maintaining financial stability. The financial system in the early days was essentially a bank-dominated system; hence financial stability was focused on the stability of banks. Lender-of-the-last-resort function was the first financial stability function that central banks performed. This function was fairly limited in its scope, with central bank operations limited merely to the function of crisis management.
RBIs Approach : As the banker to banks, RBI focus on:
1.) Enabling smooth, swift and seamless clearing and settlement of inter- Bank obligations. 2.) Providing an efficient means of funds transfer for banks. 3.) Enabling banks to maintain their accounts with us for purpose of statutory reserve requirements and maintain transaction balances. 4.) Acting as lender of the last resort.
2.3.1
Lender-of-the-last-resort:
There are different hypotheses about the origin and propagating channels of banking crises. A banking crisis is an event in which many or even all banks in the banking system face sudden demand from their creditors. Given the multiple credit creation principle, it is not possible for any bank to handle such a run.
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2.3.2
Financial Sector Regulation and Supervision:
The primary justification for banking supervision is that it limits the risk of loss to depositors and thus maintains public confidence in banks. While supervision naturally focuses on the individual bank, supervisors must also alert to the possibility that problems in one institution may have wider repercussions on others. The focus of the supervisory function is mainly on investor protection activities, rules on the conduct of business and disclosure of information, and on-site and off-site surveillance of institutions. In recent times, financial sectors in many countries have witnessed phenomenal growth with increasing liberalization and globalization.
2.3.3 Financial Stability:

Since financial instability poses a severe threat to important
macroeconomic objectives such as sustainable output growth and price stability, central banks have shown keen interest in the maintenance of financial stability. Most central banks keep a close watch on movements in national and international financial markets so as to provide emergency liquidity assistance, whenever needed. Moreover, monetary policy is implemented largely through operations in financial markets and the transmission of monetary policy to the real economy depends crucially on the smooth functioning of key financial markets and institutions. Yet another manifestation of the central bank's interest in financial stability stems from its role in the operation of oversight of payment and settlement systems.
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2.3.4
Payment System Functions:
Payment and settlement systems are the backbone of the entire gamut of economic activities of any modern economy. Varied approaches have been adopted by central banks in respect of operations of payment systems. In the United States, for instance, the Federal Reserve Banks perform the role of providing services for processing of cheques, in addition to regulating the clearing function. In United Kingdom and Canada, the central banks do not provide the services relating to clearing and processing of payment instruments; instead the function is delegated to private entities, although the governing body for such entities is the association or representatives of bankers. Generally the function of settlement for all clearing activities is invariably performed by the central banks to ensure that settlement finality is achieved and that settlement risk is mitigated to a very large extent. Large value payment systems such as the Real Time Gross Settlement Systems (RTGS) are typically operated and managed by the central bank on account of many factors including the central bank being the largest source of liquidity and the impact on monetary policy operations by these large value payment systems. Over time, central banks have migrated from organizing clearing functions to management of macroeconomic requirements through the funds transfer processes; some of them have shed the clearing functions while retaining the settlement function
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2.4 Developmental Functions:

Developmental functions are undertaken by the central bank, while not ignoring their traditional tasks. This makes functions and goals before a developing country central banker much broader and challenging.
2.4.1 Sectoral Policies:

When developing countries embarked on the growth path, they faced numerous constraints. Their markets were underdeveloped and their governments were resource-constrained. Central banks in these countries were also constrained in their operations as the transmission channels for conduct of monetary policy were often non-existent or weak.
2.4.2 Development of Financial Market:

Financial markets generally comprise the money market, bond market, foreign exchange market and capital market. In its main role of conducting monetary policy, the central bank uses an array of policy instruments that make an impact on the market. Monetary policy depends on markets for its transmission and therefore their development is an enabling factor for a good monetary policy. In turn, monetary policy instruments (mainly interest rates) have a major impact on financial markets and institutions.
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2.4.3 Research Activities:
Every major central bank in the world has a strong research department. In-house research activities are the backbone of central bank operations because the time, direction and intensity of monetary and external sector operations are based on analysis of past trends and future expectations by the research department.
2.4.4 Dissemination of Information:

Developing countries typically have a poor database. Accordingly, central banks have often taken over function of compilation of a comprehensive database comprising monetary, financial and balance of payments data to facilitate macroeconomic research. In addition to the surveillance of the banking and financial system, central banks in developing countries attempt to help the domestic commercial banks to adopt better practices in data dissemination and sharing of information.
2.4.5 External Financial Relations Agent:

In developing countries, the central bank is typically the external financial relations agent for the country. It is involved, along with the government, in interacting or negotiating on behalf of the country with agencies such as the International Monetary Fund (IMF), Bank for International Settlements (BIS), World Bank and Asian Development Bank (ADB).
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3. MONETARY POLICY
Monetary policy refers to the expansion or contraction of money and credit supply in an economy. Since monetary policy includes the regulation of both the volume and allocation of credit therefore credit policy is a part of the overall monetary policy.
Price stability is of prime concern for economies of the world. The term price stability is not used in a rigid sense to mean price fixity. A modest increase of 2-3 percent in price level per annum is compatible, sometimes even desirable, with the general connotation of price stability. In other words, price stability can be defined as low and* stable inflation. All policies of the Government, including the monetary policy, are geared to achieve this objective. The need for monetary resources is linked with the increase in output and the desire for investment. Monetary policy should react to such changes in time and adequately. It should ensure proper balance between the monetary needs of the economy and money supply. Monetary policy, by influencing the cost, volume and direction of credit, contributes to the achievement of general objectives of economic policy.
Price stability and availability of sufficient credit for productive purposes have all along remained the twin objectives of monetary policy in India.
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3.2 Monetary Policy in India The Announcement Monetary Policy

Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take p place later in the year.
Note:
RBI has announced a change in the policy review schedule. In a rapidly evolving macroeconomic scenario, the time gap is too large making it essential for RBI to make announcements or changes in between policy reviews. In order to avoid such a scenario, going forward, the frequency of the policy review will increase from 4 times a year to 8 times with one policy review being introduced every mid-quarter and the actions in the mid-quarter review will be announced in the form of a press release. So the next RBI policy review is a mid quarter review, slated for September 16th, 2010.
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4. RBI Monetary Aggregates
Reserve Money (M0): Currency in circulation + Bankers deposits with the RBI + Other deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBIs claims on banks + RBIs net foreign assets + Governments currency liabilities to the public RBIs net non-monetary liabilities.
M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + Other deposits with the RBI).
M2: M1 + Savings deposits with Post office savings banks.
M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Governments currency liabilities to the public Net non-monetary liabilities of the banking sector (Other than Time Deposits).
M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
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Variation in M3
4.1 M3 Money Supply for Selected Countries

When considering M3, the total money supply exceeds US$60.2 trillion! Of this amount, the U.S., Euro-Zone and Japan account for US$33.1 trillion or 64.4% of the total. The following graph shows a cross-country comparison for M3.
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Data as on January, 2010
Some Monetary Policy terms: Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit. Cash Reserve Ratio
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent.
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Inflation
Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up. The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation. Money Supply (M3)
This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public. The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts. The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee. The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.
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Statutory Liquidity Ratio
Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam. Repo
A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest. Open Market Operations
An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.
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5. MONETORY V/S FISCAL POLICY
Monetary policy
Fiscal policy
Announced by RBI Related to : 1.) Interest rates 2.) Money supply 3.) Asset valuation 4.) Other economic factors
Announced by the Government Related to : 1.) Government spending 2.) Tax bracket 3.) Investment 4.) Other Income-Expenditure matters
Monetary policy controls the Fiscal supply of money in the nation.
policy
gives
the
direction of economy of a nation.
Monetary policy focuses on the Fiscal policy relates to the strategy of banks. Monetary Policy helps economic position of a nation. to Fiscal policy administers the taxation nation. policy sets the Fiscal policy speaks of the governments program. economic structure of the
stabilize the economy of the country. Monetary
program of key banks of the nation.
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6. DEPARTMENTS
6.1 Department of Currency Management

The Department attends to the core statutory function of note and coin issue and currency management. This involves forecasting the demand for fresh banknotes and coins, placing the indent with four printing presses and mints, receiving supplies against those indents and distributing them through its 18 Issue Offices and one Sub office, one Currency Chest and a wide network of currency chests, (4428 as on June 30, 2006) and small coin depots (4102 as on June 30, 2006).
6.2 Urban Banks Department

This department undertakes the number of banks in the urban areas, their rules, their regulation, their liquidity requirement is governed by this department
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6.3 Rural Planning and Credit Department

The Rural Planning and Credit Department formulates policies relating to rural credit and monitors timely and adequate flow of credit to the rural population for agricultural activities and rural employment programmes. The department also oversees implementation of the Banking Ombudsman Scheme.
6.4 Foreign Exchange Department

With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect from June 1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to "facilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India".
6.5 Human Resources Development Department

The Mission of HRDD is to create a facilitating environment to enhance the efficiency of the Bank; to empower the staff so as to draw out the latent potential; and to catalyze conditions for a more wholesome quality of life on the work as well as personal front.
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6.6 Financial Markets Department
The Financial Markets Department was constituted on July 6, 2005 with a view to providing an integrated market interface for the Bank and to bringing about integration in the Banks conduct of monetary operations.
6.7 Department of Banking Supervision

The Reserve Bank of India has been entrusted with the responsibility of supervising the Indian banking system under various provisions of the Banking Regulation Act, 1949 and RBI Act, 1934. As regards commercial banks and FIs, this responsibility is discharged through the Department of Banking Supervision (DBS).
6.8 Monetary Policy Department

Mandate and Objectives The Reserve Bank of India Act, 1934 sets out broadly the objectives of monetary policy : "to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage".
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6.9 Department of Government and Bank Accounts

The Department of Government and Bank Accounts(DGBA) is responsible for discharging certain core traditional central banking functions, viz., acting as bankers to the banks and governments and administering public debt of both, central and state governments. It is also responsible for maintenance of the Reserve Bank's internal accounts and compilation of its weekly statement of affairs and annual balance sheets.
6.10 Department of Economic Analysis and Policy

Functions The Reserve Bank of India has a rich tradition of economic research. Its Department of Economic Analysis and Policy (DEAP) :
Studies and analyses the basic issues and problems (both domestic and international) affecting the Indian economy;
Serves as a primary source of data and information relating to aspects of the Indian economy, such as,
Prepares monetary and credit aggregates, balance of payments and external debt statistics, internal debt and government finance statistics, and flow-of-funds and financial saving.
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6.11 Department of Payment and Settlement Systems

The Department of Payment and Settlement Systems (DPSS) is a new department in the Reserve Bank which was operational with effect from March 2005. The Department is responsible for regulation and oversight on the Payment and Settlement Systems which encompass the cheque based clearing systems managed by the Reserve Bank and other commercial banks, Electronic Clearing Service (ECS), Electronic Funds Transfer (EFT) System, the inter-institutional Government Securities clearing, the inter-bank foreign exchange clearing as also the RTGS.
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7. PAYMENT SYSTEMS
Recognizing the importance of Payment Systems in the financial system the Reserve Bank of India has taken a number of steps to strengthen the institutional framework for the payment and settlement systems in the country. As a part of its overall high-level strategic objective, the Reserve Bank has constituted a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a Committee of its Central Board, as per the Reserve Bank of India (Board for Regulation and Supervision of Payment and Settlement Systems) Regulations, 2005 which were notified in the Gazette of India dated February 18, 2005. The role of BPSS is to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, approve criteria for authorization of payment and settlement systems, determine criteria for membership to these systems, including continuation, termination and rejection of membership.
Central banks are involved in payment and settlement systems as providers of settlement assets, operators of the systems and also as users. One of the key tasks of Central banks is to maintain public confidence in money and in the instruments and the systems used to transfer money. This would not be achieved if payment and settlement systems, which facilitate the exchange of money for goods, services and financial assets, are seen as inefficient, unreliable and prone to failures. Thus, as part of their public policy objectives, central banks, have involved themselves in the design and functioning of payment and settlement systems. Payment and settlement systems are relevant to financial stability, as any failure of this vital infrastructure, could lead to broader financial and economic
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instability due to the large-values that are transacted by the SIPS and the erosion of public confidence in the event of failures in the retail payments segment. In an event of financial stress, market participants or central banks may wish to supply emergency liquidity to certain participants in a payment and settlement system in an attempt to encourage the orderly settlement of transactions in the overall financial system. Additionally, central bank's role in payment systems frequently calls for cooperation and coordination of activities with other authorities such as banking supervisors and securities regulators to ensure smooth discharge of legal or other responsibilities essential for the payment system. Accordingly, the role of the central bank in discharging its oversight function is to assess the risks involved and in cooperation with relevant stake holders put in place risk mitigation measures. It also ensures through oversight that the risks are not transmitted to other systems / participants.
HERE IS THE BRIEF ON VARIOUS RBIs PAYMENT SYSTEM MECHANISMS: 7.1 Cheque Truncation 7.1.1 Introduction Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point en-route to the drawee branch. In its place an electronic image of the cheque is transmitted to the drawee branch along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across branches, other than in
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exceptional circumstances. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.
7.1.2 Reasons of Implementing Cheque Truncation
As explained above, Cheque Truncation speeds up the process of collection of cheques resulting in better service to customers, reduces the scope for clearing-related frauds or loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation-related and logistics-related problems, thus benefitting the system as a whole. With the other major products being offered in the form of RTGS and NEFT, the Reserve Bank has created the capability to enable inter-bank and customer payments online and in near-real time. However, to wish away cheques is simply not possible as cheques are still the prominent mode of payments in the country and that is the reason why the Reserve Bank decided to focus on improving the efficiency of the cheque clearing cycle. Cheque Truncation System (CTS) is the alternative. As highlighted earlier, CTS is a more secure system vis-a-vis the exchange of physical documents.
In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource rationalisation, cost
effectiveness, business process re-engineering, better service, adoption of latest technology, etc. CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by Reserve Bank in the Payments Systems area.
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7.1.3 Status of Cheque Truncation
The Reserve Bank has implemented CTS as a pilot project in the National Capital Region (NCR), New Delhi with effect from February 1, 2008. After migration of the entire cheque volume from MICR system to CTS effective from July 1, 2009, the traditional MICR-based cheque processing has been discontinued in NCR. Based on the advantages realised by the stakeholders and the experienced gained from the pilot roll-out in NCR, it has been decided to operationalise CTS across the country.
7.1.4 Process of Cheque Truncation
The presenting bank (or its branch) captures the data (on the MICR band) and the images of a cheque using their Capture System (comprising of a scanner, core banking or other application) which is internal to them. These have to meet the specifications and standards prescribed for data and images.
To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been implemented in CTS. As part of the requirement, the collecting bank (presenting bank) sends the data and captured images duly signed and encrypted to the central processing location (Clearing House) for onward transmission to the paying bank (destination or drawee bank). For the purpose of participation the presenting and drawee banks are provided with an interface / gateway called the Clearing House Interface (CHI) that enables them to connect and transmit data and images in a secure and safe manner to the Clearing House (CH).
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The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing. The drawee banks through their CHIs receive the images and data from the Clearing House for payment processing. The drawee CHIs also generate the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed. The entire essence of CTS technology lies in the use of images of cheques (instead of the physical cheques) for payment processing.
7.1.5 Types of Cheques that can be presented for clearing through CTS
All types of cheques can be presented for clearing through CTS. It is no different from the use of traditional clearing infrastructure for clearing paper cheques. Cheques presented as part of Speed Clearing are handled in CTS as well (for more details on Speed Clearing, the related FAQs may be looked into). The on-us instruments where the presenting and drawee banks are the same are presently not allowed in CTS. Images of such instruments are stopped at the initial Clearing House Interface itself.
Incidentally, given the fact that images of cheques (and not the physical cheques) alone need to move in CTS, it is possible for the restriction of geographical jurisdiction normally associated with the paper cheque
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clearing activity to be done away with. For realising this advantage, the concept of Grid-CTS clearing is being envisaged as part of roll-out of CTS at Chennai. Under the grid clearing, cheques drawn on centres included in the grid will be cleared as part of local clearing. It is also proposed to expand the scope of the CTS presently operational in New Delhi to become part of the New Delhi Grid.
7.1.6 Charge for Customers
There is no change in the clearing process for customers. Customers continue to use cheques as at present, except to ensure the use of image-friendly-coloured-inks while writing the cheques. Of course, such of those customers, who are used to receiving the paid instruments (like government departments) would receive only the cheque images instead. And yes, cheques with alterations in material fields (explained in detail later) are not allowed to be processed under the CTS environment.
7.1.7 Benefits of Cheque Truncation Shorter clearing cycle Superior verification and reconciliation process No geographical restrictions as to jurisdiction Operational efficiency for banks and customers alike Reduction in operational risk and risks associated with paper clearing
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7.1.8 Images of cheque
Images of cheques are taken using scanners. Scanners also function like photo-copiers by reflecting the light passed through a narrow passage on to the document. Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called a pixel. Images are classified as black and white, gray-scale or colour based on how the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a range of gray shades between black and white. The entire image of the original document gets mapped as some shade of gray, lighter or darker, depending on the colour of the source. In the case of black and white images, such mapping is made only to two colours based on the range of values of contrasts. A black and white image is also called a binary image.
7.1.9 Data transmission over secured Nework
The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to the payee bank are ensured using the Public Key Infrastructure (PKI). CTS is compliant to the requirements of the IT Act, 2000. It has been made mandatory for the presenting bank to sign the images and data from the point of origin itself. PKI is used throughout the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank. The PKI standards used are in accordance with the appropriate Indian acts and practices of IDRBT which is the certifying authority for banks and financial institutions in India.
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7.1.10 Modes to participate in CTS There are two modes in which banks may participate in CTS
(a) Direct membership : Banks may participate as direct member provided they have a settlement account with the settlement bank and have put in place necessary infrastructure for participating in CTS.
(b) Indirect / Sub-membership : Banks may become sub-members / indirect members of the direct members by using the infrastructure and / or settlement services of the direct members. The settlement for such indirect / sub-member could be done either directly (if such banks have settlement accounts with the settlement bank) or through the direct member through whom they are participating.
7.2 Electronic Clearing Service (ECS)
7.2.1 Introduction
ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa using the services of a ECS Centre at a ECS location.
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7.2.2 Variants of ECS
Primarily, there are two variants of ECS - ECS Credit and ECS Debit.
ECS Credit is used for affording credit to a large number of beneficiaries having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to an account of a bank (that maintains the account of the user institution). ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.
ECS Debit is used for raising debits to a large number of accounts maintained with bank branches at various locations within the jurisdiction of a ECS Centre for single credit to an account of a bank (that maintains the account of the user institution). ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, etc., that are periodic or repetitive in nature and payable to the user institution..
7.2.3 Initiation of ECS transaction
ECS Credit payments can be initiated by any institution (called ECS Credit User) which has to make bulk or repetitive payments to a number of beneficiaries. The institutional User has to first register with a ECS Centre. The User has to also obtain the consent of beneficiaries and get their bank account particulars prior to participation in the ECS Credit scheme.
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ECS Credit payments can be put through by the ECS User only through his / her bank (known as the Sponsor bank). ECS Credits are afforded to the beneficiary account holders (known as destination account holders) through the beneficiary account holders bank (known as the destination bank). The beneficiary account holders are required to give mandates to the user institutions to afford credit to their bank accounts through the ECS Credit mechanism.
7.2.4 Working of ECS System
The User intending to effect payments through ECS Credit has to submit details of the beneficiaries (like name, bank / branch / account number of the beneficiary, MICR code of the destination bank branch, etc.), date on which credit is to be afforded to the beneficiaries, etc., in a specified format (called the input file) through its sponsor bank to one of the ECS Centres. The list of centres where the ECS Credit facility is available has been placed on the website of Reserve Bank of India at http://www.rbi.org.in/Scripts/ECSUserView.aspx?Id=26.
The bank managing the ECS Centre then debits the account of the sponsor bank on the scheduled day and credits the accounts of the destination banks, for onward credit to the accounts of the ultimate beneficiaries with the destination bank branches.
7.2.5 MICR Code
MICR is an acronym for Magnetic Ink Character Recognition. The MICR Code is a numeric code that uniquely identifies a bank-branch
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participating in the ECS Credit scheme. This is a 9 digit code to identify the location of the bank branch; the first 3 characters represent the city, the next 3 the bank and the last 3 the branch. The MICR Code allotted to a bank branch is printed on the MICR band of cheque leaves issued by bank branches.
7.2.6 Benefits of ECS Credit Scheme ECS Credit offers many advantages to the beneficiary The beneficiary need not visit his / her bank for depositing the paper instruments which he would have otherwise received had he not opted for ECS Credit. The beneficiary need not be apprehensive of loss / theft of physical instruments or the likelihood of fraudulent encashment thereof. Cost effective. The beneficiary received the funds right on the due date.
7.2.7 Initiation ECS Debit transaction
ECS Debit transaction can be initiated by any institution (called ECS Debit User) which has to receive / collect amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, etc. It is a Scheme under which an account holder with a bank branch can authorise an ECS User to recover an amount at a prescribed frequency by raising a debit to his / her bank account.
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7.2.8 Working of ECS Debit Scheme
The ECS Debit User intending to collect receivables through ECS Debit has to submit details of the customers (like name, bank / branch / account number of the customer, MICR code of the destination bank branch, etc.), date on which the customers account is to be debited, etc., in a specified format (called the input file) through its sponsor bank to the ECS Centre.
7.2.9 Benefits of ECS Debit Scheme
The advantages of ECS Debit to customers are many and include, ECS Debit mandates will take care of automatic debit to customer accounts on the due dates without customers having to visit bank branches. Customers need not keep track of due date for payments. The debits to customer accounts would be monitored by the ECS Users. Cost effective.
The advantages of ECS Debit to institutions are many and include Savings on administrative machinery and costs of collecting the cheques from customers, presenting in clearing, monitoring their realisation and reconciliation. Better cash management because of realisation / recovery of dues on due dates promptly and efficiently.
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Avoids chances of loss / theft of instruments in transit, likelihood of fraudulent access to the paper instruments and encashment thereof. Realisation of payments on a uniform date instead of fragmented receipts spread over many days. Cost effective.
7.2.10 Limit on the value of Individual transactions in ECS Debit
There is no value limit on the amount of individual transactions that can be collected by ECS Debit.
7.3 RTGS System

7.3.1 Introduction
The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting).'Real Time' means the processing of instructions at the time they are received rather than at some later time. 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
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7.3.2 RTGS v/s NEFT
NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.
7.3.3 Minimum / Maximum amount stipulation for RTGS transactions
The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is ` 2 lakh. There is no upper ceiling for RTGS transactions.
7.3.4 Time taken for effecting funds transfer from one account to another under RTGS
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.
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7.3.5 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.
7.3.6 Would the remitting customer get back the money if it is not credited to the beneficiary's account? When?
Yes. 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.
7.3.7 Time till RTGS service window is available
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 13.30 hours 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.
7.3.8 Processing Charges / Service Charges
With a view to rationalize the service charges levied by banks for offering various electronic products, a broad framework has been mandated as under:
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a) Inward transactions Free, no charge to be levied b) Outward transactions ` 2 lakh to `. 5 lakh - not exceeding ` 25 per transaction. Above ` 5 lakh not exceeding ` 50 per transaction.
7.3.9 IFSC code
The beneficiary customer can obtain the IFSC code from his bank branch. The IFSC code is also available on the cheque leaf. The IFSC code is also available on the RBI website
7.3.10 Branches in India provide RTGS service
All the bank branches in India are not RTGS enabled. As on 23 February, 2011 there are more than 74,000 RTGS enabled bank branches. The list of such branches is available on RBI website.
7.4 NEFT System
7.4.1 Introduction
National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country.
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7.4.2 Branches in India provide NEFT service
For being part of the NEFT funds transfer network, a bank branch has to be NEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101 banks in the country (out of around 82,400 bank branches) are NEFT-enabled. Steps are being taken to further widen the coverage both in terms of banks and branches / offices.
7.4.3 How can one know which bank branches are part of the NEFT network?
The list of bank branches participating in the NEFT system is available on the website of Reserve Bank of India. Details will also be available with the banks / branches participating in the NEFT system.
7.4.4 Who can transfer funds using NEFT?
Ans: Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals, firms or corporates who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branch with instructions to transfer funds using NEFT. A separate Transaction Code (No. 50) has been allotted in the NEFT system to facilitate walk-in customers to deposit cash and transfer funds to a beneficiary. Such customers have to furnish full details including complete address, telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without the need for having a bank account.
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7.4.5 Who can receive funds through the NEFT system?
Individuals, firms or corporates maintaining accounts with a bank branch can receive funds through the NEFT system. It is, therefore, necessary for the beneficiary to have an account with the NEFT enabled destination bank branch in the country.
The NEFT system also facilitates one-way cross-border transfer of funds from India to Nepal. This is known as the Indo-Nepal Remittance Facility Scheme. A remitter can transfer funds from any of the NEFT-enabled branches in to Nepal, irrespective of whether the beneficiary in Nepal maintains an account with a bank branch in Nepal or not. The beneficiary would receive funds in Nepalese Rupees. A separate Transaction Code (No. 51) has been allotted in the NEFT system to facilitate the transfer of funds from India to Nepal. Further details on the Indo-Nepal Remittance Facility Scheme are available on the website of Reserve Bank of India at: http://rbidocs.rbi.org.in/rdocs/content/pdfs/84489.pdf.
7.4.6 Limit on the amount that could be transferred using NEFT There is no limit either minimum or maximum on the amount of funds that could be transferred using NEFT. However, for walk-in customers mentioned at Q.4 and Q.5 above, including those remitting funds under the Indo-Nepal Remittance Facility Scheme, the maximum amount that could be transferred is Rs. 49,999.
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7.4.7 Operating hours of NEFT
Presently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays.
7.4.8 Operation of NEFT system
An individual / firm / corporate intending to originate transfer of funds through NEFT has to fill an application form providing details of the beneficiary (like, name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number). The application form will be available at the originating bank branch. The remitter authorizes his/her bank branch to debit his account and remit the specified amount to the beneficiary. Customers enjoying net banking facility offered by their bankers can initiate the funds transfer request online. Some banks offer the NEFT facility even through the ATMs. Walk-in customers will, however, have to give their contact details (complete address and telephone number, etc.) to the branch. This will help the branch to refund the money to the customer in case credit could not be afforded to the beneficiarys bank account or the transaction is rejected / returned for any reason.
Step-2 : The originating bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre).
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Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch.
Step-4 : The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from (debit) the originating banks and give the funds to (credit) the destination banks. Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre).
Step-5 : The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary accounts.
7.4.9 IFSC Code
IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is a 11 digit code with the first 4 alpha characters representing the bank, and the last 6 numeric characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to route the messages to the destination banks / branches.
7.4.10 Processing or service charges
Reserve Bank of India has waived the processing or service charges for member banks till March 31, 2011. Accordingly, member banks participating in NEFT need not pay any processing or service
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charges to Reserve Bank of India. Further, processing or service charges to be levied by the member banks from their customers have also been rationalised by Reserve Bank of India as under :
a) Inward transactions at destination bank branches (for credit to beneficiary accounts) Free, no charges to be levied from beneficiaries
b) Outward transactions at originating bank branches (charges for the remitter)
7.4.11 Can a transaction be originated to draw (receive) funds from another account?
No. NEFT is a credit-push system i.e., transactions can be originated only to transfer funds to a beneficiary.
7.4.12 Features of NEFT
Launched in October 2005, NEFT is an electronic payment system that uses a secure mode of transferring funds from one bank branch to another bank branch. NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end security and rides on the INdian FInancial NETwork (INFINET) to connect the bank branches for electronic transfer of funds. The participating banks, branch coverage and transaction volumes have been continuously increasing, which is reflective of the acceptance and popularity of the NEFT system.
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7.5 ATMs 7.5.1 Introduction
Automated Teller Machine is a computerized machine that provides the customers of banks the facility of accessing their accounts for dispensing cash and to carry out other financial transactions without the need of actually visiting a bank branch.
7.5.2 Types of ATM Cards
The ATM cards/debit cards, credit cards and prepaid cards(that permit cashwhdrawal) can be used at ATMs for various transactions.
7.5.3 Services/facilities available at ATMs
In addition to cash dispensing ATMs may have many services/facilities such as: Account information Cash Deposit Regular bills payment Purchase of Re-load Vouchers for Mobiles Mini/Short Statement Loan account enquiry etc.
The services offered may vary from bank to bank, or may depend on the capacity of the machine to provide such services.
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7.5.4 Transaction at an ATM
For transacting at an ATM, the customer insert (swipe) their card in the ATM and enter their Personal Identification Number (PIN).
7.5.5 Cards be used at any bank ATM in the country
The cards issued by banks in India should be enabled for use at any bank ATM within India.
7.5.6 Personal Identification Number (PIN)
PIN is the numeric password for use at the ATM. The PIN is separately mailed/handed over to the customer by the bank while issuing the card. This PIN has to be reset to a new PIN by the customer. Most banks force the customers to change the PIN on the first use. The PIN number should not be written the card, card holder etc as in such cases the card can be misused if card is lost/stolen.
7.5.7 Minimum and Maximum cash withdrawal limit per day
Banks set limit for cash withdrawal by customers. The cash withdrawal limit for use at the ATM of the issuing bank is set by the bank during the issuance of the card. This limit is displayed at the respective ATM locations.
For cash withdrawals at other bank ATMs, banks have decided to maintain a limit of Rs 10,000/- per transaction. This information is displayed at the ATM location.
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7.5.8 Service charge
No charges are payable for using other banks' ATM for cash withdrawal and balance enquiry, as RBI has made it free under its "Free ATM access policy" since April 01, 2009. But banks can restrict the number of such free transactions to a maximum of five per month. For transactions beyond this minimum number of transaction, banks charge maximum of Rs 20/- per transaction.
7.5.9 If cash is not disbursed
The customer may lodge a complaint with the card issuing bank. This process is applicable even if the transaction was carried out at another banks ATM. As per the RBI instructions, banks may re-credit such wrongly debited amounts within a maximum period of 12 working days. Effective from July 17, 2009, banks shall have to pay customers Rs 100/- per day for delays beyond 12 working days. This shall have to be credited to the account of the customer without any claim being made by the customer. For all such complaints customer may lodge a complaint with the local Banking Ombudsman if the bank does not respond.
7.6 Indo-Nepal Remittance Facility scheme
7.6.1Introduction
Indo-Nepal Remittance Facility is a cross-border scheme to transfer funds from India to Nepal. The Indo-Nepal remittance scheme is
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a facility available under the NEFT system. A separate Transaction Code (No. 51) has been allotted in the NEFT system to facilitate the transfer of funds from India to Nepal. A remitter can transfer funds up to Indian Rupees 50,000 from any of the NEFT-enabled branches in India to Nepal. The beneficiary would receive funds in Nepalese Rupees.
7.6.2 No Mandatory Account
This is not a mandatory requirement. Under the Indo-Nepal Remittance Facility Scheme, even a walk-in customer in India can deposit cash up to Rs.50,000 for transfer of funds to the beneficiary in Nepal.
7.6.3Account in Nepal
This is not mandatory. It would, however, be ideal if the beneficiary maintains an account with a bank branch in Nepal to which the credit could be afforded. In Nepal, the Indo-Nepal Remittance Facility Scheme is handled by Nepal SBI Ltd. (NSBL). If the beneficiary resides in a locality or area in Nepal not serviced by a bank branch, an arrangement has been entered into by NSBL with a money transfer company in Nepal (called Prabhu Money Transfer) who would make arrangements for delivery of cash (in Nepalese Rupees) to the beneficiary.
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7.6.4 Documents Required
If the remitting customer maintains an account with a bank branch in India there is no need for any additional information, documents or identification. Else, the remitter has to submit documents for proof of identification such as Passport / Permanent Account Number / Driving License / Telephone Bill / Certificate of Identification issued by his employer with photograph and other details. The information will be captured in the NEFT system as part of compliance with the Know Your Customer (KYC) requirements. Complete address and telephone / mobile number of the beneficiary in Nepal will also be required.
7.6.5 Timeline
Remittances under the scheme for transfer of funds from India to Nepal can be originated from any of the NEFT-enabled branches in India, which are around 62,000 as on date.
7.6.6 Process
The transactions from the originating bank branch flow in the NEFT system to the designated branch of State Bank of India (SBI) in India. SBI then consolidates all such remittance information received during the day. At the end of the day, the remittance information is conveyed electronically in a secured mode to Nepal SBI Bank Ltd. (NSBL). NSBL then makes arrangements for credit to the bank account of the beneficiary if the beneficiary account details are available. Else, NSBL disburses funds in cash to the beneficiary through the authorised money transfer company (Prabhu Money Transfer). The beneficiary has
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to approach the local branch of the money transfer company, furnish the UTR number (also called as the Unique Transaction Reference number that uniquely identifies a transaction in the NEFT system that can be obtained from the remitter), and produce a photo identity document (generally Nepal Citizenship Certificate) to prove his identity.
If the beneficiary does not approach the money transfer company within a week from the date of the transaction, the money transfer company would make arrangements for return of the remittance to the originator.
7.7.7 Other Details
The location and addresses of NSBL and Prabhu Money Transfer are available in the Procedural Guidelines for Indo-Nepal Remittance Facility Scheme as also with the NEFT-enabled branches in India.
The amount of remittance will flow back to the originating bank branch in India through the NEFT system and the bank branch would then communicate to the remitter about return of the remittance. If the remittance was originated by debit to an account of the remitter with the bank branch, the returned amount will be credited to the account. If the remittance was by a walk-in customer through a cash deposit, the remitter has to produce evidence of proof of remittance (counterfoil of the remittance application form) for refund of the cash deposited.
As the facility is targeted at the migrant Nepali workers in India, concessional charges are envisaged for transfer of funds under the IndoNepal remittance scheme.
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The charges are as under Originating bank branch in India Maximum Rs. 5 per transaction. State Bank of India in India Rs. 20 per transaction if the beneficiary maintains an account with Nepal SBI Ltd. (NSBL). State Bank of India shares this amount equally with NSBL. NSBL would not charge any additional amount for crediting the account of the beneficiary.
In case the beneficiary does not maintain an account with NSBL, an additional amount would be charged @ Rs. 50 for remittances up to Rs. 5,000 and Rs. 75 for remittances above Rs. 5,000.
The charges would, thus, be a minimum of Rs. 25 or a maximum of Rs. 100 depending on the value of transaction and the manner in which credit is afforded to the beneficiary.
Originating bank branches have been advised to recover the entire charges from the remitter as per the structure detailed above and pass on the appropriate amount to SBI after retaining their share (of Rs. 5).
7.7.8 Restrictions
An originator in India is allowed to remit a maximum of 12 remittances in a year under the scheme.
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7.7.9 Redressal
In case of complaints relating to non-credit or delay in credit to the beneficiary account or for complaints of any other nature, the NEFT Customer Facilitation Centre (CFC) of the respective bank (the originating bank and / or SBI) can be contacted. Details of NEFT Customer Facilitation Centres of banks are available on the websites of the respective banks.
7.8 US-Dollar Cheque Collection
7.8.1 Introduction
One of the services rendered by banks as part of their normal banking operations is collection of cheques deposited by their customers, some of which could also be drawn or payable on banks that are outside the country. Such cheques are called foreign currency cheques and, presently, a significant part of these cheques are US-Dollar denominated payable by banks in the United States of America. In the interest of better public awareness, the following FAQs have been prepared for cheques denominated in US-Dollars
7.8.2 Rupee Denominated cheque vs Dollar denominated
Cheques denominated in currencies other than Indian Rupees such as Euro, Pound Sterling, US Dollar, Yen, etc., are called foreign currency cheques. Foreign currency cheques include demand drafts, personal cheques, bankers cheques, cashiers cheques, travellers cheques, etc.
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Since such cheques are not payable in India they are, therefore, required to be sent to the country concerned for realization of proceeds. Cheques denominated in US Dollars (USD cheques) constitute a major share of foreign currency cheques deposited by customers for realisation. In order to make the USD cheque collection process more efficient and transparent, RBI has advised banks to refine their USD cheque collection procedures and frame their own USD Cheque Collection Policy covering aspects like mode of collection, collection period, charges for collection, etc. This policy shall be made part of their regular Cheque Collection Policy for collection of local / outstation cheques payable within India. There are various ways of collecting (realising) USD denominated cheques. The collection process followed by banks (presenting banks) varies depending on the institutional arrangements put in place by them.
There are basically three types of arrangements adopted by banks Cash Letter Arrangement (CLA) : Cheques are sent by the presenting banks in India to their correspondent banks (CBs) in USA for domestic clearing. Funds are collected (realised) by the CBs and credited to the account of the presenting bank maintained in US. Such accounts are known as NOSTRO accounts. For cheques sent under CLA the CB gives provisional credit to the bank on a pre-determined date (which varies from 7 to 9 days after tendering of cheque to the CB). However, the provisional credit will be subjected to a cooling period. After the cooling period, the customers account with the presenting bank in India is credited. In case of secured collection facility, the CB provides a guaranteed credit but at an additional cost.
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(Cooling period is the time up to which banks wait after receiving provisional credit for the amount of cheque in their Nostro account for possible return of the cheque under provisions of the laws of USA by the drawee bank, before giving credit to the customers.)
(Secured Collection is a facility extended by the CBs. Under this facility, the CBs provide guaranteed final credit without recourse within a confirmed time period unlike normal collection service. Hence the collection time period is better under this facility. CBs offering this facility normally fix a cap for the amount of individual cheques collected under the arrangement. The CBs absorb any subsequent recall of payment by the drawee bank as per US laws. . The bank offering such service charge an additional amount for giving credit without recourse.) Direct Collection Arrangement (DCA) : Cheques are sent by the banks in India directly to the drawee banks in USA for collection. Usually collection services ensure receipts of clear funds i.e., risk of return is almost eliminated. Therefore, high value cheques are generally sent under collection though the time taken may be more. Final Credit Services (FCS) : These services are offered by some CBs. The CB offering the service guarantees confirmed credit against the instrument. Under this arrangement banks receive final credit in their Nostro accounts without any recourse. This service normally does not have any cooling period as the cooling period is factored by the CBs before releasing the clear funds.
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7.8.3 Nostro Account
A Nostro account is a bank account established in a foreign country usually in the currency of that country for the purpose of carrying out transactions there. For example most commercial banks maintain US dollar accounts with their correspondent banks in USA in order to facilitate settlement of interbank and customer transactions in US dollar.
7.8.4 Charges
The charges levied by banks for collection of such USD denominated cheques are dependent on the type of collection arrangement chosen by customers and the number of intermediaries (correspondent banks) involved in the collection process. Each of the CBs will levy their own charges for facilitating the process of collection. All these charges will be in turn levied by the collecting banks in India from the customers. The customers account is credited net of collection charges (proceeds minus collection charges)
7.8.5 US Regulation
The basic legal framework for determining rights, responsibilities and liabilities of the parties in connection with collection of USD denominated cheques drawn on US banks are governed by the legal framework as laid down under the US federal and state laws like Uniform Commercial Code (UCC) etc. However, in the event of return of a counterfeit cheque handled through this process, the drawee bank in the US has the right to recover the proceeds from presenting banks within the period stipulated under US Clearing House guidelines.
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7.9 Speed Clearing
7.9.1Introduction Banks as part of their normal banking operations undertake collection of cheques deposited by their customers, some of which could also be drawn on non-local bank branches. Such cheques are called outstation cheques. In order to facilitate faster collection of outstation cheques, the Reserve Bank of India started a special clearing styled Speed Clearing by leveraging the core-banking-solutions implemented in banks. In the interest of better public awareness, the following FAQs on Speed Clearing have been prepared.
Speed Clearing refers to collection of outstation cheques through the local clearing. It facilitates collection of cheques drawn on outstation core-banking-enabled branches of banks, if they have a net-worked branch locally.
The collection of outstation cheques, till now, required movement of cheques from the Presentation centre (city where the cheque is presented) to Drawee centre (city where the cheque is payable) which increases the realization time for cheques. Speed Clearing aims to reduce the time taken for realization of outstation cheques.
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7.9.2 Process
A person who has an outstation cheque with him deposits it with his bank branch. This bank branch is called the Presenting branch. The cheque is sent for collection to the city where it is payable / drawn called Destination centre or Drawee centre. The branch providing the collection service at the Destination centre is called the Collecting branch. On receipt of the cheque, the Collecting branch presents it in local clearing to the Drawee branch or the Destination branch. Once the cheque is paid the Collecting branch remits the proceeds to the Presenting branch. On receipt of realisation advice of the cheque from the Collecting branch, the customers account is credited. This, in short, is the process of Collection. When a cheque is accepted on a collection basis by a bank, it credits the customers account only after realisation of its proceeds.
Alternatively, in the absence of a collection arrangement at the Destination centre, the Presenting branch will send the cheque directly to the Destination branch for payment. On receiving the proceeds from Destination branch, Presenting branch credits the customers account.
Generally, it takes around a week to three weeks time depending on the drawee centre and collection arrangements to get outstation cheques realised on a Collection basis.
In Local Cheque Clearing in 66 major centres, cheques are processed at the Clearing Houses on mechanised sorters, using Magnetic Ink Character Recognition (MICR) technology.
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Local Clearing handles only those cheques that are drawn on branches within the jurisdiction of the local Clearing House. Generally, the distance between the Clearing House and the participating branches is defined, taking into account the local transportation and communication facilities as the cheques have to physically move to and from the Clearing House. For example, for a cheque to be processed in Local Clearing in Mumbai, both the presenting and drawee branches should be situated within the jurisdiction of the Clearing House in Mumbai.
Banks have networked their branches by implementing Core Banking Solutions (CBS). In CBS environment, cheques can be paid at any location obviating the need for their physical movement to the Drawee branch. The concept of Speed Clearing combines the advantages of MICR clearing with that of CBS.
Cheques drawn on outstation CBS branches of a Drawee bank can be processed in the Local Clearing under the Speed Clearing arrangement if the Drawee bank has a branch presence at the local centre.
7.9.3 Benefits
As on date, the local cheques are processed on T+1 working day basis and customers get the benefit of withdrawal of funds on a T+1 or 2 basis. 'T' denotes transaction day viz. date of presentation of cheque at the Clearing House. So, the outstation cheques under Speed Clearing will also be paid on T+1 or 2 basis.
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7.9.4 Charges Presenting branches are currently permitted to levy charges at a rate not exceeding Rs.150 per cheque (inclusive of all charges other than Service Tax) for cheques of above Rs. 1 lakh presented through Speed Clearing. No charges are payable for cheques of value up to Rs. 1 lakh. With effect from April 1, 2011, no charges will be payable for cheques of value up to and including Rs. 1 lakh from Savings a/c customers. Banks would be free to fix charges for collection of other types of accounts for all values and also from Savings a/c customers for cheque of value above Rs. 1 lakh. Charges fixed should be reasonable and computed on a cost-plusbasis and not as an arbitrary percentage of the value of the instrument.
7.9.5 Types of CHEQUES
Instruments of all transaction codes (except Government cheques) which are drawn on CBS-enabled bank branches are eligible for being presented in Speed Clearing.
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8. CONCLUSION
The Reserve Bank of India has been actively engaged in policy action to minimise the impact of the global crisis on India. The policy response of the Reserve Bank has helped in keeping Indias financial markets functioning in a normal manner and in arresting the growth moderation. The Reserve Bank will continue to maintain vigil, monitor domestic and global developments, and take swift and effective action to minimise the impact of the crisis and restore the economy to a high growth path consistent with price and financial stability. Hence, this way RBI not only perform functions for which it is obliged but also carry on other acts for the development of economy as a whole and maintain sustainable growth controlling various factors affecting the same.
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BIBLIOGRAPHY
Books: K. R. Venugopal, Growth Imbalance and Indian Economy
Journals: RBI annual report, 2009-2010 Handbook of statistics on the Indian economy RBI, February 2012 RBI weekly statistical supplement, 24th Jan.2012
Websites:
http://www.bulletin.rbi.org.in http://www.rbi.org.in http://finance.indiamart.com/investment_in_india/monetary_policy.ht ml http://www.business-standard.com/india/news/limits-to-monetarypolicy/405914/ http://thismatter.com/money/banking/inflation-money-supply-m1m2.htm http://www.rbi.org.in/scripts/AboutusDisplay.aspx http://kalyan-city.blogspot.com/2012/02/functions-of-reserve-bankof-india-rbi.html http://business.rediff.com/report/2012/jan/30/rbi-wants-superregulator-status.htm
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RBIs Payment Systems

I. II. III. IV. V. VI.

RBIs Payment Systems

1.1 RESERVE BANK OF INDIA

First RBI Building 1935, Kolkata

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1.2 HISTORY OF RBI:

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1.3 HOW IT WENT

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2. STRUCTURE and FUNCTIONS

RBIs Payment Systems

The functions of a central bank can be broadly categorized as follow

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2.1.1 Monetary Policy Functions:

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2.1.2 Maintaining Internal Value of the Currency:

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2.1.3 Maintaining External Value of the Currency:

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2.2 Banker to the Government:

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2.3 Banker to the Banks:

RBIs Approach : As the banker to banks, RBI focus on:

RBIs Payment Systems

Financial Sector Regulation and Supervision:

2.3.3 Financial Stability:

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Payment System Functions:

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2.4 Developmental Functions:

2.4.1 Sectoral Policies:

2.4.2 Development of Financial Market:

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2.4.3 Research Activities:

2.4.4 Dissemination of Information:

2.4.5 External Financial Relations Agent:

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3.2 Monetary Policy in India The Announcement Monetary Policy

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4. RBI Monetary Aggregates

M2: M1 + Savings deposits with Post office savings banks.

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4.1 M3 Money Supply for Selected Countries

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Data as on January, 2010

Some Monetary Policy terms: Bank Rate

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RBIs Payment Systems

Statutory Liquidity Ratio

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5. MONETORY V/S FISCAL POLICY

Monetary policy controls the Fiscal supply of money in the nation.

direction of economy of a nation.

stabilize the economy of the country. Monetary

program of key banks of the nation.

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6.1 Department of Currency Management

6.2 Urban Banks Department

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6.3 Rural Planning and Credit Department