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BANKING PAYMENT AND SETTLEMENT SYSTEM

UNIVERSITY OF MUMBAI

“BANKING PAYMENT AND SETTLEMENT SYSTEM”

BACHELOR OF COMMERCE & ECONOMICSBANKING & INSURANCE

SEMESTER V

ACADEMIC YEAR(2009-2010)

SUBMITTED BYMs. KAVITA SALUNKE

ROLL NO: - 37

____________________________________________________

LAXMI CHARITABLE TRUSTSHRI CHINAI COLLEGE OF COMMERCE &

ECONOMICSANDHERI (E), MUMBAI-400 069

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BANKING PAYMENT AND SETTLEMENT SYSTEM

UNIVERSITY OF MUMBAI

“BANKING PAYMENT AND SETTLEMENT SYSTEM”

BACHELOR OF COMMERCE & ECONOMICSBANKING & INSURANCE

SEMESTER V

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF

COMMERCE – BANKING & INSURANCE

SUBMITTED BYMS. KAVITA SALUNKE

ROLL NO:-37

____________________________________________________

LAXMI CHARITABLE TRUSTSHRI CHINAI COLLEGE OF COMMERCE &

ECONOMICSANDHERI (E), MUMBAI-400 069

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Laxmi charitable trust

Shri chinai college of commerce & economics

Andheri (E), mumbai-400 069

CERTIFICATE

This is to certify that Miss Kavita Salunke the student of B.Com

(Banking & Insurance) Semester v (2009-2010) has successfully

completed the project on “Banking payment and settlement

system” under the guidance of Prof. Bhavisha Patel.

Course Co-ordinator Principal

Project Guide/ Internal Examiner

External Examiner

DECLARATION

I Miss Kavita Salunke the student of B.Com (Banking &

Insurance) Semester v (2009-2010) hereby declare that I have

completed the project on “Banking payment and settlement

system ”.

The information submitted is true and original to the best of my

knowledge.

Miss Kavita Salunke

Roll No:- 35

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BANKING PAYMENT AND SETTLEMENT SYSTEM

ACKNOWLEDGEMENT

First I would like to thank the UNIVERSITY OF MUMBAI to

include this project in the curriculum which brings out our observity

analyzing and interpreting skills to the maximum.

At the outset of this project I would like to thank our project guide

MS.BHAVISHA PATEL for her outstanding moral support for making

me go through the completion of this project without any stressful method.

It is her professional approach which acts as away for a student to

reach the ultimate goal there is the successful completion of the project and

also the getting to know the true knowledge of my project guide in better

way.

I really thank MR.NISHIKANT JHA for giving me such great

guidance as the co-ordinator of B.com(banking and insurance).

I would also like to special thank my college authorities that

include-

Mrs. MALINI JOHARI principal, SHRI CHINAI COLLEGE

OF COMMERCE AND ECONOMICS.

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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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INDEXSR. NO.

TOPIC NAME PAGE NO.

1. INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKS 1-2

2. EVOLUTION OF PAYMENT SYSTEM IN INDIA 3-5

3.OBJECTIVES OF THE PAYMENT SYSTEM

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4. THE ROLE OF THE RBI

7-8

5. CHEQUE 9-10

6.CHEQUE TRUNCATION SYSTEM (CTS)

11-13

7. CHEQUE TRUNCATION MODEL FOR INDIA 14

8. NATIONAL ELECTRONIC FUND TRANSFER 15-18

9. OPERATION OF ELECTRONIC FUND TRANSFER 19-20

10. EFTPOS 21-26

11. REAL TIME GROSS SETTLEMENT SYSTEM 27-31

12. RTGS IN INDIA 32-35

13. ELECTRONIC CLEARING HOUSE 36-47

14.THE CHALLENGES AHEAD

48-49

15.QUESTIONS ASKED TO BANK

50-51

16.SURVEY REPORT

52-56

17.CONCLUSION

57-58

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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 recognised 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.

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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

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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

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.

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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:

Type Volume (in billion)

(April – March)

Value (Rupees in lakh

crore)

  2005-

06

2006-

07

2007-

08

2005-

06

2006-

07

2007-

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

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OBJECTIVES OF THE PAYMENT SYSTEM

            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.

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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 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:

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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.

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.

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The Act provides legal recognition to netting and settlement finality and

their irrevocability in the event of insolvency.

CHEQUE-

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

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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.

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CHEQUE TRUNCATION SYSTEM (CTS)

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 17

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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 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’

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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-

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.

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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

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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.

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

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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 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

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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 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-

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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 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

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position to discharge this role. So no additional organisational

infrastructure is required to be created.

OPERATION OF ELECTRONIC FUND TRANSFER

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.

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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-

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.

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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:

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

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transactions.

Celent estimates that debit card circulation will hit 169 million by the

end of 2010.

CREDIT CARDS:

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

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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

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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.

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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-

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,

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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.

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.

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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

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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 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

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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-

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.

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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 –

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-

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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-

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.

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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.

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The Reserve Bank of 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

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.

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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.

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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.

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ELECTRONIC CLEARING HOUSE

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.

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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.

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.

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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

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

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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)

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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 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

Centre

Sr. No. Name of the Centre Remarks

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

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13. New Delhi 13. Siliguri (non-MICR)

14. Patna 14. Pondicherry

15. Thiru’puram 15. Hubli

PROCESSING CHARGES / 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.

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 47

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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

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.

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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

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

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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 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

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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.)

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-

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Sr No. Name of the

Centre

Sr. No. Name of the Centre Remarks

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

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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-

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

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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 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 54

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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.

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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 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.

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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 smart card technology is its

ability to store much more information, increasing the ability to store

multiple applications on a single, dynamic card.

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SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS

BANKING & INSURANCESEMESTER V

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

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

Prof. Bhavisha Patel Kavita salunke

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

-

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.

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2) Which payment and settlement is more popular?

_

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.

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3) Which payment settlement payment use for companies?

_

In above digram 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.

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

_

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.

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CONCLUSION

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.

The 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

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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.

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BIBLIOGRAPHY

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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