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BANKING PAYMENT AND SETTLEMENT SYSTEM

UNIVERSITY OF MUMBAIBANKING PAYMENT AND SETTLEMENT SYSTEM BACHELOR OF COMMERCE & ECONOMICS BANKING & INSURANCE SEMESTER V ACADEMIC YEAR (2009-2010) SUBMITTED BY Ms. KAVITA SALUNKE ROLL NO: - 37 ____________________________________________________ LAXMI CHARITABLE TRUST SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS ANDHERI (E), MUMBAI-400 069

1T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

UNIVERSITY OF MUMBAIBANKING PAYMENT AND SETTLEMENT SYSTEM BACHELOR OF COMMERCE & ECONOMICS BANKING & INSURANCE SEMESTER V IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF COMMERCE BANKING & INSURANCE SUBMITTED BY MS. KAVITA SALUNKE ROLL NO:-37 ____________________________________________________ LAXMI CHARITABLE TRUST SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS ANDHERI (E), MUMBAI-400 069

2T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

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 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 Principal

3T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

ACKNOWLEDGEMENTFirst 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 includeMrs. MALINI JOHARI principal, SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS.

4T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

EXECUTIVE SUMMARYA 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.

5T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

INDEXSR. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. TOPIC NAME INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKS EVOLUTION OF PAYMENT SYSTEM IN INDIAOBJECTIVES OF THE PAYMENT SYSTEM THE ROLE OF THE RBI

PAGE NO. 1-2 3-5 6 7-8 9-10 11-13 14 15-18 19-20 21-26 27-31 32-35 36-47 48-49 50-51 52-56 57-58

CHEQUECHEQUE TRUNCATION SYSTEM (CTS)

CHEQUE TRUNCATION MODEL FOR INDIA NATIONAL ELECTRONIC FUND TRANSFER OPERATION OF ELECTRONIC FUND TRANSFER EFTPOS REAL TIME GROSS SETTLEMENT SYSTEM RTGS IN INDIA ELECTRONIC CLEARING HOUSETHE CHALLENGES AHEAD QUESTIONS ASKED TO BANK SURVEY REPORT CONCLUSION

6T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKSThe 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 banks 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.

7T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

Payments can be made in India in the form of cash, cheque, demand drafts, credit cards, debit cards and also by means of giving electronic instructions to the banker who will make such a payment on behalf of his customers. Electronic payments can be made in the form of Electronic Funds Transfer (EFT), Electronic Clearing Service (ECS) for small value repetitive payments and through Real Time Gross Settlement (RTGS) System for large value payments. A few banks in India have begun to offer certain banking services through Internet that facilitate transfer of funds electronically.

8T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

EVOLUTION OF PAYMENT SYSTEM IN INDIAThe history of the payment system can be said to be virtually coterminus 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 punchmarked 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 semigovernment 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 of9T.Y.B.B.I. SEM V

BANKING PAYMENT AND SETTLEMENT SYSTEM

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 promi