Thursday, August 5, 2010

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Payment and Settlement Systems

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. Some of the questions frequently asked in this regard are presented below in the form of an FAQ.

1. What is a Payment System?

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.

2. What are the components of any payment system?

Payment systems include instruments through which payments can be made, rules, regulations and procedures that guide these payments, institutions which facilitate payment mechanisms and legal systems etc. that are established to facilitate transfer of funds between different participants.

3. Who can use payment systems to make payments?

Payment systems are used by individuals, banks, companies, governments, etc. to make payments to one another. In other words, any body who has to make a payment to any one else can use one or the other form of payment system to make such a payment.

4. What are the ways in which a customer can make payments through banks?

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.

5. How is the payment made when a payer issues a cheque to the payee?

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.

6. What is a Clearing House?

A clearing house is an association of banks that facilitates payments through cheques between different bank branches within a city / place. It acts as a central meeting place for bankers to exchange the cheques drawn on one another and claim funds for the same. Such operations are called as clearing operations. Generally one bank is appointed as in-charge of the clearing operations. In the four metros and a few other major cities, the Reserve Bank of India is looking after the operations of the clearing house. Each clearing house has uniform regulations and rules for the conduct of its operations as prescribed by RBI. There are more than 1000 clearing houses operating all over the country facilitating cheque payments. These are managed by the RBI, State Bank of India and other public sector banks.

7. What is the time taken for this clearing process?

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 utilise 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 utilisation by the customer. For delay beyond the normal period, the banks are required to compensate the customer (even without customer asking for the same)

8. Would a bank customer incur any charges by using cheques for payments?

The person receiving payment by means of cheques would incur some charges to realise 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 realised. The charges levied by the banks are generally decided by the Indian Banks’ Association or the banks themselves. Banks are also required to publicise the schedule of service charges.

9. How can payments be made without use of cheques and cash?

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.

10. Can a customer of a bank use the ATM of some other bank?

Yes, if the customer’s bank has an arrangement with the bank owning the ATM. Presently, stand alone ATMs are very few and usually such stand alone ATMs are installed at the branch premises. In case ATM of another bank is used, normally a service charge called "inter-change fee" is levied on the customer.

11. Are ATMs used only for cash withdrawal?

In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry and several other banking transactions which the bank/s owning the ATM's might want to offer.

12. What is the role of credit / debit cards in payment systems?

Credit / Debit cards are being widely used in the country as they provide a convenient form of making payments for goods and services without the use of cheques and cash. Banks issue credit cards to their customers. The merchant establishment who accepts credit / debit card payments will claim the amount from the customer’s bank through his own bank.

13. How is a Debit Card different from Credit Card?

Debit Card is a direct account access card. (Amount transacted gets debited immediately). The amount permitted to be transacted in debit card will be to the extent of the amount standing to the credit of the card user’s account. On the other hand, a credit card involves provision of credit to the card user which is paid by the card user on receipt of the bill either in full or partially in instalments.

14. What is EFT?

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person / company etc. can approach his bank and make cash payment or give instructions / authorisation to transfer funds directly from his own account to the bank account of the receiver / beneficiary. Complete details such as the receiver’s name, bank account number, account type (savings or current account), bank name, city, branch name etc should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiaries’ account correctly and faster. RBI is the service provider for EFT.

15. Can I use EFT to transfer funds anywhere in India?

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.

16. How long does it take to transfer funds through EFT?

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.

17. Are there any charges for transferring funds through EFT?

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.

18. How can I make 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 divided into two types – ECS (Credit) to make bulk payments to individuals/vendors and ECS (Debit) to receive bulk utility payments from individuals.

19. What is ECS (Credit)?

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

20. What is 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.

21. Are there any 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.

22. How can an NRI remit money into India?

As an NRI, an individual can remit funds into India through normal banking channels using the facilities provided by the overseas bank. Alternately, an NRI can also remit funds through authorised, Money Transfer Agents (MTA). Of late, a good number of banks have launched their inward remittance products which facilitate funds transfer in matter of hours.

23. How do banks make payments for their own transactions?

Ordinarily, the transactions among banks (not pertaining to customer transactions) would be for large values .Hence such transactions are called as large-value funds transfers. The actual transfer of funds will take place through the accounts which the banks maintain with the RBI. For this purpose, banks can give cheques drawn on their account maintained with RBI to one another, which will then be processed through the clearing house. Alternatively, they can also make use of large value payment system called as Real Time Gross Settlement System where funds transfer takes place instantaneously, based on electronic instructions just like EFT in the case of individuals and companies.

24. What is 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.

25. Can individuals make payments through RTGS system?

Yes, individuals can transfer funds through RTGS system through their banks. Though the system is primarily designed for large value payments, bank customers have the choice of availing of the RTGS facility for their time critical low value payments as well. There is no definition of "low value" or "large value" for the purpose of RTGS transaction. As on 31 July 2005, RTGS facility was available at more than 7500 bank branches at 401 cities and towns in India. RBI plans to make the facility available at a minimum of 10,000 branches by March 2006. At present, not all bank branches are enabled to process RTGS system funds transfer. A customer who desires to use this facility should approach his bank to find out whether his own bank branch as well as the beneficiary’s bank branch is enabled to transfer funds through RTGS system. Banks may levy charges for such funds transfers at their discretion and based on the customer-bank relationship. The customer, in turn, is entitled to claim interest for delay in credit of funds into the beneficiary’s account.

26. Whom should I approach in case of any complaints relating to customer services under payment systems?

The customer may approach the bank concerned to redress the complaint. In case of lack of response / satisfactory redressal by the bank, the customer may approach the Grievance Redressal Cell in the local RBI office, if any. The customer may also approach the office of the Banking Ombudsman for redressal of his complaint.

27. What is Cheque Truncation?

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

28. How would Cheque Truncation benefit the bank customers?

The bank customers would get their cheques realised faster as T+0 local clearing and T+1 inter-city clearing is possible in Cheque Truncation System (CTS). As straight through processing and automated payment processing are enabled by CTS faster realisation is accompanied by a reduction in costs for the customers and the banks. It is also possible for banks to offer innovative products and services based on CTS. The banks have additional advantage of reduced reconciliation and clearing frauds.

29. What is the role of RBI in payment systems?

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 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.

30. How does RBI regulate payment systems?

The Board for regulation and supervision of Payment and Settlement Systems (BPSS) is a sub-committee of the Central Board of the RBI and is the highest policy making body on payment system. The Board is assisted by a technical committee called National Payments Council (NPC) with eminent experts in the field as members. The Board as well as the council are assisted by a newly created department the Department of Payment and settlement Systems (DPSS). The Board has been entrusted with the responsibility to authorise, prescribe policies and set standards for all existing and future payment systems in the country. The Board also has the powers to determine membership criteria to these systems and related policies.

31. What were the major developments in payment and settlement systems in India during the last decade?

During the last decade, payment system services offered by banks to the common persons as well as the corporate bodies have improved substantially. It is partly due to increased use of technology in service delivery and partly due to procedural changes necessitated in the wake of competition amongst the banks.

Changes visible are the following :

Firstly, cheque clearing system has vastly improved. Time taken for collecting a local cheque has now reduced to two or three days. It used to take 4 or 5 days earlier. At 42 large cities automated cheque processing centres have been set up where cheques received by all bank branches in the city are processed at night. Time taken for collection of outstation cheques has also been reduced. Now it takes 4 to 10 days depending on location of the paying centres. It used to take 10 days to one month earlier.

Secondly, during the 90s, a few variants of electronic payment products were introduced. Electronic Clearing Service(ECS) helped large corporate bodies to pay their dividend, interest and refunds electronically on the due date. Not only the investing public could get the payment on the due date, but also the corporates could save substantially by not having to print paper instruments. One can imagine the extent of savings from the fact that 36 million of such transactions were routed through ECS during the year 2005-06. Similarly, the utility bodies are now in a position to collect their bills through ECS right on the due date. Cash flow management is getting easier. There were 16 million such transactions during 2004-05.

Thirdly, extension of electronic funds transfer (EFT) facility by the banks has altered the money transfer scenario. Using the EFT infrastructure laid by the Reserve Bank, commercial banks have started offering same-day funds transfer facility to their customers. Bank customers at 15 major centres can transfer funds to one another using this facility. A variant of EFT called Special-EFT has been designed specially for the networked branches which facilitates funds transfer on the same day within the closed group of computerized and networked branches located any where in the country. Banks with internet banking infrastructure are receiving requests from their customers for EFT and executing the requests in a straight-through manner.

Fourthly, launching of Real-Time Gross settlement (RTGS) system by RBI has added a new dimension to EFT scenario. Corporate bodies and other bank customers have now the option to transfer funds to designated branches ( around 9600 at present) instantaneously. As per the RTGS operating rules, if the credit can not be applied, it should be returned within 2 hours- meaning thereby that the maximum delay can be 2 hours.

Fifthly, there has been a rapid growth in installation of ATMs in the country. Bank customers can now access their accounts for withdrawal of cash, deposit of cash, balance enquiry, requisition of cheque books, issue of stop-instruction etc. on 24X 7 basis. ATM population is around 16,000 in the country at present and in increasing by a few hundreds each month.

Sixthly, In the last three or four years there has been a phenomenal growth in use of payment cards (debit and credit cards) as a payment medium in the country. As at the end of December 2004 there were 4.33 crore payment cards in the country. The increasing use of cards is not only due to the safety and convenience aspect but on account of retail consumer boom which has taken place in the country.

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