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What is NEFT and RTGS – Difference Between NEFT and RTGS online funds transfer?


NEFT and RTGS are the two convenient modes of money transfer between banks in India. The acronym “RTGS” refers to for Real Time Gross Settlement it is a !ni"!e and #o#!lar f!nd transfer mechanism which enables the transfer of money between two banks on a “real time” and on “$ross” basis. “NEFT” is the abbreviation for National Electronic F!nds Transfer which is an online system for transferrin$ f!nds between financial instit!tions. This system was introd!ced in %&&' and is hi$hly im#roved version of EFT (Electronic F!nds Transfer) which was confined to a select centre. *The f!ndamental difference between RTGS and NEFT which can be clearly ed!ced from the above definitions is that RTGS is based on $ross settlement and NEFT is a net+settlement #rocess. *RTGS is the swiftest money transfer system thro!$h the bankin$ channel as it is done in real time (,#!sh- transfer) while NEFT bein$ net based is com#aratively slower than RTGS. *In RTGS #ayment transaction will not involve any waitin$ #eriod which is the tr!e meanin$ of “real time” settlement. .nder normal circ!mstances the transactions are settled as soon as they are #rocessed by remittin$ bank. The transaction is settled on one+one basis witho!t cl!sterin$ any other transaction makin$ it a “Gross settlement”. The transaction is considered irrevocable as the money transfer occ!rs in R/I records. NEFT f!nctions on a deferred net settlement (0NS) basis where transactions are com#leted in batches at s#ecific times. These settlements takes #lace at a #artic!lar #oint of time and all transactions are held !# till that time *1nother si$nificant factor that differentiates RTGS and NEFT is fi2in$ a floor limit. RTGS is an e2cl!sive messa$e based transfer mechanism for an amo!nt over Rs % lakhs i.e the minim!m amo!nt to be remitted thro!$h RTGS is Rs.% lakhs. There is no !##er ceilin$ for RTGS transactions. 3ontrary to that NEFT is !sed mainly to transfer f!nds below Rs % lakhs and this system is most commonly !sed for smaller val!e transactions involvin$ smaller s!m of money i.e from an amo!nt as min!te as one r!#ee. 4owever there is no ma2im!m limit for transfers thro!$h NEFT. *In RTGS the beneficiary bank credits the beneficiary-s acco!nt in a s#an of two ho!rs #ost the recei#t of f!nds transfer messa$e. RTGS transactions are #rocessed thro!$ho!t the workin$ ho!rs of the system. 5arkin$ its difference yet a$ain NEFT is done on net basis where the bank

cl!bs transactions to$ether and only the net amo!nt is transferred. This settlement !s!ally takes #lace 6 times a day on weekdays and 7 times on Sat!rdays. NEFT takes #lace within the same day if it is within the c!t+off time and the ne2t workin$ day if it is beyond the #rescribed c!t+off time. *5a8ority of the commercial banks have em#loyed RTGS and it is available in over 7&96% n!mbers of branches while the co!nt of banks which have #!rchased the software re"!ired to facilitate NEFT based transaction are over :; and NEFT facility is available at a##ro2imately 7%9&6 branches of banks in India. These branches may be available in remote corner of co!ntry also. 4ence RTGS and NEFT tho!$h distinct in their f!nctionality and #rocess are !ni"!e and similar in their !ltimate service which is now renderin$ #lethora of advanta$es makin$ the easiest service available in service sector ind!stry across $lobe.

What is Repo Rate, Reverse Repo Rate ?

A repo or repurchase Agreement is an instrument of money market. Usually reserve bank (federal bank in U.S and commercial banks involve in repo transactions but not restricted to these t!o. "ndividuals, banks, financial institutes can also participate in repurchase agreement.

Re#o is a collaterali<ed lendin$ i.e. the banks which borrow money from Reserve /ank to meet short term needs have to sell sec!rities !s!ally bonds to Reserve /ank with an a$reement to re#!rchase the same at a #redetermined rate and date. In this way for the lender of the cash (!s!ally Reserve /ank) the sec!rities sold by the borrower are the collateral a$ainst defa!lt risk and for the borrower of cash (!s!ally commercial banks) cash received from the lender is the collateral. Reserve bank char$es some interest rate on the cash borrowed by banks. This rate is !s!ally less than the interest rate on bonds as the borrowin$ is collateral. This interest rate is called ,re#o rate-. The lender of sec!rities is said to be doin$ re#o whereas the lender of cash is said to be doin$ ,reverse re#o-. In a reverse re#o Reserve /ank borrows money from banks by lendin$ sec!rities. The interest #aid by Reserve /ank in this case is called reverse re#o rate.

/orrower of f!nds is called as seller of re#o and lender of f!nds is called as b!yer of re#o. =hen the term of the loan is for one day it is known as an overni$ht re#o and if it is for more than one day it is called a term re#o. The forward clean #rice of bonds is set at a level which is different from the s#ot clean #rice by ad8!stin$ the difference between re#o rate and co!#on earned on the sec!rity. Current Reference Rates: Repo Rate : 6.'&> Re erse Repo Rate: :.'&> Ban! Rate: ;.'&>

What is #RR (#ash Reserve Ratio ?

#RR is #ash Reserve Ratio. "t refers to keeping a portion of net demand and time liabilities ($%&' of banks !ith the central banks ("n "ndia it(s Reserve )ank of "ndia, R)" . #entral bank fi*es this percentage of $%&'. #entral bank can change this percentage as a monetary measure to control the availability of funds in the economy i.e. to in+ect li,uidity or to suck li,uidity. R)" doesn(t pay any interest on such funds held !ith it. &he follo!ing are the demand liabilities of banks. )anks should pay these liabilities on demand !hich may come at any time. All liabilities !hich are payable on demand- they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit.guarantees, balances in overdue fi*ed deposits, cash certificates and cumulative.recurring deposits, %emand %rafts (%%s ,unclaimed deposits, credit balances in the #ash #redit account and deposits held as security for advances !hich are payable on demand.

&ime 'iabilities are those !hich are payable other!ise than on demand- they include fi*ed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, deposits held as securities for advances !hich are not payable on demand and /old %eposits. When a central bank increases #RR, the banks need to reduce the outflo! of money by reducing the loans to customers and keep additional amount !ith the central bank. &his usually sucks li,uidity in the markets. 'et(s e*amine one by one Stock Market: Some traders take leveraged positions (usually 0 1 2 times their funds in stock markets by taking additional funds from their brokers at an interest rate. &his interest rate goes up as the funds !on(t be available easily. When the interest rate goes up they reduce the amount of leverage or they take the same leverage positions but e*pect more returns from Stock market !hich is possible only !hen the prices go do!n. So the overall effect is prices !ill go do!n. Bond Market: &he banks need to increase interest rates to attract more deposits. &he prices of the e*isting bonds !ill go do!n because bonds of same profile !ill be available !ith higher interest rates. Over all Economy: #ompanies find it difficult to raise funds by issuing debentures.bonds because they need to pay more interest. &his may cause them to delay the implementation of their e*pansion plans and the economy slo!s do!n. &he above said effects are in general. &hey may or may not happen at same time and the e*tent of impact !ill also depend on the rate of increase in #RR. #entral banks increase #RR only if it feels there is a lot of li,uidity in the market and purchasing po!er of people is more than re,uired (as e*pected by the central bank i.e. !hen the conditions are hyperinflationary. "t reduces the #RR !hen it feels there is credit crunch in the market and li,uidity is very lo!. &he effects !ill be opposite to the discussed above. &his measure is to increase the over all gro!th rate of the economy. 3n 3ctober 4th R)" reduced #RR by 5.26 and again on 75th 3ctober by 76 to ease the credit crunch in the current market conditions and to make funds available to the banks.

8ou can find the latest rates from the R)" !ebsite itself. 9ere " am giving the link. :ouse over on reserve ratios (on Right hand side to see S'R and #RR. R)" Website

What is S'R (Statutory 'i,uidity Ratio ?

S'R is Statutory 'i,uidity Ratio. "t(s the percentage of %emand and &ime :aturities that banks need to have in any or combination of the follo!ing forms; i #ash ii /old valued at a price not e*ceeding the current market price, iii Unencumbered approved securities (/ Secs or /ilts come under this valued at a price as specified by the R)" from time to time. &he ma*imum limit of S'R is 056 and minimum limit of S'R is <06. "t(s <06 no!. &his restriction is imposed by R)" on banks to make funds available to customers on demand as soon as possible. /old and / Secs (or /ilts are included along !ith cash because they are highly li,uid and safe assets. &he R)" can increase the S'R to contain inflation, suck li,uidity in the market, to tighten the measure to safeguard the customers( money. "n a gro!ing economy banks !ould like to invest in stock market, not in / Secs or /old as the latter !ould yield less returns. 3ne more reason is long term / Secs (or any bond are sensitive to interest rate changes. )ut in an emerging economy interest rate change is a common activity. 8ou can find the latest rates from the R)" !ebsite itself. 9ere " am giving the link. :ouse over on reserve ratios (on Right hand side to see S'R and #RR. R)" Website

9o! inflation is calculated in "ndia

"n the previous article !e discussed about !hat is "nflation. $o! !e !ould like to cover ho! inflation is calculated in "ndia. "ndia uses Wholesale =rice "nde* (W=" to calculate inflation. Wholesale =rice "nde* measures the average of the changes of goods and services price on the basis of !holesale price. =resently 0>2 commodities price level is being tracked through !hole sale price inde* in "ndia. "t is also the price inde* !hich is available on a !eekly basis !ith the shortest possible time lag of only t!o !eeks. "ndia considers 7??>@?0 financial year as base year for present W=" inde* calculation. &he 0>2 commodities are divided into different groups A sub groups. &he list of 0>2 commodities can be found here. Bach commodity has some !eightage in the W=" inde*. )elo! are the !eightages of commodities group !ise;7. =rimary Articles (!eightage; <<.5<2<26 <. Cuel, =o!er, 'ight A 'ubricants (!eightage; 70.<<4<06 >. :anufactured =roducts (!eightage; 4>.D0E276 &he primary articles group consists of follo!ing sub groups; Cood articles, non food articles and minerals. &he F:anufactured =roducts( group consists of follo!ing sub groups; Cood =roducts, )everages, &obacco A &obacco =roducts, &e*tiles, Wood A Wood =roducts, =aper A =aper =roducts, 'eather A 'eather =roducts, Rubber A =lastic =roducts, #hemicals A #hemical =roducts, and $on@:etallic :ineral =roducts, )asic :etals. Alloys A :etals =roducts, :achinery A :achine &ools, &ransport B,uipments A=arts, 3ther :isc. :anufacturing "ndustries. &he !eightage of each group.subgroup of commodities in W=" can be found here. &here is another method for claculation of inflation, it is F#onsumer =rice "nde* (#=" ( . =resently most of the developed countries including US, UG A Hapan are using #=" method.

Assets and &ypes of Assets 1 Cinancial Accounting


A balance sheet is nothing but a representation of assets and liabilities of a company at a particular point of time. "n "ndia liabilities are sho!n on left side of the balance sheet and assets are sho!n on right side. Assets are anything o!ned by the company !hether it is tangible or intangible. Assets can be classified into belo! > categories 7. Iuick Assets <. #urrent Assets >. 'ong term Assets Quick assets are those !hich are in the form of cash or !hich can be ,uickly converted to #ash. &hey sho! the li,uidity of a company !hich means the company(s capability to meet its immediate obligations. Usually ,uick assets are treated as the current assets e*cluding inventory. Current Assets &hese are the assets !hich can be converted into cash !ithin one year. Accounts Receivable, #ash in bank, "nventory, =repaid e*penses and insurance, marketable securities etc are the e*amples of current assets. &he percentage of current assets to total assets should not be very lo!. A lo! value represents the company(s inability to meet its day@to@day obligations. "t should not be very high. A high value means the company is not focusing on long@term pro+ect implementation and not utiliJing the assets in a proper !ay. A #urrent Ratio is defined as the ratio of current assets to current liabilities. "t(s an important ratio in analyJing a company(s li,uidity. Long Term Assets

&hese are the assets !hich company doesn(t !ant to convert into cash in the foreseeable future. Also these assets can(t be converted to cash ,uickly in the market. 'and value, building, furniture, machinery and e,uipment come under this category. 'ong &erm Assets( value after deducting the depreciation is reported in )alance Sheet. "n most of the Accounting rules the purchase price of long term assets is sho!n in balance sheets !hich may differ from market price at the time of reporting

Understanding financial statements of a company

Understanding finance is important not only for finance students but also for investors, engineers, doctors and every group of the society. "f an investor doesn(t understand !hat is a )alance Sheet and if he can(t make out the performance of a firm by looking at the "ncome statement he !ould be doing a gambling. &his post and the future posts in this category are aimed at educating beginners in account statements and statistics in finance. Cinancial statements provide us key information to kno! the performance of a firm over a period of time and the healthiness of a firm at any given point of time. &here are t!o important financial statements released ,uarterly and annually by listed companies to general public. <. "ncome statement or =rofit and 'oss Account )alance sheet is a list of assets and liabilities of a company !hich gives us a picture of financial position of a company at a specific point of time. "ncome statement is basically a cash flo! statement !hich gives us information about the performance of a firm over a given period of time. We !ill discuss about these t!o important financial statements in other posts. 7. )alance sheet

Who are the users of these statements and in !hat !ay they are useful? /enerally investors, lenders, employees, management, suppliers and /overnment are interested in kno!ing the information provided in the financial statements. "nvestors 1 /et information to assess risks in the investments. )ased on the information they take decisions to )uy, 9old or Sell. "f the management is not doing !ell they think about replacing the :anagement? 'enders 1 &hey are interested to kno! the healthiness of the company so that they !ill get an idea on !hether they get the interest and capital back on the money the have lent. "t(s useful to ne! creditors to lend money. Suppliers 1 &hey !ould kno! if their dues !ould get paid in time. #ustomers 1 &hey !ould like to deal !ith financially stable vendors in long term engagements. /overnment 1 "nterested in allocation of resources, ta*ation policies, statistical interests &he management 1 &hey have access to additional information as !ell, !ith !hich, they try to analyJe the performance period after period to bring the best into practice. Bmployees 1 Bmployees are interested to stay !ith a financially stable company.