Banking Payment and Settlement System

BANKING PAYMENT AND SETTLEMENT SYSTEM
UNIVERSITY OF MUMBAI
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
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T.Y.B.B.I. SEM V
UNIVERSITY OF MUMBAI
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
ECONOMICS
ANDHERI (E), MUMBAI-400 069
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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
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
includeMrs. MALINI JOHARI principal, SHRI CHINAI COLLEGE
OF COMMERCE AND ECONOMICS.
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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
INDEX
SR.
NO.
TOPIC NAME
1.
INTRODUCTION TO PAYMENT AND SETTLEMENT IN BANKS
PAGE
NO.
1-2
2.
EVOLUTION OF PAYMENT SYSTEM IN INDIA
3-5
3.
6
OBJECTIVES OF THE PAYMENT SYSTEM
4.
7-8
THE ROLE OF THE RBI
5.
CHEQUE
9-10
6.
11-13
CHEQUE TRUNCATION SYSTEM (CTS)
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.
48-49
THE CHALLENGES AHEAD
15.
50-51
QUESTIONS ASKED TO BANK
16.
52-56
SURVEY REPORT
17.
57-58
CONCLUSION
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T.Y.B.B.I. SEM V
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 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.
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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
EVOLUTION OF PAYMENT SYSTEM IN INDIA

The 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 of
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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
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
Total Cheques
Of
these:
Volume (in billion)
Value (Rupees in lakh
(April March)
crore)
2005-
2006-
2007-
2005-
2006-
2007-
06
07
08
06
07
08
1.29
1.37
1.46
113.29
120.42
133.96
a) 1.03
1.14
1.22
94.74
104.35
115.29
0.023
0.024
18.55
16.07
18.67
MICR
b) Non MICR
0.026
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T.Y.B.B.I. SEM V
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 200508 was published in May 2005, articulating the
Reserve Banks 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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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
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.
The Act provides legal recognition to netting and settlement finality and
their irrevocability in the event of insolvency.
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T.Y.B.B.I. SEM V
CHEQUEThe 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
payers banker through the means of a clearing house.
CLEARING HOUSEA 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.
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
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T.Y.B.B.I. SEM V
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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T.Y.B.B.I. SEM V
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
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,
17
T.Y.B.B.I. SEM V
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 payers banker through the means of a
clearing house.
CHRGES INCURED BY BANK FOR CHEQUE PAYMENTThe 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
Association or the banks themselves. Banks are also required to publicise
the schedule of service charges.
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T.Y.B.B.I. SEM V
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 TIMEthe 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.
19
T.Y.B.B.I. SEM V
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
truncation will result in accelerated cheque clearing and settlement
process, especially for the outstation cheques.
20
T.Y.B.B.I. SEM V
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 onetoone 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
the RTGS-enabled bank branches would also be NEFT-enabled and the
customer would have a choice between the RTGS or the NEFT systems,
21
T.Y.B.B.I. SEM V
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 banks 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 receivers 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
22
T.Y.B.B.I. SEM V
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 TRANSFERFunds 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 EFTThe 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,
23
T.Y.B.B.I. SEM V
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 beneficiarys 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 beneficiarys account was credited.
ADDITIONAL ORGANISATIONAL STRUCTURE FOR BANKSEach 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
position to discharge this role. So no additional organisational
infrastructure is required to be created.
24
T.Y.B.B.I. SEM V
OPERATION OF ELECTRONIC FUND TRANSFER

Step-1: The remitter fills in the EFT Application form giving the
particulars of the beneficiary (city, bank, branch, beneficiarys name,
account type and account number) and authorises the branch to remit a
specified amount to the beneficiary by raising a debit to the remitters
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.
Step-5: RBI at the destination centre receives the files from the originating
centres, consolidates them and sorts them bank-wise. Thereafter, bankwise remittance data files are transmitted to banks on Day 1 itself. Bankwise vouchers are prepared for crediting the receiving banks accounts the
same day or next day.
25
T.Y.B.B.I. SEM V
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 TRANSFERIndia has been one of the fastest growing countries for
payment cards in the Asia-Pacific region. About 3540% of Indias
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.
26
T.Y.B.B.I. SEM V
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
transactions.
27
T.Y.B.B.I. SEM V
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
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.
28
T.Y.B.B.I. SEM V
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
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
29
T.Y.B.B.I. SEM V
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.
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.
30
T.Y.B.B.I. SEM V
Smart cardSmart 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,
drivers 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,
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
31
T.Y.B.B.I. SEM V
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.
32
T.Y.B.B.I. SEM V
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 beneficiarys bank has the
responsibility to credit the beneficiarys 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 customer
who desires to use this facility should approach his bank to find out
whether his own bank branch as well as the beneficiarys 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 beneficiarys account.
33
T.Y.B.B.I. SEM V
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 realtime 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
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.
34
T.Y.B.B.I. SEM V
Minimum / maximum amount stipulation for RTGS transactionsThe 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 RTGSUnder 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 accountThe 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.
Remitting customer get back the moneyIt 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.
35
T.Y.B.B.I. SEM V
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 TRANSACTIONSWith 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
SERVICEAll 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.
36
T.Y.B.B.I. SEM V
MAINTAINS OF RTGS SYSTEMThe 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 RTGSAs the name suggests, funds transfer between banks takes place on a
real time basis. Therefore, money can reach the beneficiary
instantaneously and the beneficiarys bank has the responsibility to credit
the beneficiarys account within two hours.
RTGS SYSTEM FOR AN INDIVIDUALFunds 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
beneficiarys 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.
CHARGES FOR USING RTGSBanks 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 beneficiarys
account.
37
T.Y.B.B.I. SEM V
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.
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.
38
T.Y.B.B.I. SEM V
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.
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
39
T.Y.B.B.I. SEM V
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.
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.
40
T.Y.B.B.I. SEM V
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.
41
T.Y.B.B.I. SEM V
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
consumers bank to debit the bill amount to his account on the due date of
the bill and transfer the amount to the companys 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.
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,
42
T.Y.B.B.I. SEM V
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.
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.
43
T.Y.B.B.I. SEM V
National Clearing Cell (NCC) or the Clearing House (CH) is

responsible for processing transaction information to sponsor bank,
destination bank as well as the RBIs 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 ECSAs 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
divided into two types ECS (Credit) to make bulk payments to
individuals/vendors and ECS (Debit) to receive bulk utility payments from
individuals.
44
T.Y.B.B.I. SEM V
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 bankwise/branch-wise reports (hard copies) NCC debits the destination banks
accounts with clearing house and simultaneously affords a consolidated
credit to the sponsor banks 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)

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 Qs for
payment automatic debiting to the accounts once the mandates are given
by the customers, to that effect cuts down the procedural delay.
45
T.Y.B.B.I. SEM V
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 underSr No.
Name of the Sr. No.
Centre
Managed by RBI*
1.
Ahmedabad
2.
Bangalore
3.
Bhubneshwar
4.
Kolkata
5.
Chandigarh
6.
Chennai
7.
Guwahati
8.
Hyderabad
9.
Jaipur
10.
Kanpur
11.
Mumbai
12.
Nagpur
13.
New Delhi
14.
Patna
15.
Thirupuram
Name of the Centre
Remarks
Managed by State Bank of India

1.
Baroda
2.
Dehradun
3.
Nashik
4.
Panaji
5.
Surat
6.
Trichy
7.
Trichur
8.
Jodhpur
9.
Gwalior
10.
Jabalpur
11.
Raipur
12.
Calicut
13.
Siliguri (non-MICR)
14.
Pondicherry
15.
Hubli
PROCESSING CHARGES / SERVICE CHARGES
46
T.Y.B.B.I. SEM V
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
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)

47
T.Y.B.B.I. SEM V
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 shareholders/ 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.
EXISTING SYSTEM AND ITS DIFFICULTIESBulk and repetitive payments like interest/dividend are mostly paper
based involving printing of warrants ( in costly MICR format) ,
48
T.Y.B.B.I. SEM V
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
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 Banks
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.
49
T.Y.B.B.I. SEM V
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 /

INSTITUTIONSavings 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
from its bank with the date of payment and bankers 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 CUSTOMERPayment on the due date
50
T.Y.B.B.I. SEM V
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 FROMThe responsibility of advising the Investor / Customer about
the amount and due date of payment rests with the User Institution.
On crediting the Investor / Customers account the destination bankbranch 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 availableAt 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 Sr. No.
Centre
Managed by RBI*
1.
Ahmedabad
Name of the Centre
Remarks
Managed by State Bank of India

1.
Baroda
51
T.Y.B.B.I. SEM V
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Bangalore
Bhubneshwar
Kolkata
Chandigarh
Chennai
Guwahati
Hyderabad
Jaipur
Kanpur
Mumbai
Nagpur
New Delhi
Patna
Thirupuram
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Dehradun
Nashik
Panaji
Surat
Trichy
Trichur
Jodhpur
Gwalior
Jabalpur
Raipur
Calicut
Siliguri (non-MICR)
Pondicherry
Hubli
LARGE VOLUME TRANSACTIONSThe 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 TRANSACTIONSThere is no value limit on the amount of individual transactions.
52
T.Y.B.B.I. SEM V
Service chargesRBI 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 / Customers account.
FOR THE ECS (CREDIT CLEARING) FACILITYIf 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
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.
53
T.Y.B.B.I. SEM V
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
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
54
T.Y.B.B.I. SEM V
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.
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.
55
T.Y.B.B.I. SEM V
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.
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 its a very safe mode of payment and settlement.
5)What is smart card?
56
T.Y.B.B.I. SEM V
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.

ECONOMICS
BANKING & INSURANCE
SEMESTER V
CUSTOMER SURVEY
57
T.Y.B.B.I. SEM V
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:________________________________________________

________________________________________________
Project guide
Prof. Bhavisha Patel
Submitted by
Kavita salunke
1) What is the fastest mode of payment of settlement?
58
T.Y.B.B.I. SEM V
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 its very easy and popular.
2) Which payment and settlement is more popular?
59
T.Y.B.B.I. SEM V
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 its a 6%,the EFT is only4%
people is using this system. And rest the5%people is using ECS.
3) Which payment settlement payment use for companies?
60
T.Y.B.B.I. SEM V
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.
4) What system of payment and settlement is more affordable?
61
T.Y.B.B.I. SEM V
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.
CONCLUSION
The payment and settlement system constitutes the backbone of
the financial sector and enables conclusion and settlement of financial
62
T.Y.B.B.I. SEM V
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
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.
63
T.Y.B.B.I. SEM V
BIBLIOGRAPHY
Books
The Indian banking system.
Banking theory and practices
64
T.Y.B.B.I. SEM V
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/
65
T.Y.B.B.I. SEM V

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BANKING PAYMENT AND SETTLEMENT SYSTEM