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RBIs Payment Systems

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1. INTRODUCTION

Central Banks

Central bank of a country is usually a government owned and operated

institution that controls the banking system and money supply in the

economy. It hasthe following responsibilities.

I. Issuing currency.II. Managing money supply.III. Administering rate of interest. -IV. Monitoring borrowing and lending policies of commercial banks.V. Undertaking governmental banking activities.VI. Maintaining foreign exchange reserves, external value of money

and a country's balance of payments.

Central banks of the leading Western nations (Federal Reserve

System in the United States, Deutsche Bundesbank in West Germany,

Bank of Japan, and Bank of England) generally work closely to improve

the global monetary system and to conduct varying degrees of co-

ordinated currency support actions in times of severe exchange or other

financial problems.

Usually a federal government-related institution that is entrusted

with control of the commercial banking system and with the issuance of

the currency. Responsible for setting the level of credit and money supply

in an economy and serving as the bank of last resort for other banks. Also

has a major impact on interest rates, inflation, and economic output.


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1.1 RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI).

It was established in April 1935 with ashare capital of Rs. 5 crores on the basis

of the recommendations of the Hilton

Young Commission. The share capital

was divided into shares of Rs. 100 each

fully paid which was entirely owned by

private shareholders in the begining. TheGovernment held shares of nominal value

of Rs. 2,20,000.

First RBI Building 1935, Kolkata

The Bank was constituted to :

1. Regulate the issue of banknotes2. Maintain reserves with a view to securing monetary stability and3. To operate the credit and currency system of the country to its

advantage.

Established in 1935, its functions and focus have evolved in

response to the changing economic environment. Its history is not only

intrinsically interwoven with the economic and financial history of the

country, but also gives insights into the thought processes that have

helped shape the country's economic policies.


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1.2 HISTORY OF RBI:

The Bank began its operations by taking over from the

Government the functions so far being performed by the Controller ofCurrency and from the Imperial Bank of India, the management of

Government accounts and public debt. The existing currency offices at

Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore

(Kanpur) became branches of the Issue Department. Offices of the

Banking Department were established in Calcutta, Bombay, Madras,

Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the

Reserve Bank continued to act as the Central Bank for Burma till

Japanese Occupation of Burma and later up to April, 1947. After the

partition of India, the Reserve Bank served as the central bank of Pakistan

up to June 1948 when the State Bank of Pakistan commenced operations.

The Bank, which was originally set up as a shareholder's bank, was

nationalized in 1949.

An interesting feature of the Reserve Bank of India was that at its very

inception, the Bank was seen as playing a special role in the context of

development, especially Agriculture. When India commenced its plan

endeavors, the development role of the Bank came into focus, especially

in the sixties when the Reserve Bank, in many ways, pioneered the

concept and practice of using finance to catalyze development. The Bank

was also instrumental in institutional development and helped set up

institutions like the Deposit Insurance and Credit Guarantee Corporation

of India, the Unit Trust of India, the Industrial Development Bank of

India, the National Bank of Agriculture and Rural Development, the


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Discount and Finance House of India etc. to build the financial

infrastructure of the country.

With liberalization, the Bank's focus has shifted back to corecentral banking functions like Monetary Policy, Bank Supervision and

Regulation, and Overseeing the Payments System and onto developing

the financial markets.

1.3 HOW IT WENT

Date Event

1926

Royal Commission on Indian Currency (Hilton Young Commission)

recommends the establishment of a central bank to be called the

'Reserve Bank of India'.

1931

Indian Central Banking Enquiry Committee revives the issue of the

establishment of the Reserve Bank of India as the Central Bank for

India.

5 March

1934

Reserve Bank of India Act, 1934, (II of 1934) constitutes the

statutory basis on which the Bank is established.

An interesting feature of the Reserve Bank of India was that at its

very inception, the Bank was seen as playing a special role in the context

of development, especially Agriculture. When India commenced its plan

endeavors, the development role of the Bank came into focus, especially

in the sixties when the Reserve Bank, in many ways, pioneered the

concept and practice of using finance to catalyze development.


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2. STRUCTURE and FUNCTIONS


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2.1 FUNCTIONS OF RESERVE BANK OF INDIA

Central bank functions have evolved over time, especially after the

economies encountered difficult periods or crises. These functions vary in

nature and with the stage of economic development of the country where

the central bank is situated.

The functions of a central bank can be broadly categorized as follow

MONETARY BANKER (BANK) (GOVT.) OTHER

Preamble:"...to regulate the issue of Bank Notes and keeping of reserves with a

view to securing monetary stability in India and generally to operate the

currency and credit system of the country to its advantage."


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2.1.1 Monetary Policy Functions:

Monetary policy functions form the core of central banking

operations and constitute the key functions of almost all central

banks. Of these functions, currency management and maintenance

of value of currency were the predominant concerns of central

banks in the early years of central banking. The explicit concern

for price stability is of relatively later origin.

1. Currency Issue and Management:

Currency management is one of the most important traditionalfunctions of central banks in most countries. Until the evolution of

central banks, private banks issued their own currency and there

were often numerous currencies with varying degrees of

acceptability.

RBIS APPROACH

I. The Department of Currency Management in Mumbai, in cooperationwith the Issue Departments in the Reserve Banks regional offices,oversees the production and manages the distribution of currency.

II. Currency chests at more than 4,000 bank branches typically commercialbanks contain adequate quantity of notes and coins so that currency is

accessible to the public in all parts of the country.


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2.1.2Maintaining Internal Value of the Currency:

Instituting a medium of exchange is one of the oldest functions

assigned to central banks. Arising from this core function is the monetary

policy function of keeping inflation low in order to maintain the value of

the medium of exchange over time. This function is still very relevant to

modern central banks as can be seen from the widespread adoption ofinflation targeting framework.

Domestic policy objectives have been

centered on price stability goals for years and

even today have remained the main pre-

occupation of central banks. In the developing


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world, central banks have had an additional task as the governments

expected central banks to use their seignorage to garner resources for

faster development. There was often a conflict between functions of

central banks, for instance, maintaining the value of currency conflicted

with its function of being a banker to the government, especially in

developing countries.

Reserve bank of India uses various instruments to control and

regulate the supply of money and credit in the economy in order to

maintain price stability:

A. Bank Rate Policy:

As lender of the last resort, the central bank helps the commercial

banks in temporary need of cash when other sources of raising cash are

exhausted. An increase in the bank rate would discourage commercial

banks to borrow from the central bank and a corresponding increase inthe lending rate of commercial banks to general public would decrease

public borrowings from the banks.

B. Variable Cash Reserve Ratio:

In most countries, commercial banks are required statutorily to

hold cash reserves with the central bank. Apart from required reserves,the banks also hold excess reserves of cash. A large proportion of these

excess reserves are held in the form of cash-in-hand or vault cash to meet

the withdrawal needs of the depositors and the remaining part with the

central bank to meet the net loss of cash due to the cross-clearing of

cheques among the banks.


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C. Open Market Operations:

The central bank can enter the money market for the purpose of

purchase or sale of government securities on its own account. Every open

market purchase by the central bank increases primary money by equal

amount while every sale decreases it. As regards their advantages, open

market operations are highly flexible, easily reversible in time, their

effect on money supply is immediate, and they do not carry

announcement effectsas in the case of changes in the bank rate.

D.Moral Suasions:

Through moral suasions, the central bank can influence the

investment and credit policies of the commercial banks. For example, it

can ask the commercial banks to invest a larger proportion, than required,

of their assets in government securities. Similarly, it can advise them

regarding theallocation of credit to the private sector.

2.1.3Maintaining External Value of the Currency:

Central banks in many economies consider exchange rate

management as a crucial function.

Exchange rate management was the coreconcern for traditional central banks even

in the 17th century. During the gold

standard, the exchange rate was

determined more or less automatically by

the mechanism of specieflow. It ensured

that the value of the currency rose with an

increase in gold reserves and decreased with a decrease in the reserves.


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Such movements along with gold reserves were not necessarily

conducive to output growth. Considerable efforts were required to

maintain the parity.

2.2 Banker to the Government:

Managing the governments banking transactions is a key RBI role.

Like individuals, businesses and banks, governments need a banker to carry

out their financial transactions in an efficient and effective manner,

including the raising of resources from the public. As a banker to the

central government, the Reserve Bank maintains its accounts, receives

money into and makes payments out of these accounts and facilitates the

transfer ofgovernment funds. RBI also acts as the banker to those state

governments that have entered into an agreement with RBI.

RBIs APPROACH :

The Role as banker and debt manager to government includes

several distinct functions:

Undertaking banking transactions for the central and stategovernments to facilitate receipts and payments and maintaining their

accounts.

Managing the governments domestic debt with the objective ofraising the required amount of public debt in a cost-effective and

timely manner.


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2.3 Banker to the Banks:

Central banks were set up in many countries to perform the

function of maintaining financial stability. The financial system in the

early days was essentially a bank-dominated system; hence financial

stability was focused on the stability of banks. Lender-of-the-last-resort

function was the first financial stability function that central banks

performed. This function was fairly limited in its scope, with central bank

operations limited merely to the function of crisis management.

RBIsApproach :As the banker to banks, RBI focus on:

1.) Enabling smooth, swift and seamless clearing and settlement ofinter- Bankobligations.

2.) Providing an efficient means of funds transfer for banks.3.) Enabling banks to maintain their accounts with us for purpose of

statutory reserve requirements and maintain transaction balances.

4.) Acting as lender of the last resort.

2.3.1 Lender-of-the-last-resort:

There are different hypotheses about the origin and propagating

channels of banking crises. A banking crisis is an event in which many or

even all banks in the banking system face sudden demand from their

creditors. Given the multiple credit creation principle, it is not possible

for any bank to handle such a run.


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2.3.2 Financial Sector Regulation and Supervision:

The primary justification for banking supervision is that it limits

the risk of loss to depositors and thus maintains public confidence in

banks. While supervision naturally focuses on the individual bank,

supervisors must also alert to the possibility that problems in one

institution may have wider repercussions on others. The focus of the

supervisory function is mainly on investor protection activities, rules on

the conduct of business and disclosure of information, and on-site and

off-site surveillance of institutions.In recent times, financial sectors in many countries have witnessed

phenomenal growth with increasing liberalization and globalization.

2.3.3 Financial Stability:

Since financial instability poses a severe threat to important

macroeconomic objectives such as sustainable output growth and price

stability, central banks have shown keen interest in the maintenance of

financial stability. Most central banks keep a close watch on movements

in national and international financial markets so as to provide emergency

liquidity assistance, whenever needed. Moreover, monetary policy is

implemented largely through operations in financial markets and thetransmission of monetary policy to the real economy depends crucially on

the smooth functioning of key financial markets and institutions. Yet

another manifestation of the central bank's interest in financial stability

stems from its role in the operation of oversight of payment and

settlement systems.


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2.3.4 Payment System Functions:

Payment and settlement systems are the backbone of the entire

gamut of economic activities of any modern economy.Varied approaches have been adopted by central banks in respect of

operations of payment systems. In the United States, for instance, the

Federal Reserve Banks perform the role of providing services for

processing of cheques, in addition to regulating the clearing function. In

United Kingdom and Canada, the central banks do not provide the

services relating to clearing and processing of payment instruments;

instead the function is delegated to private entities, although the

governing body for such entities is the association or representatives of

bankers.Generally the function of settlement for all clearing activities is

invariably performed by the central banks to ensure that settlement

finality is achieved and that settlement risk is mitigated to a very large

extent. Large value payment systems such as the Real Time Gross

Settlement Systems (RTGS) are typically operated and managed by the

central bank on account of many factors including the central bank being

the largest source of liquidity and the impact on monetary policy

operations by these large value payment systems.Over time, central banks have migrated from organizing clearing

functions to management of macroeconomic requirements through the

funds transfer processes; some of them have shed the clearing functions

while retaining the settlement function


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2.4 Developmental Functions:

Developmental functions are undertaken by the central

bank, while not ignoring their traditional tasks. This makes

functions and goals before a developing country central banker

much broader and challenging.

2.4.1 Sectoral Policies:

When developing countries embarked on the growth path, they

faced numerous constraints. Their markets were underdeveloped and their

governments were resource-constrained. Central banks in these countries

were also constrained in their operations as the transmission channels for

conduct of monetary policy were often non-existent or weak.

2.4.2 Development of Financial Market:

Financial markets generally comprise the money market, bond

market, foreign exchange market and capital market. In its main role of

conducting monetary policy, the central bank uses an array of policy

instruments that make an impact on the market. Monetary policy depends

on markets for its transmission and therefore their development is anenabling factor for a good monetary policy. In turn, monetary policy

instruments (mainly interest rates) have a major impact on financial

markets and institutions.


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2.4.3 Research Activities:

Every major central bank in the world has a strong research

department. In-house research activities are the backbone of central bank

operations because the time, direction and intensity of monetary and

external sector operations are based on analysis of past trends and future

expectations by the research department.

2.4.4 Dissemination of Information:

Developing countries typically have a poor database. Accordingly,

central banks have often taken over function of compilation of a

comprehensive database comprising monetary, financial and balance of

payments data to facilitate macroeconomic research. In addition to the

surveillance of the banking and financial system, central banks in

developing countries attempt to help the domestic commercial banks to

adopt better practices in data dissemination and sharing of information.

2.4.5External Financial Relations Agent:

In developing countries, the central bank is typically the

external financial relations agent for the country. It is involved, along

with the government, in interacting or negotiating on behalf of the

country with agencies such as the International Monetary Fund (IMF),

Bank for International Settlements (BIS), World Bank and Asian

Development Bank (ADB).


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3. MONETARY POLICY

Monetary policy refers to the expansion or contraction of money

and credit supply in an economy. Since monetary policy includes the

regulation of both the volume and allocation of credit therefore credit

policy is a part of the overall monetary policy.

Price stability is of prime concern for economies of the world. The

term price stability is not used in a rigid sense to mean price fixity. Amodest increase of 2-3 percent in price level per annum is

compatible, sometimes even desirable, with the general connotation of

price stability. In other words, price stability can be defined as low and*

stable inflation.

All policies of the Government, including the monetary policy, are

geared to achieve this objective. The need for monetary resources islinked with the increase in output and the desire for investment. Monetary

policy should react to such changes in time and adequately. It should

ensure proper balance between the monetary needs of the economy and

money supply. Monetary policy, by influencing the cost, volume and

direction of credit, contributes to the achievement of general objectives of

economic policy.

Price stability and availability of sufficient

credit for productive purposes have all along

remained the twin objectives of monetary policy

in India.


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3.2 Monetary Policy in India

The Announcement Monetary Policy

Historically, the Monetary Policy is announced twice a year - a

slack season policy (April-September) and a busy season policy

(October-March) in accordance with agricultural cycles. These cycles

also coincide with the halves of the financial year.

The Monetary Policy has become dynamic in nature as RBI reserves its

right to alter it from time to time, depending on the state of the economy.

However, with the share of credit to agriculture coming down and credit

towards the industry being granted whole year around, the RBI since

1998-99 has moved in for just one policy in April-end. However a review

of the policy does take p place later in the year.

Note:

RBI has announced a change in the policy review schedule. In a

rapidly evolving macroeconomic scenario, the time gap is too large

making it essential for RBI to make announcements or changes in

between policy reviews. In order to avoid such a scenario, going forward,

the frequency of the policy review will increase from 4 times a year to 8

times with one policy review being introduced every mid-quarter and the

actions in the mid-quarter review will be announced in the form of a press

release. So the next RBI policy review is a mid quarter review, slated for

September 16th, 2010.


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4. RBI Monetary Aggregates

Reserve Money (M0): Currency in circulation + Bankers depositswith the RBI + Other deposits with the RBI = Net RBI credit to

the Government + RBI credit to the commercial sector + RBIs

claims on banks + RBIs net foreign assets + Governments

currency liabilities to the public RBIs net non-monetary

liabilities.

M1: Currency with the public + Deposit money of the public(Demand deposits with the banking system + Other deposits with

the RBI).

M2: M1 + Savings deposits with Post office savings banks.

M3: M1+ Time deposits with the banking system = Net bank creditto the Government + Bank credit to the commercial sector + Net

foreign exchange assets of the banking sector + Governments

currency liabilities to the public Net non-monetary liabilities of

the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excludingNational Savings Certificates).


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Variation in M3

4.1 M3 Money Supply for Selected Countries

When considering M3, the total money supply exceeds US$60.2trillion! Of this amount, the U.S., Euro-Zone and Japan account for

US$33.1 trillion or 64.4% of the total. The following graph shows a

cross-country comparison for M3.


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Data as on January, 2010

Some Monetary Policy terms:

Bank RateBank rate is the minimum rate at which the central bank provides loans to

the commercial banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial banks increasing

their lending rates. Changes in bank rate affect credit creation by banks

through altering the cost of credit.

Cash Reserve RatioAll commercial banks are required to keep a certain amount of its

deposits in cash with RBI. This percentage is called the cash reserve ratio.

The current CRR requirement is 8 per cent.


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InflationInflation refers to a persistent rise in prices. Simply put, it is a situation of

too much money and too few goods. Thus, due to scarcity of goods andthe presence of many buyers, the prices are pushed up.

The converse of inflation, that is, deflation, is the persistent falling of

prices. RBI can reduce the supply of money or increase interest rates to

reduce inflation.

Money Supply (M3)

This refers to the total volume of money circulating in the economy, and

conventionally comprises currency with the public and demand deposits

(current account + savings account) with the public.

The RBI has adopted four concepts of measuring money supply. The first

one is M1, which equals the sum of currency with the public, demanddeposits with the public and other deposits with the public. Simply put

M1 includes all coins and notes in circulation, and personal current

accounts.

The second, M2, is a measure of money, supply, including M1, plus

personal deposit accounts - plus government deposits and deposits in

currencies other than rupee.

The third concept M3 or the broad money concept, as it is also known, is

quite popular. M3 includes net time deposits (fixed deposits), savings

deposits with post office saving banks and all the components of M1.


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Statutory Liquidity RatioBanks in India are required to maintain 25 per cent of their demand and

time liabilities in government securities and certain approved securities.

These are collectively known as SLR securities. The buying and selling

of these securities laid the foundations of the 1992 Harshad Mehta scam.

RepoA repurchase agreement or ready forward deal is a secured short-term

(usually 15 days) loan by one bank to another against government

securities.

Legally, the borrower sells the securities to the lending bank for cash,

with the stipulation that at the end of the borrowing term, it will buy back

the securities at a slightly higher price, the difference in price

representing the interest.

Open Market OperationsAn important instrument of credit control, the Reserve Bank of India

purchases and sells securities in open market operations.

In times of inflation, RBI sells securities to mop up the excess money in

the market. Similarly, to increase the supply of money, RBI purchases

securities.


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5. MONETORY V/S FISCAL POLICY

Monetary policy Fiscal policy

Announced by RBI Announced by the Government

Related to :

1.)Interest rates2.)Money supply3.)Asset valuation4.)Other economic factors

Related to :

1.)Government spending2.)Tax bracket3.)Investment4.)Other Income-Expenditure

matters

Monetary policy controls thesupply of money in the nation.

Fiscal policy gives thedirection of economy of a

nation.

Monetary policy focuses on thestrategy of banks.

Fiscal policy relates to theeconomic position of a nation.

Monetary Policy helps tostabilize the economy of the

country.

Fiscal policy administers thetaxation structure of the

nation.

Monetary policy sets theprogram of key banks of the

nation.

Fiscal policy speaks of thegovernments economic

program.


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6. DEPARTMENTS

6.1 Department of Currency Management

The Department attends to the core

statutory function of note and coin issue and

currency management. This involves

forecasting the demand for fresh banknotes

and coins, placing the indent with four

printing presses and mints, receiving

supplies against those indents and distributing them through its 18 Issue

Offices and one Sub office, one Currency Chest and a wide network of

currency chests, (4428 as on June 30, 2006) and small coin depots (4102

as on June 30, 2006).

6.2 Urban Banks Department

This department undertakes the number of banks in the urban

areas, their rules, their regulation, theirliquidity requirement is governed by

this department


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6.3 Rural Planning and Credit Department

The Rural Planning and Credit Department formulates policies

relating to rural credit and monitors timely and adequate flow of credit to

the rural population for agricultural activities and rural employment

programmes. The department also oversees implementation of the

Banking Ombudsman Scheme.

6.4 Foreign Exchange Department

With the introduction of the Foreign Exchange Management Act 1999,

(FEMA) with effect from June 1,

2000, the objective of the Foreign

Exchange Department has shifted

from conservation of foreign

exchange to "facilitating external

trade and payment and promoting

the orderly development and maintenance of foreign exchange market in

India".

6.5 Human Resources Development Department

The Mission of HRDD is to create a facilitating environment to

enhance the efficiency of the Bank; to empower the staff so as to draw

out the latent potential; and to catalyze conditions for a more wholesome

quality of life on the work as well as personal front.


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6.6 Financial Markets Department

The Financial Markets Department was constituted on July 6, 2005

with a view to providing an integrated market interface for the Bank

and to bringing about integration in the Banks conduct of monetary

operations.

6.7 Department of Banking Supervision

The Reserve Bank of India has been entrusted with the

responsibility of supervising the Indian banking system under various

provisions of the Banking Regulation Act, 1949 and RBI Act, 1934. As

regards commercial banks and FIs, this responsibility is discharged

through the Department of Banking Supervision (DBS).

6.8 Monetary Policy Department

Mandate and Objectives

The Reserve Bank of India Act, 1934 sets out broadly the objectives

of monetary policy :

"to regulate the issue of Bank notes and the keeping of reserves

with a view to securing monetary stability in India and

generally to operate the currency and credit system of the

country to its advantage".


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6.9 Department of Government and Bank Accounts

The Department of Government and Bank Accounts(DGBA) is

responsible for discharging certain core traditional central banking

functions, viz., acting as bankers to the banks and governments and

administering public debt of both, central and state governments. It is also

responsible for maintenance of the Reserve Bank's internal accounts and

compilation of its weekly statement of affairs and annual balance sheets.

6.10 Department of Economic Analysis and Policy

Functions

The Reserve Bank of India has a rich

tradition of economic research. Its

Department of Economic Analysis and

Policy (DEAP) :

Studies and analyses the basic issues and problems (both domesticand international) affecting the Indian economy;

Serves as a primary source of data and information relating to

aspects of the Indian economy, such as, Prepares monetary and credit aggregates, balance of payments and

external debt statistics, internal debt and government finance

statistics, and flow-of-funds and financial saving.


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6.11 Department of Payment and Settlement Systems

The Department of Payment and Settlement Systems (DPSS) is a

new department in the Reserve Bank which was operational with effect

from March 2005. The Department is responsible for regulation and

oversight on the Payment and Settlement Systems which encompass the

cheque based clearing systems managed by the Reserve Bank and other

commercial banks, Electronic Clearing Service (ECS), Electronic Funds

Transfer (EFT) System, the inter-institutional Government Securities

clearing, the inter-bank foreign exchange clearing as also the RTGS.


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7. PAYMENT SYSTEMS

Recognizing the importance of Payment Systems in the financial

system the Reserve Bank of India has taken a number of steps to

strengthen the institutional framework for the payment and settlement

systems in the country. As a part of its overall high-level strategic

objective, the Reserve Bank has constituted a Board for Regulation and

Supervision of Payment and Settlement Systems (BPSS) as a Committee

of its Central Board, as per the Reserve Bank of India (Board for

Regulation and Supervision of Payment and Settlement Systems)Regulations, 2005 which were notified in the Gazette of India dated

February 18, 2005. The role of BPSS is to prescribe policies relating to

the regulation and supervision of all types of payment and settlement

systems, set standards for existing and future systems, approve criteria for

authorization of payment and settlement systems, determine criteria for

membership to these systems, including continuation, termination andrejection of membership.

Central banks are involved in payment and settlement systems as

providers of settlement assets, operators of the systems and also as users.

One of the key tasks of Central banks is to maintain public confidence in

money and in the instruments and the systems used to transfer money.

This would not be achieved if payment and settlement systems, which

facilitate the exchange of money for goods, services and financial assets,

are seen as inefficient, unreliable and prone to failures. Thus, as part of

their public policy objectives, central banks, have involved themselves in

the design and functioning of payment and settlement systems. Payment

and settlement systems are relevant to financial stability, as any failure of

this vital infrastructure, could lead to broader financial and economic


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instability due to the large-values that are transacted by the SIPS and the

erosion of public confidence in the event of failures in the retail payments

segment. In an event of financial stress, market participants or central

banks may wish to supply emergency liquidity to certain participants in a

payment and settlement system in an attempt to encourage the orderly

settlement of transactions in the overall financial system. Additionally,

central bank's role in payment systems frequently calls for cooperation

and coordination of activities with other authorities such as banking

supervisors and securities regulators to ensure smooth discharge of legal

or other responsibilities essential for the payment system.

Accordingly, the role of the central bank in discharging its

oversight function is to assess the risks involved and in cooperation with

relevant stake holders put in place risk mitigation measures. It also

ensures through oversight that the risks are not transmitted to other

systems / participants.

HERE IS THE BRIEF ON VARIOUS RBIs PAYMENT SYSTEM

MECHANISMS:

7.1 Cheque Truncation

7.1.1 Introduction

Truncation is the process of stopping the flow of the physical

cheque issued by a drawer at some point en-route to the drawee branch.

In its place an electronic image of the cheque is transmitted to the drawee

branch along with relevant information like data on the MICR band, date

of presentation, presenting bank, etc. Cheque truncation thus obviates the

need to move the physical instruments across branches, other than in


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exceptional circumstances. This effectively eliminates the associated cost

of movement of the physical cheques, reduces the time required for their

collection and brings elegance to the entire activity of cheque processing.

7.1.2 Reasons of Implementing Cheque Truncation

As explained above, Cheque Truncation speeds up the process of

collection of cheques resulting in better service to customers, reduces the

scope for clearing-related frauds or loss of instruments in transit, lowers

the cost of collection of cheques, and removes reconciliation-related and

logistics-related problems, thus benefitting the system as a whole. With

the other major products being offered in the form of RTGS and NEFT,

the Reserve Bank has created the capability to enable inter-bank and

customer payments online and in near-real time. However, to wish away

cheques is simply not possible as cheques are still the prominent mode of

payments in the country and that is the reason why the Reserve Bankdecided to focus on improving the efficiency of the cheque clearing cycle.

Cheque Truncation System (CTS) is the alternative. As highlighted

earlier, CTS is a more secure system vis-a-vis the exchange of physical

documents.

In addition to operational efficiency, CTS offers several benefits to banksand customers, including human resource rationalisation, cost

effectiveness, business process re-engineering, better service, adoption of

latest technology, etc. CTS, thus, has emerged as an important efficiency

enhancement initiative undertaken by Reserve Bank in the Payments

Systems area.


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7.1.3 Status of Cheque Truncation

The Reserve Bank has implemented CTS as a pilot project in the

National Capital Region (NCR), New Delhi with effect from February 1,

2008. After migration of the entire cheque volume from MICR system to

CTS effective from July 1, 2009, the traditional MICR-based cheque

processing has been discontinued in NCR. Based on the advantages

realised by the stakeholders and the experienced gained from the pilot

roll-out in NCR, it has been decided to operationalise CTS across the

country.

7.1.4 Process of Cheque Truncation

The presenting bank (or its branch) captures the data (on the MICR

band) and the images of a cheque using their Capture System (comprising

of a scanner, core banking or other application) which is internal to them.These have to meet the specifications and standards prescribed for data

and images.

To ensure security, safety and non-repudiation of data / images,

end-to-end Public Key Infrastructure (PKI) has been implemented in

CTS. As part of the requirement, the collecting bank (presenting bank)sends the data and captured images duly signed and encrypted to the

central processing location (Clearing House) for onward transmission to

the paying bank (destination or drawee bank). For the purpose of

participation the presenting and drawee banks are provided with an

interface / gateway called the Clearing House Interface (CHI) that enables

them to connect and transmit data and images in a secure and safe manner

to the Clearing House (CH).


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The Clearing House processes the data, arrives at the settlement

figure and routes the images and requisite data to the drawee banks. This

is called the presentation clearing. The drawee banks through their CHIs

receive the images and data from the Clearing House for payment

processing. The drawee CHIs also generate the return file for unpaid

instruments, if any. The return file / data sent by the drawee banks are

processed by the Clearing House in the return clearing session in the

same way as presentation clearing and return data is provided to the

presenting banks for processing. The clearing cycle is treated as complete

once the presentation clearing and the associated return clearing sessions

are successfully processed. The entire essence of CTS technology lies in

the use of images of cheques (instead of the physical cheques) for

payment processing.

7.1.5 Types of Cheques that can be presented for clearing through CTS

All types of cheques can be presented for clearing through CTS. It

is no different from the use of traditional clearing infrastructure for

clearing paper cheques. Cheques presented as part of Speed Clearing are

handled in CTS as well (for more details on Speed Clearing, the related

FAQs may be looked into). The on-us instruments where the presentingand drawee banks are the same are presently not allowed in CTS. Images

of such instruments are stopped at the initial Clearing House Interface

itself.

Incidentally, given the fact that images of cheques (and not the physical

cheques) alone need to move in CTS, it is possible for the restriction of

geographical jurisdiction normally associated with the paper cheque


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clearing activity to be done away with. For realising this advantage, the

concept of Grid-CTS clearing is being envisaged as part of roll-out of

CTS at Chennai. Under the grid clearing, cheques drawn on centres

included in the grid will be cleared as part of local clearing. It is also

proposed to expand the scope of the CTS presently operational in New

Delhi to become part of the New Delhi Grid.

7.1.6 Charge for Customers

There is no change in the clearing process for customers.

Customers continue to use cheques as at present, except to ensure the use

of image-friendly-coloured-inks while writing the cheques. Of course,

such of those customers, who are used to receiving the paid instruments

(like government departments) would receive only the cheque images

instead. And yes, cheques with alterations in material fields (explained in

detail later) are not allowed to be processed under the CTS environment.

7.1.7 Benefits of Cheque Truncation

Shorter clearing cycle

Superior verification and reconciliation process No geographical restrictions as to jurisdiction Operational efficiency for banks and customers alike Reduction in operational risk and risks associated with paper

clearing


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7.1.8 Images of cheque

Images of cheques are taken using scanners. Scanners also function

like photo-copiers by reflecting the light passed through a narrow passage

on to the document. Tiny sensors measure the reflection from each point

along the strip of light. Reflectance measurements of each dot is called a

pixel. Images are classified as black and white, gray-scale or colour based

on how the pixels are converted into digital values. For getting a gray

scale image the pixels are mapped onto a range of gray shades between

black and white. The entire image of the original document gets mapped

as some shade of gray, lighter or darker, depending on the colour of the

source. In the case of black and white images, such mapping is made only

to two colours based on the range of values of contrasts. A black and

white image is also called a binary image.

7.1.9 Data transmission over secured Nework

The security, integrity, non-repudiation and authenticity of the data

and image transmitted from the paying bank to the payee bank are

ensured using the Public Key Infrastructure (PKI). CTS is compliant to

the requirements of the IT Act, 2000. It has been made mandatory for the

presenting bank to sign the images and data from the point of origin itself.PKI is used throughout the entire cycle covering capture system, the

presenting bank, the clearing house and the drawee bank. The PKI

standards used are in accordance with the appropriate Indian acts and

practices of IDRBT which is the certifying authority for banks and

financial institutions in India.


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7.1.10 Modes to participate in CTS

There are two modes in which banks may participate in CTS

(a) Direct membership : Banks may participate as direct member

provided they have a settlement account with the settlement bank and

have put in place necessary infrastructure for participating in CTS.

(b) Indirect / Sub-membership : Banks may become sub-members /

indirect members of the direct members by using the infrastructure and /

or settlement services of the direct members. The settlement for such

indirect / sub-member could be done either directly (if such banks have

settlement accounts with the settlement bank) or through the direct

member through whom they are participating.

7.2 Electronic Clearing Service (ECS)

7.2.1 Introduction

ECS is an electronic mode of payment / receipt for transactions that

are repetitive and periodic in nature. ECS is used by institutions for

making bulk payment of amounts towards distribution of dividend,interest, salary, pension, etc., or for bulk collection of amounts towards

telephone / electricity / water dues, cess / tax collections, loan instalment

repayments, periodic investments in mutual funds, etc. Essentially, ECS

facilitates bulk transfer of monies from one bank account to many bank

accounts or vice versa using the services of a ECS Centre at a ECS

location.


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7.2.2 Variants of ECS

Primarily, there are two variants of ECS - ECS Credit and ECS Debit.

ECS Credit is used for affording credit to a large number of

beneficiaries having accounts with bank branches at various locations

within the jurisdiction of a ECS Centre by raising a single debit to an

account of a bank (that maintains the account of the user institution). ECS

Credit enables payment of amounts towards distribution of dividend,

interest, salary, pension, etc., of the user institution.

ECS Debit is used for raising debits to a large number of accounts

maintained with bank branches at various locations within the jurisdiction

of a ECS Centre for single credit to an account of a bank (that maintains

the account of the user institution). ECS Debit is useful for payment of

telephone / electricity / water bills, cess / tax collections, loan instalmentrepayments, periodic investments in mutual funds, etc., that are periodic

or repetitive in nature and payable to the user institution..

7.2.3 Initiation of ECS transaction

ECS Credit payments can be initiated by any institution (calledECS Credit User) which has to make bulk or repetitive payments to a

number of beneficiaries. The institutional User has to first register with a

ECS Centre. The User has to also obtain the consent of beneficiaries and

get their bank account particulars prior to participation in the ECS Credit

scheme.


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ECS Credit payments can be put through by the ECS User only

through his / her bank (known as the Sponsor bank). ECS Credits are

afforded to the beneficiary account holders (known as destination account

holders) through the beneficiary account holders bank (known as the

destination bank). The beneficiary account holders are required to give

mandates to the user institutions to afford credit to their bank accounts

through the ECS Credit mechanism.

7.2.4 Working of ECS System

The User intending to effect payments through ECS Credit has to

submit details of the beneficiaries (like name, bank / branch / account

number of the beneficiary, MICR code of the destination bank branch,

etc.), date on which credit is to be afforded to the beneficiaries, etc., in a

specified format (called the input file) through its sponsor bank to one of

the ECS Centres. The list of centres where the ECS Credit facility isavailable has been placed on the website of Reserve Bank of India at

http://www.rbi.org.in/Scripts/ECSUserView.aspx?Id=26.

The bank managing the ECS Centre then debits the account of the

sponsor bank on the scheduled day and credits the accounts of the

destination banks, for onward credit to the accounts of the ultimatebeneficiaries with the destination bank branches.

7.2.5 MICR Code

MICR is an acronym for Magnetic Ink Character Recognition. The

MICR Code is a numeric code that uniquely identifies a bank-branch


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participating in the ECS Credit scheme. This is a 9 digit code to identify

the location of the bank branch; the first 3 characters represent the city,

the next 3 the bank and the last 3 the branch. The MICR Code allotted to

a bank branch is printed on the MICR band of cheque leaves issued by

bank branches.

7.2.6 Benefits of ECS Credit Scheme

ECS Credit offers many advantages to the beneficiary

The beneficiary need not visit his / her bank for depositing thepaper instruments which he would have otherwise received had he

not opted for ECS Credit.

The beneficiary need not be apprehensive of loss / theft of physicalinstruments or the likelihood of fraudulent encashment thereof.

Cost effective. The beneficiary received the funds right on the due date.

7.2.7 Initiation ECS Debit transaction

ECS Debit transaction can be initiated by any institution (called

ECS Debit User) which has to receive / collect amounts towardstelephone / electricity / water dues, cess / tax collections, loan instalment

repayments, periodic investments in mutual funds, etc. It is a Scheme

under which an account holder with a bank branch can authorise an ECS

User to recover an amount at a prescribed frequency by raising a debit to

his / her bank account.


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7.2.8 Working of ECS Debit Scheme

The ECS Debit User intending to collect receivables through ECS

Debit has to submit details of the customers (like name, bank / branch /

account number of the customer, MICR code of the destination bank

branch, etc.), date on which the customers account is to be debited, etc.,

in a specified format (called the input file) through its sponsor bank to the

ECS Centre.

7.2.9 Benefits of ECS Debit Scheme

The advantages of ECS Debit to customers are many and include,

ECS Debit mandates will take care of automatic debit to customeraccounts on the due dates without customers having to visit bank

branches. Customers need not keep track of due date for payments. The debits to customer accounts would be monitored by the ECS

Users.

Cost effective.

The advantages of ECS Debit to institutions are many and include

Savings on administrative machinery and costs of collecting thecheques from customers, presenting in clearing, monitoring their

realisation and reconciliation.

Better cash management because of realisation / recovery of dueson due dates promptly and efficiently.


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Avoids chances of loss / theft of instruments in transit, likelihoodof fraudulent access to the paper instruments and encashment

thereof.

Realisation of payments on a uniform date instead of fragmentedreceipts spread over many days.

Cost effective.

7.2.10 Limit on the value of Individual transactions in ECS Debit

There is no value limit on the amount of individual transactions

that can be collected by ECS Debit.

7.3 RTGS System

7.3.1 Introduction

The acronym 'RTGS' stands for Real Time Gross Settlement,

which can be defined as the continuous (real-time) settlement of funds

transfers individually on an order by order basis (without netting).'Real

Time' means the processing of instructions at the time they are received

rather than at some later time. 'Gross Settlement' means the settlement of

funds transfer instructions occurs individually (on an instruction by

instruction basis). Considering that the funds settlement takes place in the

books of the Reserve Bank of India, the payments are final and

irrevocable.


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7.3.2 RTGS v/s NEFT

NEFT is an electronic fund transfer system that operates on a

Deferred Net Settlement (DNS) basis which settles transactions in

batches. In DNS, the settlement takes place with all transactions received

till the particular cut-off time. For example, currently, NEFT operates in

hourly batches - there are eleven settlements from 9 am to 7 pm on week

days and five settlements from 9 am to 1 pm on Saturdays. Any

transaction initiated after a designated settlement time would have to wait

till the next designated settlement time. Contrary to this, in the RTGS

transactions are processed continuously throughout the RTGS business

hours.

7.3.3 Minimum / Maximum amount stipulation for RTGS transactions

The RTGS system is primarily meant for large value transactions.The minimum amount to be remitted through RTGS is ` 2 lakh. There is

no upper ceiling for RTGS transactions.

7.3.4 Time taken for effecting funds transfer from one account to another

under RTGS

Under normal circumstances the beneficiary branches are expected

to receive the funds in real time as soon as funds are transferred by the

remitting bank. The beneficiary bank has to credit the beneficiary's

account within two hours of receiving the funds transfer message.


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7.3.5 Acknowledgement of money credited to the beneficiary's account

The remitting bank receives a message from the Reserve Bank that

money has been credited to the receiving bank. Based on this the

remitting bank can advise the remitting customer that money has been

delivered to the receiving bank.

7.3.6 Would the remitting customer get back the money if it is not

credited to the beneficiary's account? When?

Yes. 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.

7.3.7 Time till 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

13.30 hours on Saturdays for settlement at the RBI end. However, the

timings that the banks follow may vary depending on the customertimings of the bank branches.

7.3.8 Processing Charges / Service Charges

With a view to rationalize the service charges levied by banks for

offering various electronic products, a broad framework has been

mandated as under:


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a) Inward transactionsFree, no charge to be levied

b) Outward transactions

` 2 lakh to `. 5 lakh - not exceeding ` 25 per transaction.

Above ` 5 lakhnot exceeding ` 50 per transaction.

7.3.9 IFSC code

The beneficiary customer can obtain the IFSC code from his bank

branch. The IFSC code is also available on the cheque leaf. The IFSC

code is also available on the RBI website

7.3.10 Branches in India provide RTGS service

All the bank branches in India are not RTGS enabled. As on 23 February,

2011 there are more than 74,000 RTGS enabled bank branches. The list

of such branches is available on RBI website.

7.4 NEFT System

7.4.1 Introduction

National Electronic Funds Transfer (NEFT) is a nation-wide

system that facilitates individuals, firms and corporates to electronically

transfer funds from any bank branch to any individual, firm or corporate

having an account with any other bank branch in the country.


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7.4.2 Branches in India provide NEFT service

For being part of the NEFT funds transfer network, a bank branch

has to be NEFT-enabled. As at end-January 2011, 74,680 branches /

offices of 101 banks in the country (out of around 82,400 bank branches)

are NEFT-enabled. Steps are being taken to further widen the coverage

both in terms of banks and branches / offices.

7.4.3 How can one know which bank branches are part of the NEFT

network?

The list of bank branches participating in the NEFT system is

available on the website of Reserve Bank of India. Details will also be

available with the banks / branches participating in the NEFT system.

7.4.4 Who can transfer funds using NEFT?

Ans: Individuals, firms or corporates maintaining accounts with a bank

branch can transfer funds using NEFT. Even such individuals, firms or

corporates who do not have a bank account (walk-in customers) can also

deposit cash at the NEFT-enabled branch with instructions to transfer

funds using NEFT. A separate Transaction Code (No. 50) has beenallotted in the NEFT system to facilitate walk-in customers to deposit

cash and transfer funds to a beneficiary. Such customers have to furnish

full details including complete address, telephone number, etc. NEFT,

thus, facilitates originators or remitters to initiate funds transfer

transactions even without the need for having a bank account.


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7.4.5 Who can receive funds through the NEFT system?

Individuals, firms or corporates maintaining accounts with a bank

branch can receive funds through the NEFT system. It is, therefore,

necessary for the beneficiary to have an account with the NEFT enabled

destination bank branch in the country.

The NEFT system also facilitates one-way cross-border transfer of funds

from India to Nepal. This is known as the Indo-Nepal Remittance Facility

Scheme. A remitter can transfer funds from any of the NEFT-enabled

branches in to Nepal, irrespective of whether the beneficiary in Nepal

maintains an account with a bank branch in Nepal or not. The beneficiary

would receive funds in Nepalese Rupees. A separate Transaction Code

(No. 51) has been allotted in the NEFT system to facilitate the transfer of

funds from India to Nepal. Further details on the Indo-Nepal Remittance

Facility Scheme are available on the website of Reserve Bank of India at:http://rbidocs.rbi.org.in/rdocs/content/pdfs/84489.pdf.

7.4.6 Limit on the amount that could be transferred using NEFT

There is no limit either minimum or maximum on the amount

of funds that could be transferred using NEFT. However, for walk-incustomers mentioned at Q.4 and Q.5 above, including those remitting

funds under the Indo-Nepal Remittance Facility Scheme, the maximum

amount that could be transferred is Rs. 49,999.


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7.4.7 Operating hours of NEFT

Presently, NEFT operates in hourly batches - there are eleven

settlements from 9 am to 7 pm on week days and five settlements from 9

am to 1 pm on Saturdays.

7.4.8 Operation of NEFT system

An individual / firm / corporate intending to originate transfer of

funds through NEFT has to fill an application form providing details of

the beneficiary (like, name of the beneficiary, name of the bank branch

where the beneficiary has an account, IFSC of the beneficiary bank

branch, account type and account number). The application form will be

available at the originating bank branch. The remitter authorizes his/her

bank branch to debit his account and remit the specified amount to the

beneficiary. Customers enjoying net banking facility offered by theirbankers can initiate the funds transfer request online. Some banks offer

the NEFT facility even through the ATMs. Walk-in customers will,

however, have to give their contact details (complete address and

telephone number, etc.) to the branch. This will help the branch to refund

the money to the customer in case credit could not be afforded to the

beneficiarys bank account or the transaction is rejected / returned for anyreason.

Step-2 : The originating bank branch prepares a message and sends the

message to its pooling centre (also called the NEFT Service Centre).


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Step-3 : The pooling centre forwards the message to the NEFT Clearing

Centre (operated by National Clearing Cell, Reserve Bank of India,

Mumbai) to be included for the next available batch.

Step-4 : The Clearing Centre sorts the funds transfer transactions

destination bank-wise and prepares accounting entries to receive funds

from (debit) the originating banks and give the funds to (credit) the

destination banks. Thereafter, bank-wise remittance messages are

forwarded to the destination banks through their pooling centre (NEFT

Service Centre).

Step-5 : The destination banks receive the inward remittance messages

from the Clearing Centre and pass on the credit to the beneficiary

accounts.

7.4.9 IFSC Code

IFSC or Indian Financial System Code is an alpha-numeric code

that uniquely identifies a bank-branch participating in the NEFT system.

This is a 11 digit code with the first 4 alpha characters representing the

bank, and the last 6 numeric characters representing the branch. The 5th

character is 0 (zero). IFSC is used by the NEFT system to route themessages to the destination banks / branches.

7.4.10 Processing or service charges

Reserve Bank of India has waived the processing or service

charges for member banks till March 31, 2011. Accordingly, member

banks participating in NEFT need not pay any processing or service


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charges to Reserve Bank of India. Further, processing or service charges

to be levied by the member banks from their customers have also been

rationalised by Reserve Bank of India as under :

a) Inward transactions at destination bank branches (for credit to

beneficiary accounts)

Free, no charges to be levied from beneficiaries

b) Outward transactions at originating bank branches (charges for the

remitter)

7.4.11 Can a transaction be originated to draw (receive) funds from

another account?

No. NEFT is a credit-push system i.e., transactions can be originated onlyto transfer funds to a beneficiary.

7.4.12 Features of NEFT

Launched in October 2005, NEFT is an electronic payment system that

uses a secure mode of transferring funds from one bank branch to anotherbank branch. NEFT uses the Public Key Infrastructure (PKI) technology

to ensure end-to-end security and rides on the INdian FInancial NETwork

(INFINET) to connect the bank branches for electronic transfer of funds.

The participating banks, branch coverage and transaction volumes have

been continuously increasing, which is reflective of the acceptance and

popularity of the NEFT system.


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7.5 ATMs

7.5.1 Introduction

Automated Teller Machine is a computerized machine that

provides the customers of banks the facility of accessing their accounts

for dispensing cash and to carry out other financial transactions without

the need of actually visiting a bank branch.

7.5.2 Types of ATM Cards

The ATM cards/debit cards, credit cards and prepaid cards(that

permit cashwhdrawal) can be used at ATMs for various transactions.

7.5.3 Services/facilities available at ATMs

In addition to cash dispensing ATMs may have manyservices/facilities such as:

Account information Cash Deposit Regular bills payment

Purchase of Re-load Vouchers for Mobiles Mini/Short Statement Loan account enquiry etc.

The services offered may vary from bank to bank, or may depend

on the capacity of the machine to provide such services.


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7.5.4 Transaction at an ATM

For transacting at an ATM, the customer insert (swipe) their card

in the ATM and enter their Personal Identification Number (PIN).

7.5.5 Cards be used at any bank ATM in the country

The cards issued by banks in India should be enabled for use at any

bank ATM within India.

7.5.6 Personal Identification Number (PIN)

PIN is the numeric password for use at the ATM. The PIN is

separately mailed/handed over to the customer by the bank while issuing

the card. This PIN has to be reset to a new PIN by the customer. Most

banks force the customers to change the PIN on the first use.The PIN number should not be written the card, card holder etc as in such

cases the card can be misused if card is lost/stolen.

7.5.7 Minimum and Maximum cash withdrawal limit per day

Banks set limit for cash withdrawal by customers. The cashwithdrawal limit for use at the ATM of the issuing bank is set by the bank

during the issuance of the card. This limit is displayed at the respective

ATM locations.

For cash withdrawals at other bank ATMs, banks have decided to

maintain a limit of Rs 10,000/- per transaction. This information is

displayed at the ATM location.


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7.5.8 Service charge

No charges are payable for using other banks' ATM for cash

withdrawal and balance enquiry, as RBI has made it free under its "Free

ATM access policy" since April 01, 2009. But banks can restrict the

number of such free transactions to a maximum of five per month. For

transactions beyond this minimum number of transaction, banks charge

maximum of Rs 20/- per transaction.

7.5.9 If cash is not disbursed

The customer may lodge a complaint with the card issuing bank.

This process is applicable even if the transaction was carried out at

another banks ATM.

As per the RBI instructions, banks may re-credit such wrongly

debited amounts within a maximum period of 12 working days.Effective from July 17, 2009, banks shall have to pay customers Rs

100/- per day for delays beyond 12 working days. This shall have to be

credited to the account of the customer without any claim being made by

the customer.

For all such complaints customer may lodge a complaint with the

local Banking Ombudsman if the bank does not respond.

7.6 Indo-Nepal Remittance Facility scheme

7.6.1Introduction

Indo-Nepal Remittance Facility is a cross-border scheme to

transfer funds from India to Nepal. The Indo-Nepal remittance scheme is


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a facility available under the NEFT system. A separate Transaction Code

(No. 51) has been allotted in the NEFT system to facilitate the transfer of

funds from India to Nepal. A remitter can transfer funds up to Indian

Rupees 50,000 from any of the NEFT-enabled branches in India to Nepal.

The beneficiary would receive funds in Nepalese Rupees.

7.6.2 No Mandatory Account

This is not a mandatory requirement. Under the Indo-Nepal

Remittance Facility Scheme, even a walk-in customer in India can

deposit cash up to Rs.50,000 for transfer of funds to the beneficiary in

Nepal.

7.6.3Account in Nepal

This is not mandatory. It would, however, be ideal if thebeneficiary maintains an account with a bank branch in Nepal to which

the credit could be afforded. In Nepal, the Indo-Nepal Remittance Facility

Scheme is handled by Nepal SBI Ltd. (NSBL). If the beneficiary resides

in a locality or area in Nepal not serviced by a bank branch, an

arrangement has been entered into by NSBL with a money transfer

company in Nepal (called Prabhu Money Transfer) who would makearrangements for delivery of cash (in Nepalese Rupees) to the

beneficiary.


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7.6.4 Documents Required

If the remitting customer maintains an account with a bank branch

in India there is no need for any additional information, documents or

identification. Else, the remitter has to submit documents for proof of

identification such as Passport / Permanent Account Number / Driving

License / Telephone Bill / Certificate of Identification issued by his

employer with photograph and other details. The information will be

captured in the NEFT system as part of compliance with the Know Your

Customer (KYC) requirements. Complete address and telephone / mobile

number of the beneficiary in Nepal will also be required.

7.6.5 Timeline

Remittances under the scheme for transfer of funds from India to

Nepal can be originated from any of the NEFT-enabled branches in India,which are around 62,000 as on date.

7.6.6 Process

The transactions from the originating bank branch flow in the

NEFT system to the designated branch of State Bank of India (SBI) inIndia. SBI then consolidates all such remittance information received

during the day. At the end of the day, the remittance information is

conveyed electronically in a secured mode to Nepal SBI Bank Ltd.

(NSBL). NSBL then makes arrangements for credit to the bank account

of the beneficiary if the beneficiary account details are available. Else,

NSBL disburses funds in cash to the beneficiary through the authorised

money transfer company (Prabhu Money Transfer). The beneficiary has


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to approach the local branch of the money transfer company, furnish the

UTR number (also called as the Unique Transaction Reference number

that uniquely identifies a transaction in the NEFT system that can be

obtained from the remitter), and produce a photo identity document

(generally Nepal Citizenship Certificate) to prove his identity.

If the beneficiary does not approach the money transfer company

within a week from the date of the transaction, the money transfer

company would make arrangements for return of the remittance to the

originator.

7.7.7 Other Details

The location and addresses of NSBL and Prabhu Money Transfer

are available in the Procedural Guidelines for Indo-Nepal Remittance

Facility Scheme as also with the NEFT-enabled branches in India.

The amount of remittance will flow back to the originating bank

branch in India through the NEFT system and the bank branch would

then communicate to the remitter about return of the remittance. If the

remittance was originated by debit to an account of the remitter with the

bank branch, the returned amount will be credited to the account. If theremittance was by a walk-in customer through a cash deposit, the remitter

has to produce evidence of proof of remittance (counterfoil of the

remittance application form) for refund of the cash deposited.

As the facility is targeted at the migrant Nepali workers in India,

concessional charges are envisaged for transfer of funds under the Indo-

Nepal remittance scheme.


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The charges are as under

Originating bank branch in IndiaMaximum Rs. 5 per transaction. State Bank of India in India Rs. 20 per transaction if the

beneficiary maintains an account with Nepal SBI Ltd. (NSBL).

State Bank of India shares this amount equally with NSBL. NSBLwould not charge any additional amount for crediting the account

of the beneficiary.

In case the beneficiary does not maintain an account with NSBL,

an additional amount would be charged @ Rs. 50 for remittances up to

Rs. 5,000 and Rs. 75 for remittances above Rs. 5,000.

The charges would, thus, be a minimum of Rs. 25 or a maximumof Rs. 100 depending on the value of transaction and the manner in which

credit is afforded to the beneficiary.

Originating bank branches have been advised to recover the entire

charges from the remitter as per the structure detailed above and pass on

the appropriate amount to SBI after retaining their share (of Rs. 5).

7.7.8 Restrictions

An originator in India is allowed to remit a maximum of 12

remittances in a year under the scheme.


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7.7.9 Redressal

In case of complaints relating to non-credit or delay in credit to the

beneficiary account or for complaints of any other nature, the NEFT

Customer Facilitation Centre (CFC) of the respective bank (the

originating bank and / or SBI) can be contacted. Details of NEFT

Customer Facilitation Centres of banks are available on the websites of

the respective banks.

7.8 US-Dollar Cheque Collection

7.8.1 Introduction

One of the services rendered by banks as part of their normal

banking operations is collection of cheques deposited by their customers,some of which could also be drawn or payable on banks that are outside

the country. Such cheques are called foreign currency cheques and,

presently, a significant part of these cheques are US-Dollar denominated

payable by banks in the United States of America. In the interest of better

public awareness, the following FAQs have been prepared for cheques

denominated in US-Dollars

7.8.2 Rupee Denominated cheque vs Dollar denominated

Cheques denominated in currencies other than Indian Rupees such

as Euro, Pound Sterling, US Dollar, Yen, etc., are called foreign currency

cheques. Foreign currency cheques include demand drafts, personal

cheques, bankers cheques, cashiers cheques, travellers cheques, etc.


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Since such cheques are not payable in India they are, therefore, required

to be sent to the country concerned for realization of proceeds.

Cheques denominated in US Dollars (USD cheques) constitute a

major share of foreign currency cheques deposited by customers for

realisation. In order to make the USD cheque collection process more

efficient and transparent, RBI has advised banks to refine their USD

cheque collection procedures and frame their own USD Cheque

Collection Policy covering aspects like mode of collection, collection

period, charges for collection, etc. This policy shall be made part of their

regular Cheque Collection Policy for collection of local / outstation

cheques payable within India.

There are various ways of collecting (realising) USD denominated

cheques. The collection process followed by banks (presenting banks)

varies depending on the institutional arrangements put in place by them.

There are basically three types of arrangements adopted by banks -

Cash Letter Arrangement (CLA) : Cheques are sent by thepresenting banks in India to their correspondent banks (CBs) in

USA for domestic clearing. Funds are collected (realised) by the

CBs and credited to the account of the presenting bank maintained

in US. Such accounts are known as NOSTRO accounts. Forcheques sent under CLA the CB gives provisional credit to the

bank on a pre-determined date (which varies from 7 to 9 days after

tendering of cheque to the CB). However, the provisional credit

will be subjected to a cooling period. After the cooling period, the

customers account with the presenting bank in India is credited. In

case of secured collection facility, the CB provides a guaranteed

credit but at an additional cost.


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(Cooling period is the time up to which banks wait after receiving

provisional credit for the amount of cheque in their Nostro account for

possible return of the cheque under provisions of the laws of USA by the

drawee bank, before giving credit to the customers.)

(Secured Collection is a facility extended by the CBs. Under this facility,

the CBs provide guaranteed final credit without recourse within a

confirmed time period unlike normal collection service. Hence the

collection time period is better under this facility. CBs offering this

facility normally fix a cap for the amount of individual cheques collected

under the arrangement. The CBs absorb any subsequent recall of payment

by the drawee bank as per US laws. . The bank offering such service

charge an additional amount for giving credit without recourse.)

Direct Collection Arrangement (DCA) : Cheques are sent by thebanks in India directly to the drawee banks in USA for collection.Usually collection services ensure receipts of clear funds i.e., risk

of return is almost eliminated. Therefore, high value cheques are

generally sent under collection though the time taken may be more.

Final Credit Services (FCS) : These services are offered by someCBs. The CB offering the service guarantees confirmed creditagainst the instrument. Under this arrangement banks receive final

credit in their Nostro accounts without any recourse. This service

normally does not have any cooling period as the cooling period is

factored by the CBs before releasing the clear funds.


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7.8.3 Nostro Account

A Nostro account is a bank account established in a foreign country

usually in the currency of that country for the purpose of carrying out

transactions there. For example most commercial banks maintain US

dollar accounts with their correspondent banks in USA in order to

facilitate settlement of interbank and customer transactions in US dollar.

7.8.4 Charges

The charges levied by banks for collection of such USD

denominated cheques are dependent on the type of collection

arrangement chosen by customers and the number of intermediaries

(correspondent banks) involved in the collection process. Each of the CBs

will levy their own charges for facilitating the process of collection. All

these charges will be in turn levied by the collecting banks in India fromthe customers. The customers account is credited net of collection

charges (proceeds minus collection charges)

7.8.5 US Regulation

The basic legal framework for determining rights, responsibilitiesand liabilities of the parties in connection with collection of USD

denominated cheques drawn on US banks are governed by the legal

framework as laid down under the US federal and state laws like Uniform

Commercial Code (UCC) etc. However, in the event of return of a

counterfeit cheque handled through this process, the drawee bank in the

US has the right to recover the proceeds from presenting banks within the

period stipulated under US Clearing House guidelines.


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7.9 Speed Clearing

7.9.1Introduction

Banks as part of their normal banking operations undertake

collection of cheques deposited by their customers, some of which could

also be drawn on non-local bank branches. Such cheques are called

outstation cheques. In order to facilitate faster collection of outstation

cheques, the Reserve Bank of India started a special clearing styled

Speed Clearing by leveraging the core-banking-solutions implemented

in banks. In the interest of better public awareness, the following FAQs

on Speed Clearing have been prepared.

Speed Clearing refers to collection of outstation cheques through

the local clearing. It facilitates collection of cheques drawn on outstation

core-banking-enabled branches of banks, if they have a net-workedbranch locally.

The collection of outstation cheques, till now, required movement

of cheques from the Presentation centre (city where the cheque is

presented) to Drawee centre (city where the cheque is payable) which

increases the realization time for cheques. Speed Clearing aims to reducethe time taken for realization of outstation cheques.


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7.9.2 Process

A person who has an outstation cheque with him deposits it with

his bank branch. This bank branch is called the Presenting branch. The

cheque is sent for collection to the city where it is payable / drawn called

Destination centre or Drawee centre. The branch providing the collection

service at the Destination centre is called the Collecting branch. On

receipt of the cheque, the Collecting branch presents it in local clearing to

the Drawee branch or the Destination branch. Once the cheque is paid the

Collecting branch remits the proceeds to the Presenting branch. On

receipt of realisation advice of the cheque from the Collecting branch, the

customers account is credited. This, in short, is the process of Collection.

When a cheque is accepted on a collection basis by a bank, it credits the

customers account only after realisation of its proceeds.

Alternatively, in the absence of a collection arrangement at theDestination centre, the Presenting branch will send the cheque directly to

the Destination branch for payment. On receiving the proceeds from

Destination branch, Presenting branch credits the customers account.

Generally, it takes around a week to three weeks time depending

on the drawee centre and collection arrangements to get outstationcheques realised on a Collection basis.

In Local Cheque Clearing in 66 major centres, cheques are

processed at the Clearing Houses on mechanised sorters, using Magnetic

Ink Character Recognition (MICR) technology.


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Local Clearing handles only those cheques that are drawn on

branches within the jurisdiction of the local Clearing House. Generally,

the distance between the Clearing House and the participating branches is

defined, taking into account the local transportation and communication

facilities as the cheques have to physically move to and from the Clearing

House. For example, for a cheque to be processed in Local Clearing in

Mumbai, both the presenting and drawee branches should be situated

within the jurisdiction of the Clearing House in Mumbai.

Banks have networked their branches by implementing Core

Banking Solutions (CBS). In CBS environment, cheques can be paid at

any location obviating the need for their physical movement to the

Drawee branch. The concept of Speed Clearing combines the advantages

of MICR clearing with that of CBS.

Cheques drawn on outstation CBS branches of a Drawee bank canbe processed in the Local Clearing under the Speed Clearing arrangement

if the Drawee bank has a branch presence at the local centre.

7.9.3 Benefits

As on date, the local cheques are processed on T+1 working daybasis and customers get the benefit of

Rbi Payment System 67

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