Thursday, February 5, 2015

Settlement Systems of India

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India has two main electronic funds settlement system for one-to-one transactions -
  1. National Electronics Funds Transfer (NEFT)
  2. Real-time Gross Settlement (RTGS)

Transactions can be bulk (meaning one-to-many or many-to-one transactions) and repetitive (regularly happening, like monthly) in nature. This type of transactions are routed through Electronic Clearing Service (ECS), and of two types -
  1. ECS Credit
  2. ECS Debit

National Electronics Funds Transfer (NEFT) - one-to-one
NEFT payment system facilitates one-to-one funds transfer. In this system, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate, having an account with any other bank in the country which is NEFT-enabled.

Note that, recipient should have a bank account (so that transfer can be traced), but the person who is transferring fund need not have any account, but in that case, there is a maximum transfer limit of Rs. 50,000 (for this walk-in customers, need to provide their identity documents).

But if he/she transfer fund from an account, then there is no limit of maximum transfer, though per transaction max limit is Rs. 50,000. e.g., For transferring Rs. 1 lakh through NEFT, there will be 2 transactions.


Note that NEFT settles transactions on net-basis and works in hourly batches. Currently, there are 12 batches (8 am to 7 pm) on weekdays and 6 batches (8 am to 1 pm) on Saturdays. Banks wait and collect all the transactions made within an hour, and then settles the transaction (not individually, known as netting). For an example, if you make a transaction on 8:30 am, then your settlement will wait till the hourly batch of 9 am, and at 9:00 am, your transaction will be settled

Transaction Costs -
No inward transaction cost for NEFT
But for outward transactions -
  • Up to Rs. 10,000 - maximum Rs. 2.5 + Service Tax
  • Above Rs. 10,000 to Rs. 1 lakh - maximum Rs. 5 + Service Tax
  • Above Rs. 1 lakh to Rs. 2 lakhs - maximum Rs. 15 + Service Tax
  • Above Rs. 2 lakhs - maximum Rs. 25 + Service Tax

Real-Time Gross Settlement (RTGS) - one-to-one
In this system, settlements are done on real-time (meaning, instantly, or without delay, note that NEFT need to wait for an hourly batch) and on gross basis (meaning, individually, transaction will not be netted with others like NEFT which are settled in hourly batches). RTGS is the fastest possible money transfer system through the banking channel.

Note that RTGS is meant for high-value transactions, and there is a minimum transaction limit of Rs. 2 lakhs (no upper limit). All the transactions go through the books of RBI.

RBI on Dec 15, 2014, increased RTGS total business hours from 7 hours 30 minutes to 12 hours. Now the business hour will be 8 am to 8 pm on weekdays against the earlier 9 am to 4:30 pm.

Transaction Costs -
No inward transaction cost for RTGS
But for outward transactions -
  • Rs. 2 lakhs to Rs. 5 lakhs - maximum Rs. 30 per transaction
  • Above Rs. 5 lakhs - maximum Rs. 55 per transaction


ECS Credit - one-to-many (single debit, multiple credit)
ECS Credit facility is used by an institution, where it needs to pay several recipients on a regular basis (may be monthly). Here single debit is made on the payers account and multiple credit is made to the beneficiaries or recipients.
For example, for paying salary, dividend, pension, etc. one can use this ECS Credit facility (e.g., employers account is debited once, and several employees are paid salary, by crediting their accounts)

ECS Debit - many-to-one (multiple debit, single credit)
ECS Debit facility is used by an institution, for raising debits to a large number of accounts. E.g., bill payment for consumers of utility services (like electricity bills deducted from bank accounts of several customers, and credited to the electricity supplier's account), periodic investments in mutual fund, insurance premium, etc.


Note, that there are several other payment systems, like Immediate Mobile Payment System (IMPS, need to register mobile number), Aadhaar-enabled Payment System (AEPS, need an Aadhar card), etc. 


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