BANKING GK : PAYMENT SYSTEM IN INDIA (PART - 1)

METHODS OF MAKING PAYMENTS 

What is a Payment System?

A Payment System is a mechanism that facilitates transfer of value between a payer and a beneficiary by which the payer discharges the payment obligations to the beneficiary. Payment system enables two-way flow of payments in exchange of goods and services in the economy.

What are the components of any payment system?

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

Who can use payment systems to make payments?

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

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

Customer can make payments by issuing paper based instruments like cheques, demand drafts, payment orders etc or by advising bank to debit his account and originate an electronic payment eg. ECS, NEFT/EFT, RTGS, etc. Another mode of making payments is by having a letter of credit transmitted to the beneficiary's banker who releases payments on fulfillment of certain conditions laid down in the LC.

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

The process of cheque payment starts when a payer gives his personal cheque to the beneficiary. In order to get the actual payment of funds, the receiver of the cheque has to present the cheque to the issuing bank. If the cheque is not crossed and is payable to bearer he can receive payment at the issuing bank counters, otherwise he has to deposit the cheque in his bank account. If the beneficiary has an account in the same bank in the same city then the funds are credited into his account through internal arrangement of the bank. If the beneficiary has an account with any other bank in the same or in any other city, then his banker would ensure that funds are collected from the payer’s banker through the means of a clearing house.

What is a Clearing House?

A clearing house is a place for exchange of cheques by banks; it facilitates transfer of funds from one bank to another, which represents the proceeds of cheques. It is 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.

What is the time taken for this clearing process?

Generally, if a cheque is to be paid within the same city (local cheque), it would take 2-3 days. In some large cities, there is a system called High Value Clearing which facilitates completion of cheque clearing cycle on the same day and the customer depositing the cheque is permitted to utilise the proceeds next day morning. However, coverage of this High Value Clearing is very limited and usually available at the branches in the main business area; say Fort and Nariman Point area in Mumbai and Connaught Place in New Delhi.

In the case of outstation cheques, the time taken would vary from three to ten days. Banks generally publicise their cheque collection policy so that customers have an idea as to when the proceeds would be available for utilisation by the customer. For delay beyond the pre-announced period, the banks are required to compensate the customer (even without customer asking for the same).

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

The person receiving payment by means of cheques would incur some charges to realise the funds through his/her bank. In case of local cheques, no charges are levied. In case of outstation cheques, the bank would take some processing / collection charges depending upon the amount of the cheque and the place from where it has to be realised. The charges levied by the banks are generally decided by the banks themselves. Banks are also required to publicise the schedule of service charges.

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

Payments can be made between two or more parties by means of electronic instructions without the use of cheques. Retail payment mechanisms available to facilitate such payments are the Electronic Funds Transfer, Electronic Clearing Service, credit / debit cards etc.

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

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

Are ATMs used only for cash withdrawal?

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

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

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

How is a Debit Card different from Credit Card?

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

What is NEFT/EFT?

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

Can I use NEFT/EFT to transfer funds anywhere in India?

As of now, NEFT/EFT facility is available for transfer of funds electronically between more than 18500 bank branches.

How long does it take to transfer funds through NEFT/EFT?

Funds transfer normally takes place on the same day or at the most the next working day depending upon the time of requesting / effecting such funds transfers. The customer should confirm this aspect from his bank at the time of requesting the funds transfer.

Are there any charges for transferring funds through NEFT/EFT?

The banks generally charge some processing charges for NEFT/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 processing charges on NEFT/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.

How can I make use of Electronic Clearing Service for receiving funds / making payments?

Electronic Clearing Service (ECS) is a retail payment system that can be used to make bulk payments / receipts of a similar nature especially where each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government departments to make/receive large volumes of payments rather than for funds transfers by individuals. The ECS facility is available in 64 centres across India operated by RBI at places where it manages the clearing houses and by SBI and other public sector banks 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.

What is ECS (Credit)?

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

What is ECS (Debit)?

ECS (Debit) is mostly used by utility companies like telephone companies, electricity companies etc. to receive the bill payments directly from the bank account of their customers. Instead of making electricity bill payment through cash or by means of cheque, a consumer (individuals as well as companies) can opt to make bill payments directly into the account of the electricity provider / company / board from his own bank account. For this purpose, the consumer has to give an application to the utility company (provided the company has opted for the ECS (Debit) scheme), providing details of bank account from which the monthly / bi-monthly bill amount can be directly deducted. Such details have to be authenticated by the bank of the customer who opts for making payments through this mode. Once this option is given, the utility company would advise the consumer’s bank to debit the bill amount to his account on the due date of the bill and transfer the amount to the company’s own account. This is done by crediting the account of the sponsor bank which again is generally the bank with which the company receiving the payments maintains the account. The actual bill would be sent to the consumer as usual at his address as before.

Are there any charges for using the ECS?

Reserve Bank of India has exempted levy o fall charges for processing ECS at the clearing houses. The banks, however, are free to charge a fee from their corporate customers for use of this facility.

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