BANKING GK : PAYMENT SYSTEM IN INDIA (PART - 3 )

Terms and Words used in Payments

Term	Details
Cash	Cash payment is the most common payment system which is well known.
Cheque, demand draft, payment order, banker’s cheque	Paper based payments are in the form of cheques, demand drafts, payment orders, banker’s cheques, refund orders, warrants etc. These are also referred to as negotiable instruments. For simplicity, they are generally referred to as cheques. i. Cheques are simply a payment instruction from the account holder to his/her banker directing that a certain sum of money should be paid to a specific individual or to the bearer of the instrument. On receipt of cheques, the beneficiary will deposit it with his banker who will collect the money through clearing house system, where banks in a city exchange cheques with one another and settle the payments by arriving at a net amount of payables and receivables. After exchange of cheque, the account of the issuer of the cheque is debited and the credit is passed on to the banker of the beneficiary. An account holder should ensure that a cheque is issued only when there is sufficient balance of funds in his/her account. Cheques drawn on any bank in the country can be cleared through various mechanisms available in the clearing system. The process usually takes 2 to 4 days depending on the local clearing house procedures. In India, cheques are valid for three years from the date of issue. However, cheques are treated as stale, by practice, by banks after since months from the date of issue, but they can be revalidated by the issuer. Dividend warrants and interest warrants issued by companies are also treated as cheques which are usually valid for three months from the date of issue. In case of a cheque, the beneficiary is entitled to receive the money due only if the balance is available to clear the cheque. However, there are some pre-paid negotiable instruments eg. Demand drafts / payment order / banker's cheques. ii.         Demand drafts are used when one person wants to send or transfer money (remit) to another person who is in another city. The person wanting to send money, deposits cash in a bank or issue a cheque in favour of the issuing bank, which issues him a demand draft. The demand draft is sent to the person who is to receive the money. The receiver gives it to the branch/bank where he holds an account and receives the payment. They are valid for 6 months. Banks normally charge a commission for issuing demand drafts. iii. Payment orders or Banker’s Cheques are similar to demand drafts but are usually issued for payments within a city. These are usually valid for 3 months. Banks may charge a commission for issuing Payment Orders and Banker’s Cheques.
Credit cards, ATM cards, debit cards, smart cards and other cards	Card based payments are made by using a credit card or a debit card i.          Credit card system is a credit facility extended to a user who is issued a plastic card which can be used in place of cash for making any type of payment/purchase. The institution which issues the card has a tie up with the concerned merchant establishment and the card issuing organization, if different, to facilitate this arrangement. The amounts charged to the customer are paid by card issuer to the merchant and subsequently billed to the customer. A credit card holder may not be an account holder in the bank which issues the credit card. Debit cards can be of two types - One which is issued by banks to account holders only and the other in which a pre-loaded amount is stored and operates in collaboration with a service provider/seller. Generally, debit cards are also ATM cards. The mode of using debit cards and credit cards is generally the same.  Comparison between Credit and Debit Card: Credit Card Debit Card Transaction amounts restricted to credit limit offered on the credit card Transaction amounts limited to permissible withdrawal out of the balance in the card holder’s bank account / cash limit / store value. Grace period of one month to 45 days is offered after which interest/penalty may be charged. Amount is debited to the customer’s account. There is no interest / penalty involved. iii. Special types of credit cards: Kisan Credit Cards can be issued up to a limit of Rs.50,000 out of which Rs.25,000 has to be used for agricultural and allied purposes. General Credit Cards are issued up to a value of Rs.25,000.
Electronic Clearing Service, Electronic Funds Transfer, Real Time Gross Settlement System, Internet banking.	Electronic Payments and Remittances:             i.          Electronic Clearing Services (ECS) are available for receiving or making payments. ECS for receipt is ECS (Credit). ECS for payment is ECS is ECS (Debit). The scheme is operational in 64 cities.             a.         ECS (Credit): Electronic Clearing Service for credit is a mode of payment by an institution and receipt by individuals for interest, dividend, salary, pension, etc. A large number of investors, share holders, employees, ex-employees can receive their dues electronically directly into their accounts on due dates without using paper cheques/instruments.             b.         ECS (Debit): Electronic Clearing Service for debit has been introduced so that bank customers can make small value repetitive payments such as electricity bills, telephone bills, loan installments, insurance premia, club fees, etc. The process operates on the basis of ‘large number of small debits and one consolidated credit’ from users to the service provider. The system provides the convenience of paperless payment on due dates by direct debit to the customer’s account.             ii. NEFT/EFT (National Electronic Funds Transfer/Electronic Funds Transfer): This electronic mode of remittance of funds is available with over 18500 bank branches. The amount sent from the sender’s bank branch is credited to the receiver’s bank branch on the same day or at the most the next day. This facility saves the effort of sending a demand draft through post and the inherent delay in reaching the money to the receiver. Banks may charge commission for using NEFT/EFT. RTGS (Real Time Gross Settlement) System: The RTGS system facilitates instant transfer of money from one account to other across cities. This is basically a large value remittance system where funds are required to be transferred quickly. While all the above payment and remittance systems are settled between banks on a net basis, RTGS is settled on a gross basis which means that each transaction is settled independently. This facility is useful to banks for their funds management, for companies to transfer large amounts for individuals who require urgent payments.