Sunday, March 25, 2012

Electronic Clearing Service (ECS)

 ECS is an electronic retail payment system for making bulk and repetitive payments such as payment of dividend, interest, salary, pension, etc., or for collection of amounts pertaining to payments to utility bills like telephone, electricity, house tax, water tax, etc or for loan installments of banks / financial institutions or regular investments of persons from one account to many accounts or vice versa. BANKNET and INFINET facilitate payment from a single account maintained in a bank branch to any number of accounts maintained with the branches of the same or other banks.

RBI started this Automated Clearing House (ACH) bulk payment system from 1996-97. RBI conducts ECS at 15 centres and State Bank and other public sector banks operate the system in the remaining centers. While ECS facilitate settlement of bulk payment instructions, EFT/NEFT facilitated one-to-one remittances.


 There are two types of ECS- ECS (Debit) and ECS (Credit). ECS (Credit) is used for affording credit to large number of beneficiaries by raising a single debit to an account. Institutions which have to make payment to large number of beneficiaries prepare payment data on a magnetic media (CD/Floppy) and submit the same to  their banker along with an authority to the clearing house to debit their  account with the bank and credit accounts of beneficiaries at the destination with their banks.

ECS (Dr/CR) has helped in eliminating unavoidable paper instruments in respect of large volume, but relatively small value payments of repetitive nature.

The clearing house advices the details of beneficiary to the service branch of the respective banks at the destination. The bank in turn credits the accounts of the beneficiaries. Un-credited items are reported back to the clearing house of the destination bank, which passes the information to the remitting bank.
Destination bank branches have been directed to afford ECS Credit free of charge to the beneficiary account holders. Banks charge a fee from their customers for using this facility.

 ECS Debit Clearing:  

A customer can make payment of the bill of the utility services either through cash or by means of cheque or by directly crediting the bank account of the service provider by getting his account debited with his bank.
Those business organisations which periodically raise bills in respect of the utility services provided by them such as telephone bills, electricity bills, water bills, repayment of loan instalments etc., use the mode of ECS (Debit). The organization desirous of participating in ECS has to get himself registered with the clearing house.
Accounts of customers of the utility company in different banks are debited and amounts are transferred to the account of the utility concern.
For availing this facility, the consumer has to give an application (mandate) to the service provider to debit his bank account with the amount of the bills at regular intervals. The mandate is submitted along with photocopy of a blank cheque (duly marked as cancelled) to the service provider who submits the same to his bank. The blank cancelled cheque facilitates the banker to know the city code, bank code, branch code and transaction code of the mandatee from which the bill amount is to be deducted.
Once the mandate of the customer is registered by the bank (consumer’s bank), the service provider’s bank (utility company/firm) advises its counterpart to debit the account of the utility bill. The service provider also sends a copy of the bill to the customer for information. Accounts of customers availing utility services (maintained in different banks) are debited and account of service providers credited. ECS (Debit) works as a standing instruction.


ECS (Debit) is advantageous to the service providers, customers and to the bank.

To the service provider (Institution):  Funds are credited in the account in one go. It saves the botheration of depositing cheques. Time involved in getting the cheques cleared and account getting credited is saved. It helps in proper management of funds.
To Customers: Customer is relieved of the botheration of keeping a track of the bills as ECS ensures timely payment of utility bills.
To Banks: Banks save expenses on printing of cheques on security paper and from the botheration of handling large volume of cheques in clearing.

    RBI has directed banks that entries in the statement of account/passbook of the customers should clearly reveal that the transaction was through ECS debit and should contain the name of the institution to which payments have been made.

ECS Credit Clearing:

 ECS Credit is used for making bulk payments from a bank account to a large number of beneficiaries by directly crediting their bank accounts. The facility is used for making payment of dividend to investors, interest on deposits, payment of salaries of employees etc. The account of the institution remitting the payment is debited and accounts of beneficiaries’ with banks are credited through the clearing system.
The company or entity making payment has to have the details of bank accounts of individual beneficiaries. The company or entity obtains a mandate or letter of authority from the beneficiary containing all relevant details e.g., bank, branch, account number, MICR code of the destination bank branch etc.
The institution making payment has to get it registered with the ECS centre and has to give a mandate to debit its account maintained with his bank i.e. the sponsor bank. In case of any change in the bank or account number etc., the beneficiary has to inform the institution and submit another mandate.
The duly encrypted input data received from the sponsor bank on behalf of the user (client) is supplied to the National clearing cell / clearing house for processing. It is also provided to the banks at the destination and to the deposit account department of RBI/clearing agency for settlement. 
The clearing house debits the account of the organisation maintained with the sponsor bank on the appointed day and credits the accounts of the recipient banks, for affording credit to the accounts of the ultimate beneficiaries. The accounts of beneficiaries are thus directly credited through the clearing system. In case credit could not be afforded to the account of beneficiaries the reverse process starts on the second day.
The securities market regulator (SEBI) has also issued guidelines to investors to furnish details of bank account in the share applications for printing the same on the physical interest / dividend warrants.

 Advantages: ECS (Credit) is advantageous to the service providers, customers and to the bank.

(i) To the paying institution: Availing ECS credit facility is advantageous to the institution.The organisation making payment saves the cost of printing payment warrants for each beneficiary. The cost on mailing payment warrants is saved. Even the chances of loosing payment warrant in transit are eliminated. The chances of frauds due to loss/pilferages of instruments in transit are also eliminated. The organization is able to mange funds properly.
(ii) To Customers: Availing ECS credit facility is advantageous to customers, as account is directly credited. Time involved in clearance of instrument is eliminated. Necessity of visiting branch exclusively for depositing cheque is obviated. Chances of theft of physical instrument in transit are eliminated. 
(iii) To Bank: Availing ECS credit facility is also   beneficial to the bank. Banks burden in processing of large number of cheques/warrants is reduced. Bank can make use its staff for other productive purposes. Payment processing by destination banks becomes smooth and easy once a database is prepared, maintained and updated by the user institutions.


           ‘National Electronic Clearing Service (NECS)’                                          

NECS is the nation wide centralised version of ECS system.The Reserve Bank of India launched ‘National Electronic Clearing Service (NECS)’ with effect from 29.09.2008. The system facilitates centralised processing for repetitive and bulk payment instructions.
Institutions desirous of availing NECS facility have to get themselves registered with the clearing house. NECS has no restriction of centres in the country. As per the guidelines, branches participating in NECS have to be core-banking-enabled. The system takes advantages of centralised accounting system in banks. All CBS bank branches irrespective of their location participate in the system.
The Sponsor bank submits NECS data at Mumbai (single centre) where transactions are processed for the whole of India. This facilitates sponsor banks (the bank who acts as the agent of the user i.e. companies/corporations/Government Departments or any other entity using NECS services) in submitting ECS files centrally at Mumbai.

 Types of NECS:

 NECS have two variants NECS (Credit) and NECS (Debit). The NECS (Credit) facilitates multiple credits to beneficiaries’ account at bank branches spread across the country against a single debit of the account of a user with the sponsor bank. The NECS (Debit) facilitates multiple debits to destination account holders against single credit to user account.
The account holder has to give a mandate in triplicate (Original for the bank, one copy for the user company and one for the customer) to the user institution for debiting and effecting payment from the account. The mandate contains:

o        9 Digit Code numbers of Bank and Branch.
       o        Type of account number with code. (SB/Current/ Cash Credit)  -10/11/13 Account Number
              is an essential field in the data record.
      o        Ledger No. / Ledger Folio No.

 The Scheme:

The scheme covers bulk payment transactions like payments of interest/ salary/ pension/ commission/ dividend/ refund or bulk collection of utility bills/insurance premium/school fee/ loan installments, etc., by companies /corporations /government departments and such other entities.
NCCS / Clearing Houses, have the discretion to accept the lower volume of transactions. The Sponsor bank acts as the agent of the user, and uploads the NECS data on to the web-server of the designated agency/Clearing House (CH) at Mumbai. All files uploaded on the web server are subjected to final validation for determining whether the file can be accepted or not. The validation is done with reference to the User name, User number, Sponsor Bank Branch sort code and other parameters.
When an input file passes through the test validation in the web server, an output report in the form of Data Validation Report (DVR) is printed by the sponsor bank. Once the test DVR is confirmed, the settlement process begins at Clearing House. The Sponsor Bank and the users have to preserve the output data/file for a minimum period of 3 years. Settlement under NECS is final and irrevocable as defined in Sec.23 of the ‘Payment and Settlement Act 2007’. Therefore, withdrawal /modification of file/record are not permitted.

Structured Financial Messaging System (SFMS)

Structured Financial Messaging System (SFMS)

Payment and settlement systems play a vital role in the efficient functioning of the financial system. IDRBT Hyderabad developed and launched the Structured Financial Messaging System on December 14, 2001.  It is messaging system that can be used for speedy funds transfer and for all purposes for secure communication within the bank (inter-bank) and between banks (intra-bank). SFMS is an Indian standard similar to SWIFT (Society for World-wide Interbank Financial Telecommunications) an international messaging system used globally for financial messaging. SFMS is an EDI (Electronic Data Intervention) for banks and it uses INFINET as the communication medium. This system is connected to banks gateways with HUB located at IDRBT, Hyderabad. Banks secure intra-bank transactions messages by means of standard encryption and authentication services conforming to ISO standards. SFMS messages from a bank branch to another bank branch are delivered via Bank Gateways and the Hub. The Hub and the bank gateway are connected via VSAT communication links or dedicated leased lines or dial up lines depending on proximity and the volume of traffic with Bank Servers. The bank servers are connected to the branches in the offline mode.
The inter-bank messaging is useful for applications like Electronic Funds Transfer (EFT), Real Time Gross settlement System (RTGS), Delivery Versus Payments (DVP), Centralized Funds Management System (CFMS) etc.
Security aspect of SFMS
Authentication, Confidentiality, Non-Repudiation, Integrity are the main security aspect of SFMS. Security is taken care by using Public Key Infrastructure (PKI).  Under Public Key Infrastructure each entity has a public key and a private key. Messages sent through SFMS are digitally signed.
Advantages of SFMS 
SFMS reduces transaction time, cost and make trade finance operations more efficient.  The electronic handling of communications reduces considerable reduce risk of fraudulent transactions. SFMS facilitates inter-bank and intra-bank transactions in cash and securities, in treasury operations, forex transactions, Letters of Credits and in negotiation of bills drawn against the Letters of Credit. With SFMS banks would be able to avoid paper based transactions.
 Centralised Funds Management System:
 The centralised funds management system (CFMS) was set up by the Reserve Bank of India. It is operated and maintained by RBI. There are two components;
1.      The Centralised Funds Enquiry System (CFES) and
       2.      Centralised Funds Transfer System (CFTS).
Centralised funds management system provides a centralised view of balance positions of the accounts maintained by banks with RBI at various locations. It enables banks to operate and transfer funds from one account to another account maintained with different Deposit Accounts Department (DADs).
Only those banks who maintain current account with the Deposit Accounts Department (DAD) of RBI and are the members of INFINET can become the member of this system. Each member is required to install on its own cost and maintain in good order computer/s, servers, telecommunication equipment and other electronic equipment as required / prescribed for the purpose. All funds transfer messages received by the Central system for debiting of any current account are digitally signed. Each message is identified by a unique identifier for tracking at a future point of time.
On the successful completion of a transaction, the originator of the message is informed by the Bank Level Funds Management System (BLFMS) / Local Banks Funds Management System (LBFMS). The CFMS normally operates on all days on which at least two Deposit Accounts Departments of Reserve Bank of India function.
The Centralised Funds Transfer System (CFTS) provides services through:
  1. Apex Level Server (ALS) built in the main frame computer maintained at Mumbai.
  2. Local Funds Management System (LFMS): The facility is provided by those   Regional Offices of RBI which have the Deposit Accounts Department (DAD).
  3. Bank Level Funds Management System (BLFMS): RBI provides the soft ware to CFMS members for the use of Treasury Department / Central Accounts Department.
  4. Local Banks Funds Management System (LBFMS): RBI provides this facility to the CFMS members for accessing local DAD.

  5. Negotiated Dealing:

    Negotiated Dealing System (NDS) is an electronic trading and biding plateform for  Govt. dated securities, Treasury Bills, call/notice/term money, commercial paper certificate of deposit; forward rate agreements/interest rate swaps, Repurchase Agreements (Repos) under Liquidity Adjustment Facility etc. All dealings are done through screen (computer) which has anonymous order matching. NDS provides interface to Securities Settlement System (SSS) of Public Debt Office (PDO) RBI, Clearing Corporation of India (CCIL) and finally the RTGS. It  disseminate  information on trades and foreign exchange markets on a real time basis and  helps in achieving paperless and straight through settlement of transactions. The system became operational from February 15 2002.
    NDS has brought significant improvements in transactional efficiency and transparency.
    It uses INFINET network as communication backbone. It facilitates RBI in settlement of deals done in govt. securities and treasury bills. All outright and repo transactions in Treasury Bills and Government dated securities (Central and State governments) are settled through NDS. All inter-bank money market deals are done through the NDS and reported to CCIL.
    Negotiated security transactions once reported on NDS. Once a deal is   approved it can not be revoked in the system. However, prior to the settlers' approval, either the dealer or the settler of the dealing member can reject the deal entered into the system.
    The securities clearing against assured payment is handled by Clearing Corporation of India Ltd (CCIL), a specialised institution which started operations on February 15, 2002 along with the commencement of operations of RBI’s Negotiated Dealing System (NDS).
    CCIL guarantees settlement for trades done in government securities including Treasury Bills, Repos through the process of Novation.Once a trade is done/reported over NDS it can be settled either though CCIL or directly through RBI- SGL. With the implementation of NDS the system of submission of physical SGL transfer form in respect of deals done between members has been discontinued. All big banks, primary dealers and satellite dealers (Gilt Dealers) maintain SGL account with RBI at Mumbai. The account facilitates investors a simple and indirect form of investment in government securities.
    All inter-bank money market deals and negotiated security transactions are also reported to CCIL. CCIL provides straight through processing (STP) for USD/INR, and CCIL as an intermediary settles inter-bank USD/Rupee deals on net basis, so that individual banks need not exchange payments for each transaction.

    Settlement through CCIL is done on Delivery Versus Payment II (DVP II) mechanism. DVP II refers to settlement of securities on gross basis (trade by trade basis) while funds are settled on net basis. Settlement through RBI-SGL is through DVP-I mechanism i.e. settlement of both securities and funds on gross basis. The securities clearing against assured payment is handled by Clearing Corporation of India Ltd. (CCIL) through the process of Novation.
    The NDS membership is open to banks, primary dealers, mutual funds, financial institutions and insurance companies, who maintain SGL account with RBI, and also those who have constituent SGL accounts through banks / depository institutions. Brokers are not eligible to become members of NDS. Subsidiary General Ledger Account is maintained in the books of Public Debt Offices with Reserve Bank of India for holding Government Securities and T-Bills in paperless form (demat account). This facilitates Delivery v/s Payment (DvP) trades. It is mandatory for all NDS members to report all deals in government securities, call/notice/term money, CDs and CP executed among NDS members.  Even if a deal is done outside NDS, irrespective of the size of the deal or whether the counterparty is a member of the NDS or not the deal is reported.


    Section 62 of ‘The Indian Contract Act, 1872’ deals with the effect of novation, rescission, and alteration of contract. As per Sec.62 ‘If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed’. Thus, Novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party contract remaining the same. When a trade is reported to CCIL for settlement, CCIL becomes the central counterparty to the trade by replacing the trade between the two members. This means that CCIL will act as a buyer to the seller of security and simultaneously will act as a seller to the buyer of the security. This in effect remove the credit risk faced by members’ vis-à-vis their counterparties.

Real Time Gross Settlement System

The Reserve Bank of India introduced RTGS in March 2004 for transferring funds electronically from one bank to another bank on real time (continuous processing) and on gross basis. It is a faster and efficient mode that facilitates instant transfer of Inter and intra bank funds, as well customer payments to any account with any bank in India through a secured system. RTGS is maintained and operated by the RBI.
All transactions sent through RTGS are queued and submitted on ‘First in first out’ basis. Banks participating in RTGS has an option to assign priorities to their transactions.  Transactions are settled on one to one basis without bunching with other transaction. Transaction involving banks are settled on a continuous gross basis (on a transaction by transaction basis) with the Reserve Bank.
As per Sec.2 (d) of the Payment and Settlement Systems Act 2007, Gross settlement’ means “a payment system in which each settlement of funds or securities occurs on the basis of separate or individual transactions.”
The digitally signed (PKI) messages for transfer of funds flow through the INFINIT using SFMS to Inter Bank RTGS gateway at RBI. It is necessary for both the sending and receiving branches of banks to be RTGS enable.
Payment messages sent by a bank for crediting beneficiaries account are routed through the Inter-Bank Funds Transfer Processor (IFTP) which contains the settlement account processor.
Since the money transfer takes place in the books of Reserve Bank of India, settlement is immediate, final and irrevocable. (Sec.23 ofThe Payment and Settlement Systems Act, 2007’)  Funds are instantaneously transferred on a ‘real time basis’ between banks and beneficiary’s account gets credited within two hours. RTGS reduces settlement risks and eliminates credit as settlements occur simultaneously. RBI also provides intra-day fund liquidity to participating banks for smooth and timely settlement.
A customer desirous of availing this facility has to approach his bank with the following information:
1. Amount to be remitted.
          2. Customer’s account number with authority to debit account.
          3. Name of beneficiary’s bank.
          4. Beneficiary’s name and his account number.
          5. Sender to receiver information, if any.
          6. The IFSC code of the receiving branch (IFSC code in printed on the cheque leaf. A remitter can ascertain the number from the beneficiary.)
 Though the system is primarily used for high value payments, individuals can transfer funds involving  2 lakh and above through RTGS. There is no upper amount ceiling for RTGS transaction. RBI has directed banks to offer the NEFT facility to their customers for transactions below  1 Lakh. For transferring funds through RTGS charges are levied.
Banks transfer funds between themselves and with RBI through RTGS in respect of following transactions.
1.   Money market transactions.
                   2.   Foreign exchange –Rupee Settlement.
                   3.   Capital market and debt instruments – Rupee Settlement.
                   4    Funds Settlement under DvP (delivery versus Payment) for Government
                       Securities and Treasury Bills.
                   5.  Funds settlement after securities auctioning.
                    6. Funds Settlement after various inter-bank clearings MICR, Returns, ECS, etc.
The Clearing Corporation of India (CCIL) is the settlement agency through whom transactions are settled.
The RTGs members can undertake following types of transactions through RTGS.
  • Inter-institutional transactions
  • Customer transactions
  • Delivery versus Payment transactions
  • Own Account transfers transactions
  • Multilateral Net Settlement Batches transactions
RTGS members send different types of payment messages through the Inter-Bank Funds Transfer Processor (IFTP). The funds transfer messages are digitally signed and encrypted for security purposes.
The moment Settlement Account of the bank sending payment instructions is debited and Settlement Account or the Current Account of RTGS member recipient bank has been credited, the payment transaction is considered to have been settled. RTGS members have to open a ‘Settlement Account’ with the Deposit Accounts Department of RBI at Mumbai and have to give an authority to RBI for debiting their current account and crediting settlement Account.
The settlement account of RTGS member is funded at the start-of-day from the current account maintained with the Deposit Accounts Department of RBI. At the RTGS end of day balances in the Settlement Account is swept back to the funding account of the RTGS member. RBI provides intra-day liquidity facility to the eligible RTGS members for settlement of the transactions during the RTGS business day. This facility of intra-day liquidity is used by RTGS members to overcome genuine short term funds requirements. Since banks have to maintain adequate funds to meet their liquidity, RBI conducts Repo auctions for meeting payment obligations under RTGS system.  
Difference between EFT/ NEFT and RTGS
EFT/ NEFT = In electronic fund transfer system transactions are settled in batches. The system operates on a deferred net settlement (DNS) basis. In DNS, the settlement takes place with all transactions received till the particular cut-off time. Any transaction initiated after a designated settlement time has to wait till the next designated settlement time. 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.
RTGS= In RTGS, transactions are processed continuously during the RTGS business hours. Funds are received by branches in real time. As soon as the funds are transferred by the remitting bank, account of beneficiary is credited within two hours of receiving money.
EFT/ NEFT = There is no minimum or maximum stipulation of amount.
RTGS= The system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs.2 lakh. There is no upper ceiling for RTGS transaction.

Monday, February 27, 2012



The Society for Worldwide Interbank Financial Telecommunication "SWIFT" is a cooperative society owned by financial institutions. It is registered under Belgian laws. It has offices in almost all the major financial centres and developing markets across the world.
SWIFT operates a worldwide financial messaging network which exchanges secured messages between banks and other financial institutions with speed, certainty, confidentiality and integrity. The majority of international interbank messages use the SWIFT network. SWIFT neither holds accounts for its members nor performs any form of clearing or settlement.

Swift Code:

ISO/NP 9362 (also known as SWIFT-BIC, BIC code, SWIFT ID or SWIFT code) is a standard format of ‘Business Identifier Codes’ (BIC) approved by the ‘International Organization for Standardization’ (ISO). The BIC code is a special type of alphanumeric code. The BIC is a universal identifier code, for financial and non-financial institutions and related entities.
These codes are used while transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks. These codes make safe and fast transactions from one bank to the other bank. The code (an international identifier) is required for facilitating automated processing of telecommunication messages in banking and related financial transactions.
The code contains main bank code, country code, location code and branch code as well. SWIFT facilitate transfer of funds by sending payment orders, which is settled via correspondent accounts that the institutions have with each other.
It enables customers to automate and standardise financial transactions, thereby lowering costs, reducing operational risk and eliminating inefficiencies from their operations.