Clearing System in India
In India, the clearing system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone. The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office (and a banking department), the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks.
In India there are about 1050 cheques clearing houses. These clearing houses clear and settle transactions relating to various types of paper based instruments like cheques, drafts, payment orders, interest / dividend warrants, etc. In 40 of these clearing houses, cheque processing centers (CPCs) using MICR (Magnetic Ink Character Recognition) technology have been set up. At 14 more clearing houses, MICR cheque processing systems are proposed to be set up. The Reserve Bank has issued the Uniform Regulations and Rules for Bankers’ Clearing Houses (URRBCH) which have been adopted by all the clearing houses. These regulations and rules relate to the criteria for membership / sub-membership, withdrawal / removal / suspension from membership and the procedures for conducting of clearing as well as settlement of claims between members.
- Clearing Process: The clearing process begins with the deposit of a cheque/other clearing instruments referred above in a bank. The bank arranges the cheques submitted to it for clearing bank wise and presents it in the clearing house to other banks. When there are more than one bank branch for a bank in the clearing area, they would have a coordinating branch/ service branch to take care of presenting the cheques to the clearing house. Upon receipt of the cheques/other instruments, they are passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument. The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing. The realization of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque
- Settlement of Funds: The settlement of funds in clearing occurs at several levels. The aggregate amount or value of cheques presented by a bank on other banks represents the claim by that bank on other banks. Similar claims are made by all the banks on every other bank in the clearing. A net settlement is arrived at the clearing house and the debit or credit position of the bank is determined. These are booked in their current accounts maintained by the settling bank. This represents the inter- bank settlement. The settlement of funds between the service branch and the branch concerned represents the transfer of funds to the branch level. The payment process is completed only when the funds are debited from the drawer’s account and credited to the payee’s account. This occurs after the completion of the return clearing mentioned earlier
Electronic fund transfer system
There are various types of electronic clearing systems functioning in the retail payments area in the country. Some of them are ECS, NEFT etc.
- 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 47 centers across India operated by RBI at places where it manages the clearing houses and by SBI and its associates in other centers. 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
- National Electronic Funds Transfer (NEFT) system is a nationwide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch. This is typically for individual / single payments. The system uses the concept of centralized accounting system and the bank’s account that is sending or receiving the funds transfer instructions, gets operated at one center, viz. Mumbai only. The individual branches participating in NEFT could be located anywhere across the country. The beneficiary gets the credit on the same Day or the next Day depending on the time of settlement. NEFT operates on a deferred net settlement (DNS) basis which settles transactions in batches. Presently it is settled in six batches the last one being 1600 hrs. on a weekday and 3 batches with the last one being 1200hrs on a Saturday. To participate in NEFT the participating banks branch needs to have IFSC code
Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify the bank-branches in India. This is 11 digit code with first 4 characters representing the banks code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR code has 9 digits to identify the bank-branch.
Large Value Payments
There are a few large value payment systems functioning in the country. These are the Inter-Bank Cheques Clearing Systems (the Inter-bank Clearing), the High Value Cheques Clearing System (the High Value Clearing), the Government Securities Clearing System (the G-Sec Clearing), the Foreign Exchange Clearing System (the Forex Clearing) and the Real Time Gross Settlement (RTGS) System. All these systems except the High Value Clearings are electronic based systems. These mostly relate to interbank / inter-financial institutional transactions except the High Value Clearing where high value customer cheques are cleared.
The Inter-bank Clearing functions in 7 places and the High Value Clearing in 15 places – both are managed by the Reserve Bank. The G-Sec Clearing and the Forex Clearing are managed by the Clearing Corporation of India Limited (CCIL). The RTGS System is operated by the Reserve Bank. All these are deemed to be Systemically Important Payment Systems (SIPS) and therefore the Reserve Bank has, in line with the international best practices in this regard, moved them (except High Value Clearings) to either secure and guaranteed systems or the RTGS System.
- Real Time Gross Settlement(RTGS) is a large value funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers on a “real time” and on “gross” basis. The system effects final settlement of interbank funds transfers on a continuous, transaction- by-transaction basis throughout the processing day(RTGS business hours). The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. On a typical day, RTGS handles about 14000 transactions a day for an approximate value of Rs.1,50,000 crore
The remitting customer has to furnish the following information to a bank for effecting a RTGS/NEFT remittance:
1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC code of the receiving branch
While RTGS remittance would be credited to a beneficiary’s account by maximum time lag of two hours, NEFT transaction depending on the timing of the transfer will be transferred the same day or the next day and in both the cases when the transfer has not happened the money would be returned to payer’s account
- Systemically Important Payment Systems (SIPS) – The Committee on Payment and Settlement Systems (CPSS) of Bank for International Settlements (BIS) serves as a forum for central banks to monitor and analyze developments in domestic payment, clearing and settlement systems as well as in cross-border and multicurrency settlement schemes. This committee published core principles of Systemically Important Payment Systems (SIPS). They emphasize the importance of “systemically important” payment systems. If such systems are insufficiently protected against risk, disruption within them could trigger or transmit further disruptions amongst participants or systemic disruptions in the financial area more widely. Systemic importance is determined mainly by the size or nature of the individual payments or their aggregate value. Systems handling specifically large-value payments – mostly interbank transactions – would normally be considered systemically important