We have discussed about Indian Financial Network (INFINET), a high-tech communication facility established by RBI for the Indian Banking Sector. There can be no better measure of success of the INFINET than the facility for quick funds transfer. The Reserve Bank of India has, over the last few years, developed many new products for the benefit of banks which are all aimed at ultimately improving customer service and systemic efficiency. One of this – the Electronic Clearing Service (ECS) – is aimed at effecting electronically, repetitive credits or debits for a large population of customers spread across a large number of branches of many banks.
ECS (Credit Clearing)
This is a new method of payment whereby the institutions having to make a large number of payments (such as interest / dividend) can directly deposit the amount into the bank accounts of the share-holders/ depositors/ investors without having to issue paper instruments.
Bulk and repetitive payments like interest/dividend are mostly paper based involving printing of warrants (in costly MICR format) , dispatching them by post (most often by Regd. post) and reconciliation thereof after payment by the agency banks. The difficulties are-
- It requires an expensive administrative machinery for printing, dispatch and reconciliation<
- Bunching of a large number of instruments in clearing results in operational bottlenecks and pressures on the cheque processing system
- Chances of loss of instruments in transit and their fraudulent encashment
- The customer has also to keep track of the receipt/non-receipt of the instrument and take efforts in depositing the instrument to the bank on receipt of the same;
- Banks find processing of such a large volume of instruments not only error prone and monotonous, but also a strain on the cheque clearing system.
How does ECS (Credit Clearing ) work ?
- Step 1 : The corporate body institution (called “User” ) which has to make payments to a large number of customers/investors would prepare the payment data on a magnetic media (i.e., tape or floppy) and submit the same to its banker (Sponsor Bank).
- Step 2 : The Sponsor Bank would present the payment data to the local Bankers’ Clearing House (managed by Reserve Bank of India at 15 centres and by State Bank of India or Associate banks at other centres) authorising the Manager of the Clearing House to debit the Sponsor Bank’s account and credit the accounts (Destination Bank) of the banks where the beneficiaries of the transactions maintain their accounts.
- Step 3 : On receiving this authorisation, the Clearing House will process the data and work out an inter-bank funds settlement.
- Step 4 : The Clearing House will furnish to the service branches of the destination banks branch-wise credit reports indicating the beneficiary details such as the names of the branches where the accounts are maintained, the names of the beneficiaries, account type, account numbers and the respective amounts.
- Step 5 : The service branches will in turn pass on the advices to the concerned branches of their bank, which will credit the beneficiaries’ accounts on the appointed date.
How does this Scheme benefit a corporate body / institution?
- Savings in administrative cost presently being incurred for printing of paper instruments in MICR format and dispatching them by Registered Post.
- Loss of instruments in transit or fraudulent encashment thereof totally eliminated.
- Reconciliation of transactions is made automatic. By the time the ECS cycle is completed, the user institution gets an electronic data file from its bank with the date of payment and banker’s confirmation thereon.
- Cash management becomes easier as arrangement for funds is required to be made only on the specified date.
- Ensuring better customer/investor service.
- Paying the way the best companies in the world pay to their share holders/ investors, customers
How does the Scheme benefit the beneficiary customer ?
- Payment on the due date
- Effortless receipt – No need for visiting the bank for depositing the dividend/interest warrant.
- Loss of instrument in transit or fraudulent encashment thereof and consequent correspondence with the company are totally eliminated
ECS (Debit Clearing)
The Reserve Bank of India has introduced the Electronic Clearing Service(Debit) scheme to provide faster method of effecting periodic and repetitive payments by ‘direct debit’ to customers’ accounts(duly authorised) thereby minimising paper transactions and increasing customer satisfaction. Electronic Clearing Service (Debit) envisages “a large number of debits and one credit” in the case of collection of electricity bills, telephone bills, loan installments, insurance premia, Club fees, etc by the Utility Service Providers.
As per the existing system for collection of electricity bills and telephone bills, the customers/subscribers are required to go to the collection centres /designated banks and stand in long queues for payment of bills/dues. There would not be any cash transaction or payment through cheques in the new system. There is an overall limit of Rs.5,00,000 per transaction. Levy of service charges by both sponsoring bank and destination bank is now left entirely to the discretion of respective banks. A sum of Rs.0.50 p. only is collected by NCC, RBI towards Clearing House charges. Utility service providers like MTNL, Telephone/Mobile companies, Telecom Departments, State Electricity Boards, Banks (for collection of credit cards dues) LIC, Housing Finance Companies, Intermediaries and Clubs etc are making use of ECS(Debit) Clearing system.
How does ECS(Debit) work?
- Utility Companies, banks/institutions receiving periodic/repetitive payments towards electricity bills/telephone bills/loan installments/insurance premia initially collect mandates from their customers / subscribers for collection of amounts due from them by direct debit to their accounts with banks. The mandate provides details such as the name, account number, name of bank/branch etc. duly certified by the bank concerned.
- Based on the details furnished in the mandates, the user company prepares transaction data on electronic media and submits the encrypted data to the local Clearing House, through its Sponsor bank.
- After due validation of the data, the local clearing house processes the same and arrives at the inter-bank settlement as also generates bank-wise/branch-wise reports(hard copies)
- NCC debits the destination banks’ accounts with clearing house and simultaneously affords a consolidated credit to the sponsor bank’s account and furnishes the bank-wise and branch-wise reports to the service branches of destination banks.
- Service branches forward the branch-wise reports to the respective branches for debiting the accounts of customers with the indicated amounts.
Benefits under ECS(Debit)
- Faster Collection of bills by the companies and better cash management by them
- eliminates the need to go to the collection centres/banks by the customers and no need to stand in long ‘Q’s for payment
- automatic debiting to the accounts once the mandates are given by the customers, to that effect cuts down the procedural delay