Page 33 - Banking Finance March 2021

ARTICLE

manual clearing system to a Magnetic Ink Character of time, various systems as discussed below have come into
Recognition (MICR) clearing systems in mid 1980s which existence to meet the remittance requirements of different
brought in a great level of automation in cheque clearing segments of users.
process alongwith standardising the cheque in terms of its
physical dimensions. Electronic Funds Transfer (EFT) Systems:
The electronic funds transfer (EFT) system for retail segment
After nearly twenty odd years of MICR clearing existence,
introduced in the late 1990s enabled an account holder of
the cheque truncation system (CTS) was introduced first in
a bank to electronically transfer funds to another account
New Delhi in 2008 and then all the 66 MICR centres were
holder with any other participating bank. This system was
subsumed into three grid-CTS systems. With this
then available across 15 major centers in the country. The
transformation a very large share of cheque clearing in the system is no longer available for use by the general public,
country started taking place on T+1 basis akin as if they were for whose benefit a feature-rich and more efficient system,
being cleared as 'local' cheques. Standardisation of cheque which is the National Electronic Funds Transfer (NEFT)
with features of built-in fraud prevention measures have also system as it is popularly known is now in place. Though NEFT
been brought in the form of CTS-2010 cheque standards.
began its journey a decade ago as a local EFT system, it
expanded to cover large areas and is a pan-India system
At present the use of paper-based instruments like cheques,
today.
drafts, etc accounts for nearly 60% of the volume of total
non-cash transactions in the country which in value terms
NEFT was made available across a longer time window and
comes out to be around 11%. This share has been steadily it provided for batch settlements at hourly intervals, thus
decreasing over a period of time with the electronic mode
enabling near real-time transfer of funds. This System later
gaining popularity. Cheque clearing which was made efficient incorporated some unique features like accepting cash from
through MICR clearing however had an inherent issue. customers for originating NEFT transfer transactions,
Settlements through cheques were cumbersome and time facilitating NEFT transfer transactions without any minimum
consuming especially when they were being used for bulk or maximum amount limitations, initiating one-way transfers
and repetitive payments such as collection of utility to Nepal, receiving confirmation of the date and time of
payments, payment of dividends and the like.
credit to the account of the beneficiaries.
To address the growing need and also to minimise the use Apart from NEFT, the Immediate Payment Service (IMPS)
of cheques for such payments, the Reserve Bank introduced and Real Time Gross Settlement System (RTGS) that
the ECS (Credit) scheme during the 1990s which became a facilitate funds transfer requirements of users were made
popular tool to handle bulk and repetitive payment operational. RTGS was introduced in 2004 and this system
requirements like salary, interest, dividend payments of settles all inter-bank payments and customer transactions
corporates and institutions. ECS (Credit) facilitated customer on real time basis. Whereas IMPS is a 24x7 platform for
accounts to be credited on a specified value date and is immediate funds transfer system, the RTGS essentially
made available at all major cities in the country. ECS in itself involves a larger Financial Market Infrastructure which
has undergone many changes and reforms from being a processes large payments including customer payment
local system to a regional system and then a national level transaction where value is above Rs. 2 lakh.
system.
With the fast improvements in IT systems of banks and their
These changes have been facilitated by the adoption of Core core banking systems, the smooth integration of various
Banking System in banks which brought in straight-through delivery channels into banking system has been made
processing of payments. Efficiency has been further possible. The banking facilities including for payment
improved with the operationalization of the National purposes thus are now easily available in online channel. On
Automated Clearing House (NACH) by National Payments the one hand, all these changes have been taking place from
Corporation of India (NPCI). NACH is a pan-India system that the perspective of customer-initiated transactions, a whole
is used for processing bulk and repetitive payments and the set of changes have also been introduced from the
ECS is gradually being subsumed into NACH. Over a period perspective of government payments.

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