Basic Economic Series part 5 (Payment and Settlement Systems)

Traditional Payment and settlement systems: Cheque is one of the oldest form of payment and settlement system. It orders bank to credit a specific amount to drawer’s (the person for whom the payment has to be made) account from drawee’s account. Validity of cheque is 3 months. Ideal time to clear cheque by clearing house is 2-3 days. Cheque clearing process has evolved a lot since the invention of cheque. One of the notable advancement in Cheque clearing process is Magnetic Ink Character Recognition(MICR) which is a code written in the bottom of the cheque to automate the Cheque clearing process.  In India, MICR code has 5 distinct fields. It includes Cheque serial number(6 digits), Bank branch code number(9 digits), Account number(6 digits), Transaction code(2 digits) and amount(13 digits).

Demand Draft(DD) is a prepaid negotiable instrument.It is used to credit amount to a person’s account by debiting amount in any branch of the drawer’s bank. Drawer can get the amount debited to his account by giving demand draft in his branch. Drawer cannot get the money directly by giving DD in his branch but will get the money in his account.

Banker’s Cheque or Payment order is similar to DD in all ways except Payment order orders bank to pay amount directly to drawer.While DD orders bank to debit amount to drawer’s bank account.

Modern Payment and Settlement System: Cheque Truncation System speeds up the traditional cheque clearing process by sending the scanned copy of the cheque to the drawee’s branch. Traditional cheque clearing process includes sending cheque manually to the drawee’s branch. This procedure wastes lot of time. While sending cheque digitally can save lot of time. Ideal time to process cheque in Cheque Truncation process is 1-2 days.

Electronic Clearing System(ECS): ECS is classified into two types: ECS (debit) and ECS (credit). ECS (debit) is used to debit money to multiple persons. ECS debit can be used to debit dividends or interest or salary electronically. ECS(Credit) is used to credit money to a company automatically such as paying telephone bill, loan interest.

National Electronic Fund Transfer or Electronic Fund Transfer(NEFT/EFT): This is a electronic system in which any person may request his bank to transfer money to another person another branch of same bank. EFT/NEFT may take one day for transaction.

Real Time Gross Settlement (RTGS): This is the fastest available electronic method to transfer money within any bank in India.Maximum time for RTGS transaction is 30 minutes.Minimum fund of 1 lakh needs to be transacted via RTGS. FOREX, Government security are processed via RTGS.

Mobile Banking: It is the method of transaction in which mobile devices are used to transfer funds from one account to another.Usually Internet are used to Transfer funds. SMS based mobile banking enables to transact funds via SMS. Unstructured Supplementary Service Data (USSD) based mobile banking enables to transact funds in real time in basic mobiles. USSD is the same method that is used in mobile to view mobile’s balance by dialing particular USSD code such as *123#. National Payment Corporation of India(NPCI) launches mobile banking for all banks with Rupay Debit card. They can transfer funds via USSD by dialing *99#. ICCI recently launched Card less transfer. Only mobile number is needed to transact funds to any person in India. Person who needs to transfer account can send a code to recipient mobile phone. Recipient can go to the nearest ATM and debit the money by entering the necessary details such as name of the sender and PIN.


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