The Electronic Clearing Service in India

8/4/2019 The Electronic Clearing Service in India

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The Electronic Clearing Service (ECS) in India

We have discussed about Indian Financial Network (INFINET), a high-tech communication facilityestablished by RBI for the Indian Banking Sector. There can be no better measure of success of theINFINET 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 improvingcustomer service and systemic efficiency. One of this – the Electronic Clearing Service (ECS) – is aimedat effecting electronically, repetitive credits or debits for a large population of customers spread across alarge 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 andpressures 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 effortsin 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 andmonotonous, 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 largenumber of customers/investors would prepare the payment data on a magnetic media (i.e., tapeor 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 banksat other centres) authorising the Manager of the Clearing House to debit the Sponsor Bank’saccount and credit the accounts (Destination Bank) of the banks where the beneficiaries of thetransactions maintain their accounts.

• Step 3 : On receiving this authorisation, the Clearing House will process the data and work out aninter-bank funds settlement.

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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 theaccounts are maintained, the names of the beneficiaries, account type, account numbers and therespective 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 MICRformat 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’sconfirmation thereon.

• Cash management becomes easier as arrangement for funds is required to be made only on thespecified 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 providefaster method of effecting periodic and repetitive payments by ‘direct debit’ to customers’ accounts (dulyauthorized) thereby minimizing paper transactions and increasing customer satisfaction. ElectronicClearing 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 ServiceProviders.

As per the existing system for collection of electricity bills and telephone bills, the customers/subscribersare required to go to the collection centers /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 bankand destination bank is now left entirely to the discretion of respective banks. A sum of Rs.0.50 p. only iscollected 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 electricitybills/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 onelectronic 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 theinter-bank settlement as also generates bank-wise/branch-wise reports(hard copies)



• NCC debits the destination banks’ accounts with clearing house and simultaneously affords aconsolidated credit to the sponsor bank’s account and furnishes the bank-wise and branch-wisereports to the service branches of destination banks.

• Service branches forward the branch-wise reports to the respective branches for debiting theaccounts 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 centers / banks by the customers and no need to standin long ‘Q’s for payment

• automatic debiting to the accounts once the mandates are given by the customers, to that effectcuts down the procedural delay

Documents

The Electronic Clearing Service in India