Payment and settlement systems in India
India has two funds settlement systems: the Real Time Gross Settlement systen (RTGS) and the National Electronic Fund Transfer system (NEFT).
Real Time Gross Settlement
The Reserve Bank of India (India's Central Bank) maintains this payment network, which is available on weekdays only from 10:00am to 1:30pm. Fees for RTGS vary from bank to bank. Both the remitting and receiving must have Core Banking in place to enter into RTGS transactions. Core Banking enabled banks and branches have assigned RTGS 11-character alphanumeric codes, which are required for transactions along with recipient's account number.
RTGS is a large value (minimum value of transaction should be Rs.1,00,000/- funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system effects final settlement of interbank funds transfers on a continuous, transaction- by-transaction basis throughout the processing day. Customers can access the RTGS facility between 9.00 am to 4.30 pm on week days and 9.00am to 12.00 noon on Saturday) [1].
The statistics of transactions for the month of March 2004 shows that in the interbank market transactions involving 45000 instruments and aggregating Rs 1,79,000 crore were settled. High value instruments (3,17,000) settlement aggregated Rs 2,74,000 crore. However, settlement of MICR instruments (145 lakhs) accounted for only Rs 54,000 crore. RTGS will eliminate settlement risk in the case of interbank and high value transactions.
The system went ‘live’ on March 26 with State Bank of India, HDFC Bank, Standard Chartered Bank, and Saraswat Co-operative bank. The Reserve Bank of India expects 120 scheduled commercial banks and primary dealers to become part of the real time gross settlement system (RTGS) by June 2004. ICICI Bank, IndusInd Bank, BNP Paribas, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank and Union Bank of India are likely to join shortly.
Banks could use balances maintained under the cash reserve ratio (CRR) instead of the intra-day liquidity (IDL) to be supplied by the central bank for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI has fixed the IDL limit for banks to three times their net owned fund (NOF).
The IDL will be charged at Rs 25 per transaction entered into by the bank on the RTGS platform. The marketable securities and treasury bills will have to be placed as collateral with a margin of five per cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day.
On 11th May 2004, 19 more banks joined RBI's RTGS bringing the total to 23. This include, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Overseas Bank, Central Bank of India, Dena Bank, BNP Baripas, IndusInd Bank, ING Vysya Bank. Out of the total 23 banks, the early batch of four banks State Bank of India, HDFC Bank, Standard Chartered Bank and Saraswat Bank have already embarked upon customer transactions.
National Electronic Fund Transfer
National Electronic Fund Transfer (NEFT) is an online system for transferring funds of Indian financial institution (especially banks). This facility is used mainly to transfer funds below Rs 100,000.
The Reserve Bank of India has instructed banks that they should not use RTGS for amounts below Rs 1 lakh. The new rule came into effect on January 1, 2007. For small transactions, RBI has asked banks to offer National Electronic Fund Transfer (NEFT) which provided T+0 and T+1 settlement system (depending on the time a customer gives instruction to the bank for transferring the fund).
Comparision
The key difference between RTGS and NEFT is that while RTGS in on gross settlement basis, NEFT is on net settlement basis. Besides, RTGS facilitates real-time ("push") transfer, while NEFT involves four settlement cycles a day 9.30 am, 10.30 am, 12 pm and 4 pm. Thus if a customer has given instruction to its bank to transfer money through NEFT to another bank in the morning hours, money would be transferred the same day, but if the instruction is given later during the day, money would be transferred next day.
However, RTGS facility is available in over 25000 branches, while NEFT is available in 51,219 (as of 25 October 2008)[2] branches of 88 banks. Besides, while all commercial banks have put in place the RTGS facility, only 43 banks have purchased the software required to facilitate NEFT based transaction. RBI has instructed banks that all branches which are RTGS enabled should also provide NEFT by December 2006. Sources said that RBI also had planned to discontinued EFT-Electronic funds Transfer. This is because EFT is available only in 15 locations where RBI has its clearing house.
The minimum transaction value for RTGS is Rs.1,00,000 [3], whereas there is no minimum value for NEFT. [4]
History
The NEFT system went live with effective from November 21, 2005. NEFT was set to cover all banks which were participating in the Special Electronic Funds Transfer (SEFT) clearing. NEFT was made on the Structured Financial Messaging Solution (SFMS) platform and is Public Key Infrastructure (PKI) enabled.
RBI made it mandatory to migrate all the SEFT banks to NEFT by December 15, 2005. As NEFT would be serving all the bank customers using SEFT, the SEFT system was discontinued from January 1, 2006. Banks which fulfill the eligibility criteria for participation in RTGS were invited by RBI to participate in the NEFT. [5]
External links
- FAQs on the NEFT System on the RBI Website
- FAQs on the RTGS System on the RBI Website
- Using the RTGS System in India
- Simple FAQs on the NEFT System