a study on payment and settlement system
TRANSCRIPT
ABSTRACT
The payment and settlement system constitutes the backbone of the financial sector .It facilitate the movement of money in the economy.
In payment and settlement system a study is made on components of payment system which includes both retail and large value systems. In
retail it is both paper based and electronic based instrument. The features and process of Cheque, Cheque truncation system, credit card, ECS,
NFET, and RTGS are explained. The efficient functioning of the payment system makes a key contribution to overall economic performance
by allowing safe and timely completion of financial transactions. Recognizing the importance of payments systems to the development the
economy, Reserve Bank of India, has taken number of steps during the last few years to build a robust payments system. Then the five year
annual payment report of BNP are compared and visualize the growth of electronic payment in India. From the analysis, to suggest the
initiatives for the adoption of new payment modes.
In International Trade a study is made on methods of payment (letters of credit, documentary collections, cash in advance), methods of funds
remittance (checks, banker’s draft, SWIFT transfer), different types of letters of credit that are available to use for international business
transactions (confirmed/ unconfirmed, transferable, standby), the risks and opportunities for each type of letter of credit. types of payment
(sight, deferred, commercial invoices, transport documents and documents relating to services), documentation and requirements (e.g.,
commercial invoices, transport documents and documents relating to services). To find Changes in International Trade Practices.
1. Introduction
Payment Systems are the key component of any financial system. They facilitate the movement of money in the economy. The
efficient functioning of the payment system makes a key contribution to overall economic performance by allowing safe and timely
completion of financial transactions. Payment Systems also provides the conduit for effective transmission of monetary policy.
World over, the payment systems segment of the financial system have been witnessing rapid changes due to the developments in
Information and communication technologies.
Recognizing the importance of payments systems to the development the economy, Reserve Bank of India, has taken number of steps
during the last few years to build a robust payments system. The steps taken include building the necessary payments infrastructure and
develop a strong institutional framework for the payment and settlement systems in the country. Developments in payment systems for
increasing its efficiency are a continuous process. In the context of progressive integration of financial markets, both domestically and cross
border, and the fast-paced changes in technology and institutional infrastructure, there is a need for annual review of payment and settlement
systems. The parameters of the reviews would be based on the timelines of customer service, cost of operation, service charges and overall
impact on the financial system.
This project covers the developments in retail and large payment systems during the last few years.
Objective
1. To make a study in various Indian payment system like MICR, ECS / NECS, NEFT and RTGS.
2. To analyze and compare the FIVE year annual payment report of BNP and to visualize the growth of electronic payment in India.
3. From the analysis, to suggest the initiatives for the adoption of new payment modes.
4. To ensure that all the payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and
authorized.
5. To learn the future trends in payment and settlement systems.
6. To learn the most appropriate methods and terms of payment and required documentation to ensure timely payment for the sale of
goods and/or services.
COMPONENT OF INDIAN PAYMENT SYSTEM:
COMPONENT OF INDIAN PAYMENT SYSTEM
Retail Systems Large Value Systems
Paper-based Electronic
MICRCTS ECS NEFT CARD
Electronic
RTGS
Retail Payment Systems
Retail payments are transactions which can typically be classified as, (i) Person to Person, (ii) Person to Business - (eg. bill
payments), (iii) Currency withdrawals( ATM/debit cards) and (iv) Advances (credit cards). These payments generally refer to obligations
arising from retail commercial and financial transactions which can be either one-time person to person (or business) payments or recurring
bill payments (or domestic remittances from person to persons) or payments to Governments. These transactions need not be of small value
alone, but are generally of low average transaction value but high transaction volumes. They also involve a much broader range of payment
instruments and transaction systems.
The instruments used to effect these payments differ based on the requirements. They can be currency, paper based instruments like Cheque
and demand drafts, electronic message based systems, cards based systems and off-late Short Messaging System of mobile phone. These
instruments (excluding currency) along with the systems and procedures of clearing and settlement arrangements for these instruments
constitute the retail payment systems.
Consumers generally use retail payments in one of the following ways:
• Purchase of Goods and Services—Payment at the time the goods or services are purchased. It includes attended (i.e., traditional retailers),
unattended (e.g., vending machines), and remote purchases (e.g., Internet and telephone purchases). A variety of payment instruments may be
used, including cash, check, credit, or debit cards.
• Bill Payment—Payment for previously acquired or contracted goods and services. Payment may be recurring or nonrecurring. Recurring bill
payments include items such as utility, telephone, and mortgage/rent bills. Nonrecurring bills include items such as medical bills.
• P2P Payments—Payments from one consumer to another. The vast majority of consumer-to-consumer payments are conducted with checks
and cash, with some transactions conducted using electronic P2P payment systems.
• Cash Withdrawals and Advances—Use of retail payment instruments to obtain cash from merchants or automated teller machines (ATMs).
For example, consumers can use a credit card to obtain a cash advance through an ATM or an ATM card to withdraw cash from an existing
demand deposit or transaction account. Consumers can also use personal identification number (PIN)-based debit cards to withdraw cash at an
ATM or receive cash-back at some point-of-sale (POS) locations.
The most popular means of retail payment instrument is, the Currency which is the legal tender. The main advantage of currency vis-
à-vis other payments instrument is – its universal acceptance, immediate final settlement and relatively lowest cost to the
payee for upfront payment (cost would be involved when the payment has to made at a particular location). The major disadvantage of
currency is – carrying of large quantities of currency to make payments would involve transportation issues and is also a security risk.
Further, holding large quantities of currency does not fetch any return - the interest foregone because of currency holding is a cost to the
holder of currency. While currency as a payment instrument would have no perceptible cost to the payer, the processing of this instrument
involves a cost to the society. Next to currency the other paper based payment instruments viz. cheques have been a
Common mode of payment instrument for the business. The general public prefers this mode mainly for payment of utility bills etc.
The developments in technology resulted in numerous innovations in the payment system area. These innovations resulted in systems
which are more efficient in terms of the time and effort needed to process payment instructions. The innovations started with processing of
payment instructions stored in electronic formats in their storage media's, which were manually transported to processing centers (clearing
houses) which further graduated to the transmission of electronic messages insecure formats through secured communication channels. These
innovations have resulted in the payment instruments like – electronic funds transfer systems and card based systems; the latest innovation
being mobile phone based payment systems.
Retail payment instruments
Cheque:
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand. A Cheque is a document (usually a piece of paper) that orders
a payment of money. The person writing the cheque, the drawer, usually has a chequing account where their money is
deposited. The drawer writes the various details including the money amount, date, and a payee on the cheque, and
endorse it, ordering their bank, known as the drawee, to pay this person or company the amount of money
stated.Cheques as payment instrument is most popular mode of payment in the country.
Specimen of a Cheque
Parts of a cheque
Drawer, the person or entity who makes the cheqe
Payee, the recipient of the money
Drawee, the bank or other financial institution where the cheque can be presented for payment
Amount, the currency amount
Features of a cheque
i. A Cheque must be in writing and endorsed.
ii. It contains an unconditional order.
iii. It is issued on a specified banker only.
iv. The amount specified is always certain and must be clearly mentioned both in figures and words.
v. The payee is always certain.
vi. It is always payable on demand.
vii. The cheque must bear a date otherwise it is invalid and shall not be honored by the bank.
Types of Cheque
a) Open cheque
b) Crossed cheque.
c) Bearer cheque
d) Order cheque
Open cheque: An open cheque is a cheque which is payable at the counter of the drawee bank on presentation of the cheque.
Receive its payment over the counter at the bank.
Deposit the Cheque in his own account
Pass it to some one else by signing on the back of a cheque.
Crossed cheque:
A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures
security to the holder of the cheque as only the collecting banker credits the proceeds to the account of the payee of the cheque.
When two parallel transverse lines, with or without any words, are drawn generally, on the left hand top corner of the cheque. A crossed
cheque does not effect the negotiability of the instrument. It can be negotiated the same way as any other negotiable instrument.
Types of Crossing There are two types of negotiable instruments:-
• General Crossing
• Special Crossing
Cheque crossed generally
Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse
lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed generally.
Cheque crossed specially
Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that addition shall
be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.
Account Payee or Restrictive Crossing
Not Negotiable Crossing
Account Payee or Restrictive Crossing
This crossing can be made in both general and special crossing by adding the words Account Payee. In this type of crossing the collecting
banker is supposed to credit the amount of the cheque to the account of the payee only. The cheque remains transferable but the liability of the
collecting banker is enhanced in case he credits the proceeds of the cheque so crossed to any person other than the payee and the indorsement
in favour of the last payee is proved forged.The collecting banker must act like a blood hound and make proper enquiries as to the title of the
last indorsee from the original payee named in the cheque before collecting an 'Account Payee' cheque in his account.
Not Negotiable Crossing
The words 'Not Negotiable' can be added to General as well as Special crossing and a crossing with these words is known as Not Negotiable
crossing.The effect of such a crossing is that it removes the most important characteristic of a negotiable instrument i.e. the transferee of such
a crossed cheque cannot get a better title than that of the transferor ( cannot become a holder in due course ) and cannot covey a better title to
his own transferee, though the instrument remains transferable.
Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer
cheque can be transferred by mere delivery and requires no endorsement.
Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ may be cut out or
cancelled and the word ‘order’ may be written. The payee can transfer an order cheque to someone else by signing his or her name on the
back of it.
cheques may not be valid if it is
Ante-dated cheques: - cheques which have been written by the maker, and dated at some point in the past. For example, a cheque
issued on 20th May 2003 may bear a date 5th May 2003.
Stale Cheque: - cheque is typically valid for six months after the date of issue, after which it is a stale-dated cheque.
Mutilated Cheque: - In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a
mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a
cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
Post-dated Cheque: cheque which has been written by the drawer for a date in the future. For example, if a cheque presented on
8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003.
MICR Cheque:
MICR stands for Magnetic Ink Character Recognition used primarily by the banking industry to facilitate the processing of cheques. In
MICR technology the information is printed on the instrument with a special type of ink which is made up of magnetic material. On insertion
of the instrument in the machine, the printed information is read by the machine. MICR system is beneficial as it minimizes chances of error,
clearing of cheques becomes easy and transfer of funds becomes faster in order to facilitate operations.
This process involving the following steps:
a. Standardization of encoding information at the bottom.
b. Encoding in magnetic ink specific details on the cheque itself, to facilitate mechanical sorting. The code line contains the following
information :
i. First six numbers indicate cheque number
ii. Next three numbers indicate city code
iii. Next three numbers indicate bank code
iv. Next three numbers indicate branch code
v. After some space there is number for transaction code i.e. whether the transaction relates to a saving or a current
account
c. Selections and acquisition of different types of equipments, necessary in the clearing-house and banks for implementing the MICR
technology.
d. The magnetized portion when put under MICR equipment allows instant readability and identification.
Transaction Code No.
Nature of transaction represented by the code
Definitions
01 to 09 Codes reserved for clearing house control documents representing debit instruments
10 Savings Bank Account Cheque
11 Current Account cheque
12 Banker's cheque
A cheque issued by a bank on itself used for making own payments. Also issued in lieu of demand drafts on the same city.
13 Cash credit account chequeCheques issued to a running
loan account
14 Dividend warrant
15 Traveler’s cheque
16 Demand Draft
17Cheques which will be issued inlieu of existing payment order
A prepaid instrument issued by a bank on to itself, similar to banker's cheque issued
in lieu of a draft on the same city.
18 Gift cheque
19 Interest warrant
20 State government transactions
21 Central Government transactions
22 Railway transactions
23 Posts & Telegraphs transactions
24 Defense transactions
25 Telecommunication transactions
26 Reserved
27Departmentalized ministries (UMALO)
transactions
28 Refund warrant
29 At Par Current Account ChequesMulti-city cheques pertaining to Current
account
30 At par Cash Credit Account ChequesMulti-city Cash Credit Account instruments
payable at all branches of the bank
31 Savings Bank at par cheque
Savings Bank Account cheques payable at all branches of the bank i.e multi-city
cheques
40Credit transactions to NRE Accounts in
Indian Rupees
Credit transactions to Non- Resident External Accounts maintained by Non-
Resident Indians
32 to 48 Reserved
49 Income Tax Refund OrdersIncome Tax Refund Orders payable at
banks other than Reserve Bank of India.
Process flow:
Clearing and settlement of cheques
Local Cheques:
All cheques and other Negotiable Instruments payable locally would be presented through the clearing system prevailing at the centre.
Cheques deposited at branch counters and in collection boxes within the branch premises before the specified cut-off time will be presented
for clearing on the following day. Bank would give credit to the customer account on the same day of clearing settlement. Withdrawal of
amounts so credited would be permitted after reckoning the cheque return schedule of the clearing house.
Bank branches situated at centres where no clearing house exists, would present local cheques on drawee banks across the counter and
proceeds would be credited, at the earliest, on realisation
Outstation Cheques:
B receives cheque, deposits in Y bank.
Where heMaintain account
A draws cheque on X bank to B.
Y bank sends the cheque to X bank
for realization
X bank honor cheque on
receipt. Pays to Y bank
Maximum timeframe for collection of Cheque drawn on state capitals/major cities/other locations are 7/10/14 days respectively. If
there is any delay in collection beyond this period, bank are entitled to pay interest at the rate specified in the Cheque Collection Policy of the
bank. In case the rate is not specified in the Cheque Collection Policy, they are entitled to receive interest rate on Fixed Deposits for the
corresponding maturity. Banks' Cheque collection policy also indicates the limit up to which outstation cheques are given immediate credit.
Working” days shall not include Bank Holidays and days when clearing house in not operational.
The clearing and settlement of cheques drawn on different banks require the coming together of the banks in that area for transfer of
instruments and the final settlement of funds. This process is facilitated by the clearing houses at these centers. Currently, 1064 clearing
houses are operational in the country. Of these, at 59 centers the clearing and settlement process has been mechanized by the introduction of
“Magnetic Ink Character Recognition (MICR)” based sorter machines. Eighty percent of the total cheque clearing volume and value in the
country are accounted for by these centers. To further bring in efficiency and automating the settlement obligation Magnetic Media Based
Clearing System (MMBCS) is being implemented at centers with more than 15 bank branches, where, currently the process is being carried
out manually. At the remaining centers where the volumes of cheques are low, manual clearing continues. The clearing and settlement cycle
in the country is two days – one Day-1 the cheques are presented at the clearing house and Day-2 the funds settlement and return clearing are
accounted for.
Electronic Retail Payment Instruments:
Cheque Truncation System (CTS):
Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation
eliminates cumbersome physical presentation of the cheque and saves time and processing costs.
The process of removing the paper check from its processing flow is called truncation. In truncation, both sides of the paper check are
scanned to produce digital images. The checks are sorted by machine according to the routing/transit (RT) number as presented by the
magnetic ink character recognition (MICR) line, and scanned to produce a digital image. A batch file is generated and sent to the Reserve
Bank for settlement or image replacement. If a substitute check is needed, the transmitting bank is responsible for the cost of generating and
transporting it from the presentment point to the Reserve Bank or other corresponding bank.
The electronic Information can be exchanged with other banks for clearing purpose.
Legal recognition : By amending Sec 6 of NI Act, the physical image of a truncated cheque and electronic cheques, have been
recognized equal to a paper cheque.
Method for truncation:
The truncation can be done by using image processing.
Imparting uniqueness of the cheque to the image: Image carries digital signature, and physical endorsement of the presenting bank, in a
prescribed manner.
Process flow
Step-1: The presenting bank captures the data & images of the cheques using their Capture System.
Step-2: The captured images and data are sent to the central clearing house (CH) for transmission to the payee/ Drawee banks. For that,
RBI provides to the banks, the Clearing House Interface (CHI) software. It enables the banks to connect and transmit data in a
secure way and with non-repudiation, to the Clearing House (CH).
Step-3: CH processes the data and arrives at the settlement figure for the banks and sends the required data to payee/drawee banks
for processing at their end.
Step-4: The drawee/payee banks use the same CHI for receiving the data and images from CH. The drawee bank Capture System processes
the inward data and images and generates the return file for unpaid instruments.
Criteria to participate in CTS:
The criteria for banks participating in CTS are:
i. Membership of the clearing house.
ii. Membership of the Indian Financial Network (INFINET) Infrastructure requirement: The infrastructure required for CTS from bank's
end are, (a) connectivity from the bank gateway to the clearing house, (b) hardware and software for the CTS applications. RBI
provides CHI and the banks have to procure other hardware and system software for the CHI and the application software for their
capture systems on their own.
Image specifications in the CTS:
The electronic images of truncated cheques is in gray scale technology. There are 3 images of the cheques i.e. front grey,
front black & white and back black & white.
The image specifications are:
Image Type: Minimum DPI Format Compression
Front Grayscale: 100 DPI JFIF JPEG
Front Black & White: 200 DPI TIFF CCITT G4
Reverse Black & White: 200 DPI TIFF CCITT G4
The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).
Security of the image and data:
The security, integrity, non-repudiation and authenticity is ensured using the Public Key Infrastructure (PKI). The CTS is
compliant to the requirement of the IT Act, 2000. The PKI standards used are in accordance with the appropriate Indian Acts and
practices of IDRBT which is the certifying authority for banks & FIs in India.
Image Replace Document (IRD)
Under CTS, after the capture of the image, the physical cheque would be warehoused with the presenting bank.
In case any connected persons require the instrument, the payee bank would issue a copy of the image, under its authentication,
which is called the Image Replacement document (IRD). It is a legally recognized replacement of the original cheque for re-presentment. The
provisions of NI act (Section 81(3) of the NI Act as amended) also permit the usage of such IRD.
Important characteristics of cheque truncation
1) Truncated is possible when the cheque enters the banking system.
2) Truncation can be done only in the clearing process, to reduce the time delay. It can be done by the banks involved or clearing
house. The drawer or holder cannot truncate a cheque.
3) The paper cheque will be replaced by the electronic image in the process of truncation.
4) The paper cheque shall be preserved by the collecting bank or the clearing house, after truncation.
5) Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one
point to another.
Net cheque
Net cheque is mode of online payment where in the money is deposited from one account to another. Net cheque dismisses the need of the
physical cheques and the money is transferred via the electronic medium.
The mechanism of this mode of online payment is simple. There is a regulatory authority that registers the users who want to transfer money
via net cheque. If want to transfer money via online payment, the requirement is that both the involved parties are registered. There are many
network protocols which offer the e commerce services of online payment. It is necessary that both the involved parties have an online
account that is associated with a bank which is recognized by that payment gateway. In this mode of online payment, when the net cheque is
deposited, the corresponding amount is debited from the giver’s account and the same amount is credited in the receiver’s account. In return,
the payment gateway used in the online payment charges some commission for providing the services. The rates depend on the amount being
exchanged.
There is a net cheque server which keeps all the information about the registered users. It is the duty of the servers to authenticate the users
when they are initiating the online payment. The servers store all the relevant information of the users.
This information includes a
Unique id of the user
His personal details
Bank account details
The digital signature and other details.
The digital signature is a form of an electronic signature. Each registered user who uses online payment has a unique signature. When the
sender sends a net cheque to the receiver, he appends his digital signature on the cheque. This signature authenticates the sender of the net
cheque. The receiver can verify the digital signature to make sure that sender of net cheque is valid and that the message is not tampered
on its way.
Online payment using net cheques provides scalability and reliability. The servers used by the net cheques are more than one. So even if one
of the servers is out of order, you can rely on the other servers. It also provides efficiency since you can be rest assured that the net cheque
system will never fail. The digital signature mechanism is implemented using the Kerberos. This ensures security.
The advantages offered by net cheque online payment are many. It is time saving. When cheque is deposited in conventional manner, it
takes at least a day for the money to get credited. In this mode of online payment, money is credited almost instantly.
Electronic Clearing Service (ECS):
The Reserve Bank of India has introduced the Electronic Clearing Service (Debit) Scheme to provide faster method of effecting
periodic and repetitive payment by direct debit to customers accounts (duly authorized) thereby minimizing paper transactions and increasing
customers satisfaction .Electronic Clearing Service (Credit) Scheme to provide institutions having to make large number of payments (such as
Interest/Dividends) can directly deposit the amount into the bank accounts of the share-holders/ depositors/ investors .
ECS is a retail payment system which facilitates bulk payments, that facilitate payments from one-to-many and receipts that
are from many-to-one. The two components of this system are ECS (credit) and ECS (Debit). This facility is now available at 67 major.
ECS-Credit System
In this 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.
The ECS user's bank is called as the sponsor bank and the ECS beneficiary account holder is called the destination account holder or
beneficiary and his bank is called the destination bank.
Working of ECS Credit system:
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 authorizing 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 authorization, 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
beneficiary’s accounts on the appointed date.
Benefits under ECS (Credit)
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 system
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) envisage “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. 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.
Working of ECS Debit system:
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.
Credit and Debit cards
Credit and Debit cards have been in use in the country for many years now. However the card base as well as the usage has picked up
only during the last five years. Nearly 2 million cards are added each month and the card base as at the closed of March 2007 was 98 millions.
Nearly all the cards have been issued by bank in affiliation with card issuing companies such as Visa, Master Card and American Express.
Many banks converted their ATM cards to debit cards to take advantage of the switching and clearing and settlement facilities offered by Visa
and Master Card. Smart Cards are relatively new and only a handful of banks have issued such cards numbering around 3 lakh cards with
outstanding value of Rs.1000 crores.
Credit and Debit cards have been in use in the country for many years now. As at the end of May 2007, banks have issued 24.13
million credit cards and 78.46 million debit cards. The growth in the card based payment systems is being closely monitored. However no
conclusive inference could be drawn on the impact of the charges being levied by banks as also the announcement in the Central Government
Budget on the levying of service tax for the transactions through the cards.
Credit card Processing
1. Customer pays by credit card
6. Principal bank sends transaction back to merchant
5. Isuing bank approves/declines transaction back to
principal bank
4. Principal bank sends request to
issuing bank
2. Merchant process credit card using the software
provided
3. Ectronically submitted to
principal bank
ENTIRE PROCESS
TAKES 5-15 SECONDS
The bank that issued the credit card to customer
The bank that undertake mermerchant account
National Electronic Funds Transfer (NEFT):
National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates individuals, firms and corporate to electronically
transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country.It is an
online system for transferring funds. This facility is used mainly to transfer funds below Rs. 2,00,000.
The Reserve Bank of India has instructed banks that they should not use NEFT for amounts above Rs 2 lakh (200 thousand). The new rule
came into effect on 15 November 2010. For small transactions, 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).
Process flow:
Step-1: An individual / firm / corporate intending to originate transfer of funds through NEFT has to provide details
1. Amount to be remitted
2. Account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC(Indian Financial Service Code) number of the receiving branch
IFSC: Indian Financial System Code (IFSC) is used in NEFT transactions. It is an alpha numeric code designed to uniquely identify the
bank-branches in India. It is an 11 digit code with first 4 characters representing the banks code, the next character reserved as control
character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch.
Step-2: The service bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre).
Step-3: The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India,
Mumbai) to be included for the next available batch.
Step-4: The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from
(debit) the service banks and give the funds to (credit) the beneficiary banks. Thereafter, bank-wise remittance messages are forwarded to the
beneficiary banks through their pooling centre (NEFT Service Centre).
Step-5: The beneficiary banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary
accounts.
Data Entry at the Sending Bank Branch
The sending bank branch shall prepare the Structured Financial Messaging system (SFMS) message as and when the applications for the
funds transfer is received and arrange to send the message to NEFT Service Centre till the cut off time for the batch.
Transmission/Submission of NEFT message to the NEFT centre
The sending Service Centre shall transmit the NEFT SFMS message to the NEFT Clearing Centre by using the communication network
designated by Reserve Bank.
Revocation of Payment Instruction
A payment instruction issued for execution shall become irrevocable when it is executed by the sending bank. Any revocation, after the
payment instruction is executed by the sending bank shall not be binding on any other party in the NEFT system.
Acknowledgement by the beneficiary bank and return in case of non-credit
No acknowledgements are envisaged under NEFT Scheme. A message which is not returned unaffected before the next settlement day is
treated to have been completed and credit afforded to the beneficiary's account by the beneficiary branch. It is, therefore, vital that unaffected
credits are re-transmitted back as return NEFT transactions in the immediate next batch itself.
Sender to be advised in case of refund
If the beneficiary specified in the sender's payment instruction fails to get payment through the NEFT system for some valid reasons, the
sender shall be informed immediately after the sending bank gets the returned NEFT. The sending bank shall also arrange to make payment to
the sender by crediting the account of the sender or otherwise placing funds at the disposal of the sender.
Beneficiary to be advised of the receipt of funds
After crediting the account of the beneficiary, the beneficiary bank shall advise the beneficiary of the funds received. The Statement of
account/Pass Book entry or any online messaging system shall indicate briefly the source of funds as well.
The NEFT system was initially designed to allow destination banks to return transactions on a T+1 basis. The traffic analysis has revealed
that a major chunk of returns are effected by banks either in the last batch of the day or in the first batch of the next day, indicating that the
transactions are processed by the destination batches only at the end of the day instead of batch-wise. In order to streamline the system and
complete the processing cycle on a near-real-time basis, the concept of return within two hours of completion of a batch has been introduced.
The B+2 return discipline would require banks to afford credit to beneficiary accounts immediately upon completion of a batch or else return
the transactions within two hours of completion of the batch settlement, if credits are unable to be afforded for any reason.
NEFT has eleven batches of settlement from 9am – 7pm on week days and five batches of settlement at 9 am-1pm batches of settlement
Saturdays.
This is a message based funds transfer system. The system provides secure one-to-one funds transfer facility for customers of banks.
Unlike its precursors the EFT system which provided settlement facility only at few centers, the NEFT facilitates national coverage, with
centralized clearing and settlement facility. Further, to provide sound legal basis to the system, the system is provided with Public Key
Infrastructure (PKI) based security system. There are eleven settlements during a day in this system, thereby facilitating same day settlement
of funds, for customers using this facility.
RTGS-Real Time Gross Transaction System:
RTGS The acronym 'RTGS' stands for Real Time Gross Settlement. The Reserve Bank of India maintains this payment network. RTGS
system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This
is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected
to any waiting period. The transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to
one basis without bunching with any other transaction. The money transfer takes place in the books of the Reserve Bank of India, the payment
is taken as final and irrevocable.
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. 2, 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 am to 4:30 pm on week days and 9 am to 12 noon on Saturday.
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 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.
Process of RTGS
The remitting customer has to furnish the following information to a bank for affecting a RTGS remittance:
1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC(Indian Financial Service Code) Number of the receiving branch
Step1: Each bank is required to have a single gateway interface called Participant Interface (PI) for RTGS system. The payment / settlement
message originates from the participant’s host system.
Step2: This message is passed on by the PI to Inter-bank Funds Transfer Processor (IFTP) acting as broker. Communication between PI and
IFTP is through RTGS only.
Step3: IFTP stores the message and in case of payment messages, constructs settlement message, containing a core subset of the information
required for settlement and routed to the RTGS system at RBI.
Step4: After receipt of this subset, RBI (the settlement agent) carries the settlement by debit and credit of the accounts of respective banks and
conveys the status to IFTP.
Step5: On receipt of this confirmation, IFTP reconstructs the message by adding back other details and sends settlement advice to both the
originating and beneficiary participant. The business information is not known to the settlement agent i.e. RBI
Payment Queues:
The system also provides for facilities to the participants to view their respective transactions held in their payment queues, cancel
such transactions and even change their priority. However, participants can only view transactions on their own payment queues. They can
not view other participants’ queues or their own pending incoming payment instructions.
MESSAGE FLOW STRUCTURES
In India, the RTGS has been implemented by RBI. It has decided to use Y shaped structure out of the four messages flow structures (V, Y, L,
and T). In this structure the following flow of instructions (it is not actual and is only for understanding the process) takes place:
MESSAGE FLOW STRUCTURES
Y- Message Flow Structure:
Each bank is required to have a single gateway interface called Participant Interface (PI) for RTGS system. The payment / settlement
message originates from the participant’s host system. This message is passed on by the PI to Inter-bank Funds Transfer Processor (IFTP)
acting as broker. Communication between PI and IFTP is through RTGS only.IFTP stores the message and in case of payment messages,
constructs settlement message, containing a core subset of the information required for settlement and routed to the RTGS system at RBI.
After receipt of this subset, RBI (the settlement agent) carries the settlement by debit and credit of the accounts of respective banks and
conveys the status to IFTP.On receipt of this confirmation; IFTP reconstructs the message by adding back other details and sends settlement
advice to both the originating and beneficiary participant. The business information is not known to the settlement agent i.e. RBI.
Under normal circumstances the beneficiary branches are expected to credit the beneficiary's account within two hours of receiving the funds
transfer message.
If the money cannot be credited for any reason, the receiving bank has to return the money to the remitting bank within 2 hours. Once the
money is received back by the remitting bank, the original debit entry in the customer's account is reversed.
Payment Queues:
The system also provides for facilities to the participants to view their respective transactions held in their payment queues, cancel
such transactions and even change their priority. However, participants can only view transactions on their own payment queues. They can
not view other participants’ queues or their own pending incoming payment instructions.
Participant’s Dedicated Settlement Account for RTGS Transactions:
A single dedicated account, the RTGS Settlement Account for each participant for outward and inward RTGS payments, is provided
by the solution, enabling easy monitoring, tracking and reconciliation of the transactions as well as more efficient liquidity management.
Each participant of the RTGS system will be required to open a dedicated settlement account for putting through its RTGS
transactions. This account will be an intra-day account in the sense that it would be operational only during the duration of the RTGS day.
The account would be funded at the start of the day (SOD) from a current account, the participant holds under the present dispensation at
DAD, Mumbai. Balances in the RTGS Settlement account at the End of Day (EOD) of the RTGS day are swept back to the Participant’s
current account and thereby zeroing the RTGS settlement account.
The system enables the participants to place standing instructions with DAD, Mumbai to fund their RTGS settlement account each
morning. They can specify an actual amount or percentage of balance to be transferred to the RTGS settlement account every day at SOD.
Participants can also specify a minimum threshold value, which must be maintained in their current account while funding their RTGS
settlement account.
The system also provides a facility to fund the RTGS settlement account during the day from the participants’ current accounts by the use of
Own Account Transfers.
FIFO processing/Transaction Priority:
Payment transactions emanating from a participant’s payment Systems gateway are processed by the RTGS system strictly in First-In-
First-Out or FIFO basis. However, to enable the participants to take care of urgent or time critical payments and to enable more effective
funds management, the system allows the participants to assign priorities to their payment messages and thereby, enabling a particular
transaction to be processed before another transaction, which was submitted earlier to the RTGS system. Within payment messages having
the same priority, however, the transactions will be processed on FIFO basis.
Liquidity and Collateral Management:
Any RTGS system entails active management of intra-day liquidity by all participants. To ensure smooth settlement of transactions
and to avoid bunching of transactions and delay of credit to other participants, it is imperative that participants ensure, at the time of
submission of payment instructions, that there are sufficient funds in their RTGS settlement account to settle their transactions as soon as
they are submitted or within a very short interval thereafter.
The RTGS system also provides several facilities and tools to aid and supplement the participants’ liquidity management efforts. The
provision of a separate RTGS settlement account, own account transfers, queuing facilities and priority assignment are all examples of such
tools. There are two additional powerful intra-day liquidity management utilities, offered by the proposed RTGS system viz. Intra Day
Liquidity and Gridlock Resolution Mechanism.
Intra Day Liquidity:
The RTGS system enables the provision of intra day lines of credit by the Reserve Bank of India to the participants of the RTGS
system to enable them to meet their intra day liquidity requirements. Such liquidity will be provided by the RBI at its discretion and under
terms and conditions, to be specified by it from time to time. Such intra-day liquidity will be fully collateralized and will be provided to the
participants at a charge per transaction. However, failure to repay the credit before the end of the day will invite strict penal action
Gridlock Resolution Mechanism:
The Grid lock mechanism has the potential to clog the entire system.
The solution for this is an optimized gridlock resolution tool.
The optimized gridlock resolution tool is to overcome crippling liquidity problem.
ANALYSIS OF FIVE YEAR (2006-2010) ANNUAL PAYMENT AND SETTLEMENT REPORT OF BNP PARIBAS.
NATIONAL ELECTRONIC FUND TRANSFER - 2006 REAL TIME GROSS TRANSCATION SYSTEM-2006
MONTH Total outward debit Received Inward creditMONT
H Total outward debit Received Inward credit
No Of transaction
Amount in (cores)
No Of transaction
Amount in (cores)
No Of
transaction Amount in
(cores)No Of
transaction Amount in
(cores)
Jan 965 11.02 2136 123.2 Jan 998 123.02 2236 125.21
Feb. 1200 15.02 2365 125.27 Feb. 1002 116.58 3562 100.2
Mar 1325 20.1 5632 200.1 Mar 1024 102.02 4587 144.2
April 2456 24.02 4562 236.2 April 1336 123.25 6987 99.65
May 2365 23.2 2563 124.2 May 1201 120.4 8654 170.4
June 2143 25.2 4562 214.2 June 1235 112.02 4562 99.04
July 2456 25.4 1123 102.2 July 1123 125.36 4587 98.20
August 3654 30.2 2365 123.02 August 996 125.2 2562 95.64
Sept 2456 26.4 2455 102.3 Sept 1125 96.3 2547 110.23
9685 34.2 2145 136.2 Oct 2396 100.2 2441 112.14
Nov 9654 31.2 1254 123.2 Nov 1236 63.2 1254 98.36
Dec 3698 20.1 2145 235.2 Dec 2003 45.02 2145 50.32
Total 4663 286.06 33307 1845.29 Total 15675 1252.57 46124 1303.59
Avg 3504.75 23.84 2775.58 153.77 Avg 1306.25 104.38 3843.67 108.63
NATIONAL ELECTRONIC FUND TRANSFER - 2007 REAL TIME GROSS TRANSCATION SYSTEM-2007
MONTH Total outward debit Received Inward creditMONTH
Total outward debitReceived Inward
credit
No Of transaction
Amount in (cores)
No Of transaction
Amount in
(cores)
No Of transaction
Amount in
(cores)
No Of transaction
Amount in
(cores)
Jan 1002 20.3 4021 203 Jan 1235 201 5621 125.21
Feb. 9564 22.5 9685 275 Feb. 2456 180.3 6653 100.2
Mar 6542 50.3 8956 210.2 Mar 2569 141.01 9954 144.2
April 3654 42.3 4563 115.2 April 2456 100.2 8856 110.01
May 9996 42.2 3654 236 May 3654 120.4 10234 170.4
June 5463 29.26 7563 207 June 2456 125.2 3651 99.04
July 4789 40.2 1185 111 July 4463 1002.23 9963 98.20
August 3654 32.92 3654 112 August 4280 55.01 12347 111.20
Sept 5632 34.45 4564 249 Sept 4864 36.12 24563 110.23
Oct 12919 35.1 2741 241 Oct 2365 56.32 36987 112.14
Nov 12365 12.2 1236 301.2 Nov 1254 54.32 64545 115.23
Dec 10728 36.1 4565 311.03 Dec 3265 125.36 81171 129.00
Total 11730 397.83 56387 2571.63 Total 35317 2197.47 274545 1425.06Avg 7192.33 33.15 4698.92 214.30 Avg 2943.08 183.12 22878.75 118.76
NATIONAL ELECTRONIC FUND TRANSFER - 2008 REAL TIME GROSS TRANSCATION SYSTEM-2008
MONTH Total outward debit Received Inward creditMONTH
Total outward debitReceived Inward
credit
No Of transaction
Amount in (cores)
No Of transaction
Amount in
(cores)
No Of transaction
Amount in
(cores)
No Of transaction
Amount in
(cores)
Jan 1110 40.01 5002 203 Jan 5132 241 8546 211
feb 5536 22.5 10254 236.24 feb 5782 187.09 1254 112.1
Mar 9825 50.3 11466 244.25 Mar 5236 300.2 10236 153.2
April 11213 42.3 9963 115.2 April 4563 115.2 10236 119.2
May 9960 54.96 11553 396.85 May 5651 171.54 129768 170.4
June 7234 29.26 928 207 June 3661 54.45 2923 99.04
July 8307 47.15 1185 114.02 July 4463 54.96 5192 98.20
August 7799 61 1630 143.22 August 4280 51.36 14123 111.20
Sept 7756 34.45 2315 287.63 Sept 4864 63.24 31384 110.23
Oct 12919 56.58 2741 314.88 Oct 5163 68.52 48719 112.14
Nov 7856 39.89 3894 391.84 Nov 5157 73.49 64545 115.23
Dec 10728 61.04 6351 311.03 Dec 5796 85.96 81171 129.00Total 11838 539.44 67282 2965.16 Total 59748 1467.01 408097 1540.94
Avg 8353.58 44.95 5606.83 247.10 Avg 4979.00 122.25 34008.08 128.41
NATIONAL ELECTRONIC FUND TRANSFER - 2009 REAL TIME GROSS TRANSCATION SYSTEM-2009
MONTH Total outward debit Received Inward credit MONTH Total outward debit Received Inward credit
No Of transaction
Amount in (cores)
No Of transaction
Amount in (cores)
No Of transaction
Amount in (cores)
No Of transaction
Amount in (cores)
Jan 1311 63.44 9026 309 Jan 6091 253 99815 246
Feb. 14437 53.16 11313 368.74 Feb. 5782 187.09 107001 187.2
Mar 15099 67.48 12453 378.11 Mar 6563 304.59 125154 316.89
April 12113 54.45 10611 334.39 April 5851 258.5 124472 267.56
May 10221 54.96 11553 396.85 May 5651 171.54 129768 170.4
June 14119 51.36 14066 341.11 June 6511 206.31 111222 215.15
July 15423 63.24 14489 405.36 July 7087 177.92 122245 186.16
Aug 16044 68.52 12953 501.88 Aug 5875 169.55 126621 171.57
Sep 16711 73.49 12726 557.81 Sep 5609 193.16 124050 184.26
Oct 21877 85.96 14826 430.36 Oct 6591 159.17 133226 163.81
Nov 16944 69.52 12954 558.81 Nov 5783 134.63 145440 129.98
Dec 2753 84.9 14930 420.36 Dec 6488 167.287 140525 147.05
Total 157052 790.48 151900 5002.78 Total 73882 2382.747 1489539 2386.03
Avg 13087.667 65.873333 12658.333 416.8983 Avg 6156.833 198.5623 124128.3 198.8358
NATIONAL ELECTRONIC FUND TRANSFER - 2010 REAL TIME GROSS TRANSCATION SYSTEM-2010
MONTH Total outward debit Received Inward credit MONTH Total outward debit Received Inward credit
No Of transaction
Amount in (cores)
No Of transaction
Amount in (cores)
No Of transaction
Amount in (mill)
No Of transaction
Amount in (mill)
Jan 20670 84.61 14202 400.88 Jan 6065 174.63 149292 164.492
Feb. 25891 86.57 14945 429.38 Feb. 6192 204.8 151205 159.3
Mar 25807 131.11 18025 443.05 Mar 7403 189.19 169950 190.35
April 28824 138.49 15671 395.15 April 6276 189.31 166584 190.74
May 26602 141.7 17046 710.36 May 6664 203.84 172028 187.96
June 28499 161.06 17932 552.96 June 6910 173.85 15680 198.12
July 29550 192.23 16077 488.81 July 6987 193.18 171355 164.57
Aug 34083 272.78 16380 571.54 Aug 6734 179.11 166874 175.62
Sep 27546 289.4 16492 505.77 Sep 6384 170 158473 167.96
Oct 37193 179.11 16492 505.77 Oct 6514 246.61 15247 156.32
Nov 36116 254.46 14930 962.7 Nov 4598 174.14 169156 246.13
Dec 39835 561.04 56147 353.34 Dec 6666 167.287 168091 264.53
Total 360616 2492.56 234339 6319.71 Total 77393 2265.947 1673935 2266.092
Avg 30051.333 207.71333 19528.25 526.6425 Avg 6449.417 188.8289 139494.6 188.841
STATISTICS REPORT OF PAYMENT AND SETTLEMENT ANALYSIS
NATIONAL ELECTRONIC FUND TRANSFER
year Total outward transaction Received Inward transaction
2006 3955.25 2775.582007 7192.33 4698.922008 8353.58 5606.832009 13087.66 12658.832010 30051.33 19528.25
REAL TIME GROSS TRANSCATION SYSTEM
yearTotal outward
transactionReceived Inward
transaction2006 1306.25 3843.672007 2943.08 22878.752008 4769.14 35436.102009 61166 124128.252010 90239 139494.58
INFERENCE FROM ANALYSIS
The growing trend in the usage of various modes of payment is a clear indication of the momentum acquired in the area of payment
systems.
The overall turnover in RTGS / NEFT payment and settlement systems rose during 2006-2010 it is on top during 2010 sharply.
Turnover in RTGS now constitutes the largest component, followed by foreign exchange clearing.
From this we conclude that most institutions were using a mix of paper and electronic mode of payment for effecting their payments,
an increasing trend of usage of electronic modes of payments is being observed. Institutions with higher level of adoption of
technology were more forthcoming in migration to electronic payment instruments. A major proportion of large and MNC clients,
financial institutions have emerged as early adopters of electronic payment systems.
In electronic mode of payments most large Corporates prefer RTGS mode of payment for instant and large payments and NEFT for
low value transactions for their day to day payment obligations.
The use of ECS for making dividend payments, vendor payments, salary payments etc are increasing. The use of ECS has reduced
paper work and increased speed of transfers adding to business growth as well as increased customer convenience /satisfaction.
In most cases, the industries that have successfully migrated to new electronic modes of payments, where successful in migrating their
vendors to accepting payments in electronic modes, hence bringing in efficiency to their whole processing cycle.
These industries have also experienced definite savings in payment processing expenses (saving in stationery, postal/courier expenses
and other charges).
New Projects / Major Initiatives
The evolving payment systems scenario offers new challenges and opportunities to all segments of this industry. Large corporate bodies have
taken number of initiatives for the adoption of new payment modes. They have been able to identify cost advantages in the migration to new
payment instruments. Further, the implementation of ERP systems at the industries, with the support from banks facilitated the migration to
new payment modes.
• Implementing a new and feature rich RTGS system – The need to migrate to a new version of RTGS that could leverage on
advancements in technology, provide for scalability in volumes, parameterise more features in line with similar facilities available in other
countries, result in more flexibility in operations, better liquidity saving features, etc., and would be pursued.
• India Money Line – A 24x7 system for one-to-one funds transfers – The existing NEFT system operates during weekdays from 9 am to 5
pm and on Saturdays from 9 am to 12 noon. The Bank would pursue the suggestion to consider the need to extend NEFT to function on a
24x7 basis or to develop a new system akin to the Faster Payments Service in the UK which operates on a 24x7 basis.
• India Card – A domestic card initiative – The concept of a domestic payment card (India Card) and a PoS switch network for issuance
and acceptance of payment cards would be looked into. The need for such a system arises from two major considerations (a) the high cost
borne by the Indian banks for affiliation with international card associations in the absence of a domestic price setter (b) the connection with
international card associations resulting in the need for routing even domestic transactions, which account for more than 90% of the total,
through a switch located outside the country.
• Redesigning ECS to function as a true Automated Clearing House (ACH) for bulk transactions – Currently, Local ECS (to facilitate
bulk electronic transactions with one-to-many and many-to-one variants) is operational at 76 centres. Centralization of this process is already
underway with the launch of credit variant of NECS at Mumbai (and RECS on a pilot basis). The debit variant is also being planned for
implementation. The ECS / NECS solution is internally developed and has been in use since long and the need for building a technology and
feature-rich ACH network by totally redesigning the existing ECS to provide end-to-end processing in a straight-through manner would be
examined.
• Mobile payments settlement network – Mobile phones are expected to emerge as an important channel for transmission of payment
instructions. Efficient mobile payments would require real time transfer of funds with adequate security. Currently all inter-bank mobile
transfers are payment instructions for settling funds through existing payment systems.
Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account
transactions, payments, credit applications etc. via a mobile device such as a mobile phone or Personal Digital Assistant (PDA). The earliest
mobile banking services were offered via SMS.
Application functionality
The mobile banking facility can be provided to mobile phone users through a client or a web based access. .
.
User Authentication
1. User uses the browser or the client to connect to the mobile banking server located at the 3rd party site. The connection over the mobile
network is encrypted using public/private key. The public keys can be transferred during the client installation on the mobile phone or
when the client first communicates with the server using the browser.
User requesting a transaction
1. The mobile banking server asks for re-authentication for critical transactions.
2. Re-authentication with the mobile banking sever ensures that critical transactions are verified and mapped to the user.
3. The re-authentication can be restricted with the vendor only; the user need not authenticate with the bank every time a transaction
is performed. Again this depends on the role played by the vendor.
4. User re-enters the ID.
5. Server authenticates the mobile user and forwards the data to the bank on how to process the mobile user’s service request.
For e.g., checking the account balance service, the mobile banking server will contact the bank’s server on how to process the
request.
Bank processing the transaction
1. The bank server will ask for details required to service the user request
2. Taking the above example, the bank will ask for cheque number and this is forwarded by the mobile banking server to the end
user.
3. The end user enters the details and sends it to the mobile banking server.
4. The server again asks for authentication. Once authenticated, the mobile banking server will forward the cheque number to the
bank’s server.
5. This can be an optional check based on the criticality of the service requested. For e.g., if the bank provides fund transfer service,
then it is good to check for the user’s identification.
6. The bank’s server will check the status of the cheque and provide the details to the mobile user via the mobile banking server.
Finally, this is just an example to show how the application should process requests from the mobile user. Based on the services provided by
the bank, the security of the application can be built-in. For e.g., if the application allows fund transfer or bill payment, then the required
security threats should be identified and mitigated.
The important part is maintaining Confidentiality, Integrity and Availability while using this facility without comprising on functionality.
Mobile Banking Services
Account Information
1. Mini-statements and checking of account history
2. Alerts on account activity or passing of set thresholds
3. Monitoring of term deposits
4. Access to loan statements
5. Mutual funds / equity statements
6. Insurance policy management
7. Status on cheque, stop payment on cheque
8. Ordering cheque books
9. Balance checking in the account
10. Recent transactions
11. Due date of payment (functionality for stop, change and deleting of payments)
12. PIN provision, Change of PIN and reminder over the Internet
13. Blocking of (lost, stolen) cards
Payments, Deposits, Withdrawals, and Transfers
1. Commercial payment processing
2. Bill payment processing
3. Peer to Peer payments
4. Withdrawal at banking agent
5. Deposit at banking agent
Investments
1. Portfolio management services
2. Real-time stock quotes
3. Personalized alerts and notifications on security prices
4. mobile banking
Marketing:
Awareness of thes payment instrument would depend on the marketing campaigns of the service providers. The marketing campaigns educate
the customers on the advantages, convenience and safety of the payment instrument. The level of transparency of the campaigns and the
confidence gained by the customers during the campaign would facilitate large scale migration to these payment modes.
Conclusion
Electronic payment products are expected to provide speedier, cheaper and hassle free payment experience to customers in
comparison to traditional paper based payment instruments. The evolution of electronic payment products in the country have progressed
through two main phases - (i) introductory phase and (ii) rationalization phase. During the introductory phase, electronic products like ECS
and EFT were introduced the country by Reserve Bank of India. These systems were decentralized serving the population of specific areas.
The focus of Reserve Bank of India during the rationalization phase has been to introduce centralized payment solutions. This coincided with
the implementation of Core Banking Solutions/ centralized liquidity management solutions in banks. The RTGS, NEFT and NECS provided
settlement at a central location.
The payment and settlement system constitutes the backbone of the financial sector and enables conclusion and settlement of financial
contracts. The country has made phenomenal progress in enhancing the reach and improving the efficiency of the national payment system –
in which the RBI and the banking system have been equal partners. Creating a world-class payment system in the country is a long, arduous
but an exciting journey in which we have to constantly keep striving to better past achievements. It is sure that banking community present
here would make dedicated and systematic efforts in this direction to meet the challenges ahead and actively contribute to realizing vision for
the payment system that have set for them.
International Trade
Introduction :
International finance is focused on the global business which involved in the sale and/or purchase of goods and/or services internationally. It
is essential to understand methods of payment available for international business transactions, the documentation required to obtain or
initiate payment, and the risks involved.
International Regulations
Identifying the various options available in these organizations provides an opportunity to improve chances for timely payment from their
buyers.
ICC
Uniform Customs and Practice (UCP) for Documentary Credits
Uniform Customs and Practice-Electronic Supplement (eUCP)
Uniform Rules for Collections
ICC International Court of Arbitration
INCOTERMS
WTO
ICC
The International Chamber of Commerce was founded in 1919 with a goal to serve world business by promoting trade and investment, open
markets for goods and services, and the free flow of capital. ICC activities cover a broad spectrum--resolving disputes through arbitration,
making the case for open trade and the market economy system, helping business become self-regulated, fighting corruption, and combating
commercial crime.
ICC model contracts make life easier for small companies that cannot afford high legal costs by providing templates.
ICC is a pioneer in business self-regulation of e-commerce.
ICC codes on advertising and marketing are frequently reflected in national legislation and the codes of professional associations.
ICC has direct access to national governments all over the world through its national committees. The organization's Paris-based
international secretariat feeds business views into intergovernmental organizations on issues that directly affect business operations.
The ICC also sets rules and standards:
o Arbitration under the rules of the ICC International Court of Arbitration is on the increase. Since 1999, the Court has received
new cases at a rate of more than 500 a year.
o ICC's Uniform Customs and Practice for Documentary Credits (UCP 500) are the rules that banks apply to finance billions of
dollars worth of world trade every year.
ICC Incoterms are standard international trade definitions used every day in countless transactions.
Uniform Customs and Practice (UCP) for Documentary Credits
International standards of letter of credit practices were established for bankers by the International Chamber of Commerce. the UCP has been
revised about every ten years to keep up with changing practice; the most recent revision, UCP600, was completed in 2006 and was put into
effect July 1, 2007. Although the UCP defines rights and obligations of the various parties in a letter of credit transaction, it is not law; so
any given letter of credit is subject to the UCP only to the extent indicated in the letter of credit itself.
Uniform Customs and Practice – Electronic Supplement (eUCP)
The electronic supplement to UCP 500 was first launched in April 2002. It was also updated and is now part of the UCP600. The eUCP
provides a general framework of principles for dealing with the electronic documents (shipping, customs clearance and banking documents)
being presented in letter of credit transactions. This document outlines the steps to authenticate documents and gives presentation
requirements as well as the steps to take if a document is corrupted. The creation of this supplement shows the need and willingness of the
ICC to maintain its currency in the world of business and the changes in technology that affect business.
Uniform Rules for Collections
The Uniform Rules of Collections are the international standards of draft collection practices established for bankers by the International
Chamber of Commerce. The Uniform Rules are not law but are more properly viewed as a handbook for banks used to establish common
understanding of terminology and expectations.
ICC International Court of Arbitration
The International Chamber of Commerce has applications that can impact timely payments. In particular, there are arbitration mechanisms
available that can help parties reach an amicable settlement for payment issues. A final and enforceable decision can generally be obtained
only by recourse to the courts or by arbitration. Because arbitral awards are not subject to appeal, they are much more likely to be final than
are the judgments of courts of first instance. Although arbitral awards may be subject to being challenged (usually in either the country where
the arbitral award is rendered or where enforcement is sought), the grounds of challenge available against arbitral awards are limited.
INCOTERMS
The Incoterms are internationally accepted commercial terms defining the respective roles of buyer and seller in the arrangement of
transportation and other responsibilities and clarifying when the ownership of the merchandise transfers from seller to buyer. They are used
in conjunction with sales agreements, payment terms and other methods of transacting sales.
EXW
(Ex Works)
Title and risk pass to the buyer, including payment of all transportation and insurance cost from the
seller's door. Used for any mode of transportation.
FCA
(Free Carrier)
Title and risk pass to the buyer, including transportation and insurance costs when the seller delivers
goods cleared for export to the carrier. The seller is obligated to load the goods on the buyer's
collecting vehicle; it is the buyer's obligation to receive the seller's arriving vehicle unloaded.
FAS
(Free
Alongside
Ship)
Title and risk pass to the buyer, including payment of all transportation and insurance costs once
delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export
clearance obligation rests with the seller.
FOB
(Free On
Board)
Free On Board and risk pass to the buyer, including payment of all transportation and insurance costs
once delivered on board the ship by the seller. Used for sea or inland waterway transportation.
CFR
(Cost and
Freight)
Title, risk and insurance costs pass to the buyer when delivered on board the ship by the seller who
pays the transportation costs to the destination port. Used for sea or inland waterway transportation.
CIF
(Cost,
Insurance and
Freight)
Title and risk pass to the buyer when delivered on board the ship by the seller who pays
transportation and insurance costs to destination port. Used for sea or inland waterway
transportation.
CPT
(Carriage Paid
To)
Title, risk and insurance costs pass to the buyer when delivered to carrier by the seller who pays
transportation costs to destination. Used for any mode of transportation.
CIP
(Carriage &
Insurance Paid
To)
Title and risk pass to the buyer when delivered to carrier by the seller who pays transportation and
insurance costs to destination. Used for any mode of transportation.
DAF
(Delivered at
Frontier)
Title, risk and responsibility for import clearance pass to the buyer when delivered to the named
border point by the seller. Used for any mode of transportation.
DES
(Delivered Ex
Ship)
Title, risk, responsibility for the vessel discharge and import clearance passes to the buyer when the
seller delivers goods on board the ship to destination port. Used for sea or inland waterway
transportation.
DEQ Title and risk pass to the buyer when delivered on board the ship at the destination point by the seller
(Delivered Ex
Quay Duty
Paid)
who delivers goods on dock at destination point cleared for import. Used for sea or inland waterway
transportation.
DDU
(Delivered
Duty Unpaid)
Title, risk and responsibility of the import clearance pass to the buyer when the seller delivers goods
to the named destination point. Used for any mode of transportation. The buyer is obligated for
import clearance. The seller fulfills his obligation when goods have been made available at the
named place in the country of importation.
DDP
(Delivered
Duty Paid)
Title and risk pass to the buyer when the seller delivers goods to the named destination point cleared
for import. Used for any mode of transportation
Funds Remittance
The following funds remittance tools are used to move funds between buyers and sellers. They are not methods of payment but can be used in
conjunction with various methods of payment.
Remittance methods
Cheque
Banker's Drafts
Electronic Funds Transfers
Money Orders
Cash or Bank Notes
Credit Cards
SWIFT
Cheque
A check is a negotiable instrument issued against deposited funds to pay a specified amount of money to a specific person/company upon
demand. This method of fund remittance is normally utilized for an international transaction when a local country representative will pick up
a check or the check is given directly to the international manager by the buyer. Checks can be drawn on banks located in any country
depending on where a buyer holds accounts. A check drawn on a bank in a seller’s country is less risky since the seller can verify availability
of funds. The most risk is found with a company check drawn on a bank outside the seller’s country.
In order for the seller to receive funds, a check must be deposited/cashed. If the check is deposited in a seller’s account and the check is drawn
on an overseas bank, the funds will not be available to the seller until the check is sent overseas for clearance and the funds are transferred to
the seller’s bank. The relationship between the banks involved, the countries involved, and the currency of the check will determine how long
it will take and the fees that will be charged.
Some examples follow:
Bill of Exchange-- an order by one person for a second person to pay a third. The tenor is the period of time from issue of the bill of
exchange until maturity.
Clean-- without supporting documentation
Documentary-- with supporting documentation
Sight-- on demand, calling for payment as soon as presented to the drawee
Term/time/usance-- payable at a fixed future date or at a determinable future date
Draft-- an instrument signed by a drawer to a drawee requesting payment at a future time to a third party, often the drawer.
Banker’s Drafts
This draft is similar to a check. However, it is a time draft drawn on a bank by a bank; and once accepted by the drawee bank, it becomes an
unconditional obligation of the bank to honor at maturity.
Electronic Funds Transfers
Electronic funds transfers (also commonly known as wire transfers or TT) are a quick and effective method of transferring money between
buyers and sellers, in particular when buyer and seller are located in different countries. This term is often misused in international
transactions to mean a prepayment, which is not the case, since funds can be electronically transferred at any time during the transaction as
agreed by buyer and seller.
A customer/buyer contacts its bank and arranges for the funds transfer.
A seller's bank name, address, ABA number, routing number and account number are identified as the receiving bank and recipient
respectively.
The remitting bank issues a payment order to the receiving bank requesting the payment to be credited to the third party beneficiary or
the seller.
The remitting bank at the request of its customer, called the "by order of" party, issues a funds transfer.
The receiving bank must be a correspondent of the remitting bank to the extent that the receiving bank can verify the authenticity of
the instructions.
Payment orders are sent by telex or via an inter-bank telecommunication system known as SWIFT.
The receiving bank will honor requests sent to it by remitting banks only when the receiving bank feels assured that the remitting bank
will reimburse it for any outlay of funds, which can be accomplished in any of the following ways:
A remitting bank can assure reimbursement by authorizing the receiving bank to charge its account with them. This rule applies when
the remitting bank requests payment to be made in the receiving bank's local currency.
A remitting bank can assure reimbursement by crediting their account with the receiving bank. In the case of American banks
remitting US dollars abroad, the credit would be posted to the receiving bank's US dollar account. If foreign banks specify that they
have credited the account of a US bank, then the credit would normally be in their local currency.
Money transfers can also be accomplished between remitting and receiving banks even when there are no direct accounts between the
two. To do so, the remitting bank transfers the funds into the receiving bank's account via their US correspondent bank. The US
correspondent bank, the covering bank, would then advise the receiving bank of the credit.
When payment is to be made in the local currency of the receiving bank and the remitting bank does not maintain an account in that
particular currency, payment must be made through a third correspondent bank. This action is usually accomplished by requesting the
covering bank to issue a payment order on behalf of the remitting bank. In this case, the true remitting bank would be the third party
bank while the original remitting bank would be an additional "by order of" party to the transfer. No direct payment order would be
sent by the original remitting bank to the receiving bank. The original remitting bank would authorize the covering bank either to
charge its account or would transfer covering funds by wire transfer to the correspondent bank. An exchange rate would have to be
agreed upon between the remitting bank and the correspondent bank.Example:
If ABC Bank receives an application for a payment of 400,00 Pakistan rupees in Pakistan and ABC Bank does not maintain a Pakistan
rupee account, payment could be made through a third party correspondent bank such as XYZ Bank in New York.
ABC Bank would request XYZ Bank to issue their payment order for 400,000 Pakistan rupees on behalf of ABC Bank's customer and
authorize XYZ Bank to charge ABC Bank's account in US dollars, using a prevailing rate of exchange.
If the rate of exchange were 0.0292, then XYZ Bank would charge ABC Bank's account $11,680.00 plus funds transfer charges and
issue the payment order directly to the receiving bank for the payment of 400,000 rupees.
XYZ bank then would assure reimbursement to the receiving bank by authorizing it to charge its Pakistan rupee account.
For exporters (sellers), the primary concern is receiving fund transfers in a timely fashion. The fastest method of doing so is using an
overseas remitting bank that maintains an account with the beneficiary's receiving bank. Then fund transfers are typically received
within one to two business days. However, if the transfer must be made through an intermediary bank, such as the remitting bank's US
correspondent, it will take longer, typically four to seven business days. It is critical that a foreign buyer asked to remit payment by
wire transfer has the following information:
the seller's full name and address
the city and state of the seller's bank
the bank's ABA and routing number
the seller's account number
the exact name in which the account is maintained
the amount to be wired
the currency of the funds to be wired
A buyer's bank should instruct its US correspondent bank that the payment is to be wire transferred to the seller's bank. A failure to provide
specific instructions to the buyer can result in delays in receiving funds transfers. Errors can even result in electronic funds transfers being
credited to the wrong account or returned to the remitting bank as undeliverable
Cash or Bank Notes
The exchange of bank notes or cash is seldom used in international transaction because of the risk of loss or forgery.
Money Orders
A money order is a financial instrument issued by a bank or other institution allowing the individual named on the order to receive a specified
amount of cash on demand. It is often used by people who do not have checking accounts. It is a limited tool since it can be used only for
certain currencies in certain amounts.
Credit Cards
With the increase in online business, international payments made through consumer/business credit cards are becoming more common.
These transactions are limited to the credit available on the credit card and often incur high fees for a seller as well as a buyer for currency
exchanges.
SWIFT
SWIFT was founded in 1973, as non-profit cooperative organization under Belgian law (with its HQ in La Hulpe, near Brussels in Belgium),
by 239 banks spread over 15 countries. As of December 2008, SWIFT had linked nearly 9000 banks/institutions in 209 countries.
The objective of SWIFT is to create a unified international transaction processing and transmission system to meet the ever growing
telecommunication needs of the banking industry. It does not perform any clearing or settlement system. It also does not facilitate funds
transfer
Major features of SWIFT:
•It is owned by member banks.
•It is a basically a message transmission system, takings place world-over.
•It operates on a 24 x 7 basis.
•The messages are acknowledged i.e. either accepted or rejected.
•In India, most of the banks are members of SWIFT. These are connected to Swift’s regional processor at Mumbai.
Message formats
The message formats for inter-bank transactions are standardized, some of which are as under
•Customer directed transfers
•Inter-bank transfers
•Documentary credits or guarantees.
•Collection of cheque including travelers’ cheque
•Cash management
Security of messages
SWIFT uses the telegraphic test keys (that are traditionally used for authentication of amounts in messages between banks). It is automatically
calculated on the entire message text. Any change in the message text, in this manner, is immediately detected.
•The information over the SWIFT network is secured and confidential.
•It makes use of encryption (a security control for ensuring data confidentiality) and checksum (a security control to prevent automatic
changes during the transmission)
• SWIFT undertakes financial liability for the accuracy and timely delivery of all validated messages from the point these enter the network to
the point they leave the network. In other words, the SWIFT is responsible for the messages between the regional processors of SWIFT and
not between the regional processor and the individual banks.
•SWIFT provides protection against unauthorised access and protection of transmission (for loss or mutilation of the message, errors in
transmission, loss of privacy, fraudulent alteration).
Steps In Transmission
1. Preparing message
2. Verifying message
3. Authorizing message
4. Transmitting message
5. Receiving system acknoeledgment
Most documentary credits are transmitted electronically either by telex or through the SWIFT interbank telecommunication system.
When documentary credits are transmitted in this way the telecommunication itself becomes the actual documentary credit or
“operative instrument.”
Sometimes, an issuing bank will send a brief telex/SWIFT message to the advising bank to let the bank know the "brief details" of the
documentary credit and to advise that "full or complete" details will follow by mail. The issuing bank must send the actual
documentary credit by mail without delay. The "pre-advice" is not the operative instrument. Once an issuing bank has issued a pre-
advice, it must issue the operative instrument without delay unless the pre-advice indicates that the issuing bank may choose not to
issue the credit. begin production or otherwise act as if the credit were on its way.
If a bank uses an advising bank to have the documentary credit advised to the beneficiary, it must also use the services of the same
bank for advising an amendment(s).
Methods of payment
Methods of payment available to buyers and sellers conducting international transactions.
To identify the methods of payment available for international transactions.
To determine when to apply different methods of payment.
1. Cash in Advance (Prepayment)
2. Documentary Collections
3. Letters of Credit
4. Open Account
5. Clean Payments
6. Combining Methods of Payment
Cash in Advance/Prepayment
The buyer agrees on a price for the goods and makes the payment to the seller before the goods are shipped. This method is typically used
where the buyer can negotiate a significant cash discount for taking on the trade risk. It could also be possible that the buyer is unable or
unwilling to open a letter of credit.
Time of PaymentPrior to manufacturing and/or shipping, through the agreed upon
method (cash, wire transfer, check, credit card, etc.).
Goods Available to
BuyerAfter payment is received.
Risks to Buyer
Seller does not ship per the order (quantity, product, and quality,
shipping method).
Seller does not ship when requested.
Financing Buyer must have cash or financing available
Documentary Collections
A documentary collection is a payment technique provided by a bank acting as a collection and paying agent. The seller receives payment
from the bank's correspondent bank (known as the remitting bank) on the delivery of the shipping and financial documents. The buyer then
makes the payment to the bank. The seller retains title of goods until the payment – or at least promise of payment – is received.
The difference between a documentary collection and a letter of credit is that under a documentary collection, the bank does not guarantee
payment to the seller. This is one of the reasons why documentary collections are cheaper and less complicated than letters of credit.
One of the greatest problems with documentary collections is that they offer less security for a seller than a letter of credit. Credits, political,
and transfer risks, for instance, are not covered under a documentary collection.
Documents against Payment (D/P) Collection
Under a D/P collection, the exporter ships the goods, and then gives the documents to his bank, which will forward them to the importer’s
collecting bank, along with instructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the
documents to the importer only on payment for the goods. Upon receipt of payment, the collecting bank transmits the funds to the remitting
bank for payment to the exporter.
Time of Payment: After shipment, but before documents are released
Transfer of Goods: After payment is made on sight
Exporter Risk: If draft is unpaid, goods may need to be disposed
Documents against Acceptance (D/A) Collection
Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this case, the documents are released to the
importer to receive the goods upon acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a
future date. At maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the
funds to the remitting bank for payment to the exporter.
Time of Payment: On maturity of draft at a specified future date
Transfer of Goods: Before payment, but upon acceptance of draft
Exporter Risk: Has no control of goods and may not get paid at due date
Terms associated with documentary collections
Buyer = Importer
Seller = Exporter
Remitting Bank = Exporter’s Bank >> receives payment
Collecting Bank = Importer’s Bank >> transmits funds from buyer to seller
Bill of Exchange/Draft – document issued by exporter and used for remittance of funds
Time/Usance Bill of Exchange – tenured at 30, 60, 90, 120 or 180 days, etc.
Letters of Credit
A letter of credit is a bank instrument that can be used to even the risk between a buyer and a seller since a buyer is guaranteed to receive
payment if when he/she has complied with the exact requirements of this buyer. A letter of credit offers a seller numerous advantages but only
if that seller complies exactly with its terms and conditions of the transaction. In addition to providing reduced risk for both a seller and a
buyer, there are many variables that can be used with a letter of credit to reduce the political and commercial risks that may accompany the
transaction as well as provide extended terms to a buyer through the letter of credit instrument.
Characteristics of a Letter of Credit
Applicability
Recommended for use in new or less-established trade relationships when satisfied with the creditworthiness of the buyer’s bank.
Risk
Risk is evenly spread between seller and buyer.
Pros
• Payment after shipment
• A variety of payment, financing and risk mitigation options
Cons
• Process is complex and labor intensive
• Relatively expensive in terms of transaction costs
Open Account
This method of payment involves an agreement between the seller and the buyer whereby the goods are shipped to the buyer and the buyer
makes the payment at a predetermined date in the future. In this case, it is the seller who is taking on all the trade risk.
Time of Payment•As agreed between a buyer and seller, net 15, 30, 60 day terms, etc., from date of invoice or bill of lading
date.
Goods Available to Buyer •Before payment (depending on how the products are shipped and the length of payment option).
Risks to Seller
•Buyer defaults on payment obligation.
•Delays in availability of foreign exchange and transferring of funds from buyer’s country occur.
•Payment is blocked due to political events in buyer’s country.
Risks to Buyer•Seller does not ship per the order (product, quantity, quality, and/or shipping method).
•Seller does not ship when requested, either early or late.
Use
•Seller has absolute trust that buyer will accept shipment and pay at agreed time.
•Seller is confident that importing country will not impose regulations deferring or blocking transfer of
payment.
•Seller has sufficient liquidity or access to outside financing to extend deferred payment terms.
•Used more regularly in international transactions to avoid high banking fees.
Combining Methods of Payment
The important thing to remember about methods of payment is that they are not absolute. They can be combined in many ways to reduce risk
for all of the parties involved. For example, should a new customer require custom-made products, but cannot afford 100% prepayment, an
exporter could offer 50% prepayment to cover the cost of manufacturing and 25% payment at invoice date and 25% payment 90 days after
invoice.
Clean Payments:
Clean Payments are the means of forwarding funds overseas. These can be made by:
1. Telegraphic Transfer - a message forwarded electronically to an overseas branch or a correspondent bank, instructing it to pay a
named party (beneficiary) a specified sum of money by order of the remitter (applicant).
2. Draft - similar to a bank check but drawn on an overseas bank. Payment is made to the payee after adequate verification of identity.
TRADE TRANSCATIONS
Trade finance involves commercial transactions between buyers and sellers in different countries. It presents a number of difficulties for the
firms involved.
One of the most popular instruments used in international trade is letters of credit. A letter of credit is a guarantee of payment by the buyer's
bank to the seller, if certain terms and conditions stipulated in the letter of credit are met.
Definition:
Letter of credit (more secure for seller as well as buyer): It is the assurance given by the opening bank to make payment at sight or on due
against production of documents in compliance with the terms and conditions of the LC
Types of L/Cs:
Letters of credit can differ greatly with regard to their underlying terms and conditions.
The following are the kinds of letters of credit structures
Revocable
A revocable letter of credit can be amended or canceled by the buyer at any time without giving prior notice or warning to the seller.
For this reason, a revocable letter of credit does not serve as a payment guarantee. It is only a payment agreement because it is little more than
an expression of intent on the buyer's behalf.
The seller, therefore, bears a great deal of credit risk because the letter of credit may be amended or canceled while the goods are in transit
and before documentation is presented for payment. The seller would then be forced to request payment directly from the buyer. Revocable
letters of credit are seldom used because the sellers could find themselves exposed to default risk in much the same way as they would with
open account trading.
Irrevocable
An irrevocable letter of credit cannot be amended or canceled without the agreement of the issuing bank, the confirming bank (if the letter of
credit is confirmed), and the seller.
The seller is, therefore, assured of payment, provided the prescribed documents are presented and are in order. The issuing bank is compelled
to guarantee payment even if the buyer does not pay. Therefore, there need not be the same level of trust between the seller and buyer as there
must be in the case of a revocable letter of credit or cash payment.
Most changes made to an irrevocable letter of credit will tend to favor the seller, as the seller must agree to any amendment. Examples of such
amendments include an extension of the shipment date or an increase in the amount due to the seller.
All letters of credit are irrevocable unless it is expressly stated otherwise in the letter of credit.
Irrevocable Confirmed Letters of Credit
An irrevocable confirmed letter of credit is an irrevocable letter of credit to which the advising bank adds its confirmation. The buyer will
request the advising bank to do so if the seller is not satisfied with assurances from the issuing bank. An irrevocable confirmed letter of credit
gives the seller a double assurance of payment.
The advising/confirming bank is at risk when it confirms a letter of credit. Although an irrevocable confirmed letter of credit cannot be
canceled without the consent of all parties, the issuing bank can refuse to honor it leaving the advising/confirming bank at a loss.
The issuing/confirming bank can refuse to honor the letter of credit if the seller does not comply with the terms and conditions specified in the
letter of credit, for example, if the documents are presented late or are not in order.
Back to back letter of credit
Arrangement in which one irrevocable L/C serves as the collateral for another; the advising bank of the first L/C becomes the issuing bank
of the second L/C. In contrast to a 'transferable letter of credit,' permission of the ultimate buyer (the applicant or account party of the first
L/C) or that of the issuing bank, is not required in a back-to-back L/C. It is used mainly by middlemen (intermediaries) to hide the identity of
the actual supplier or manufacturer. Also called counter credit or reciprocal letter of credit
Deferred payment
That is paid a fixed number of days after shipment or presentation of prescribed documents. It is used where a buyer and a seller have close
working relationship because, in effect, the seller (beneficiary of the L/C) is financing the purchase by allowing the buyer a grace period for
payment. It differs from a sight draft or time draft in that no drafts are involved but the payment is guaranteed on the stated date. However,
there being no draft, the beneficiary party's ability to discount or sell his or her right to payment is restricted. Also called usance letter of
credit.
Red clause
L/C that carries a provision (traditionally written or typed in red ink) which allows a seller to draw up to a fixed sum from the advising or paying-
bank, in advance of the shipment or before presenting the prescribed documents. It is normally used only where the buyer and seller have close
working relationship because, in effect, the buyer is extending an unsecured loan to the seller (and bears the financial risk and the currency risk). The
red clause L/Cs was once popular in fur trade with China and wool trade with Australia.
Green clause
In the case of a green clause letter of credit (letter of credit with advance payment) the beneficiary can request the advance payment of an
agreed amount (defined in the terms and conditions of the letter of credit) from the correspondent bank. This is basically intended to finance
the production or purchase of the goods to be delivered under the letter of credit. Unlike the red clause letter of credit the advance is not paid
out against receipt and the written undertaking of the beneficiary to subsequently deliver the transportation documents by an agreed date, but
an additional document is also always required providing proof that the goods to be shipped have been warehoused
Unconfirmed
An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An
advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part except that it must use
reasonable care to check the authenticity of the credit which it advised. It does not provide a commitment from the advising bank to pay, so
the beneficiary is reliant upon the undertaking of the overseas bank. The beneficiary is not protected from the credit risk of the issuing bank
nor the country risk.
Confirmed
L/C that adds the endorsement of a seller's bank (the accepting-bank) to that of the buyer's bank (the issuing bank). It provides the highest
level of protection to the seller because not only the L/C cannot be canceled (or its terms changed) unilaterally by the buyer (the account
party), but also both banks involved in the transaction guaranty its payment on its due (maturity) date.
Transferable Credit
Irrevocable L/C with two (and only two) successive beneficiaries. In this arrangement, the first beneficiary (an intermediary or importer's
foreign representative) can assign part or whole of the L/C amount to a second beneficiary (the supplier or manufacturer). To be transferable,
the L/C must be so marked by the issuing bank on the instructions of the buyer or importer (the account-party). On the instructions of the first
beneficiary the advising bank can transfer it to the second beneficiary but not any further. Used extensively in the Far East (China, Japan,
Korea, Singapore, Taiwan, among others). See also back to back letter of credit.
In general, unless the letter of credit states that it is transferable, it is considered non-transferable.
Revolving
Single L/C that covers multiple-shipments over a long period. Instead of arranging a new L/C for each separate shipment, the buyer
establishes a L/C that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is
available in fixed installments over a period such as week, month, or year). L/Cs revolving in time are of two types: in the cumulative type,
the sum unutilized in a period is carried over to be utilized in the next period; whereas in the non-cumulative type, it is not carried over.
Standby
Primarily a substitute for a performance bond or payment guaranty, this L/C is used mainly in the US where banks are legally barred from
issuing certain types of guaranties. It serves as a parallel (collateral) payment source in case the primary source fails to meet its obligations in
part or in full.
Payment Forms
Once the seller presents the documents to the issuing or advising/confirming bank, the settlement process begins. If an advising bank is
involved, it will check the documents. Thereafter, it may accept, pay, or negotiate the letter of credit. It may also forward the documents to the
issuing bank for settlement.
The following forms of payment can be used to settle a letter of credit.
Payment
Acceptance
Negotiation
Sight
Settlement by payment, acceptance, or negotiation is only made if the buyer’s bank receives the required document before the buyer
receives the goods.
D/P – Documents against Payment
The export documents and the sight bill of exchange provided to a collecting bank are only made available to an importer when payment is
made. The collecting bank then transfers the funds to the seller through the remitting bank.
D/A – Documents against Acceptance
The export documents and a time/usance bill of exchange are sent to a remitting bank. The documents are then sent to a collecting bank with
instructions to release the documents against a buyer’s acceptance of the bill of exchange.
Sight
A sight letter of credit requires payment to be made once the documents have been presented and are in order .Payments are made
immediately once the document are verified by the issuing bank .
Involved Parties:
The Buyer / Applicant / Importer
The buyer, also known as the applicant or the importer, enters into a letter of credit due to a certain lack of absolute trust in the seller's
willingness and ability to supply the requested goods in the quantity and quality required.
The buyer and the seller will therefore seek to agree upon a sales contract and a trade arrangement, such as a letter of credit, where the buyer
can specify the:
1. Documents required before payment is made
2. Final date for receipt of these documents
3. Latest date for shipment of the goods in question
Settlement by payment, acceptance, or negotiation is only made if the buyer's bank (issuing bank) receives the required documents before the
buyer receives the goods.
If the issuing bank finds everything in order, the buyer is notified and the payment is forwarded to the seller. The buyer's account is then
debited by the appropriate amount.
Beneficiary / Seller/Exporter
The seller, also known as the beneficiary or the exporter, enters into a letter of credit because they know in advance that they are entitled to
payment once the documentary evidence required by the letter of credit is provided.
The issuing bank is not liable for the performance of the underlying goods delivered to the buyer. The issuing bank's obligation to the buyer is
to examine all the documentary evidence and verify that it meets all the terms and conditions of the letter of credit. A seller conforming to the
letter of credit doesn't have to wait until the buyer is ready to pay. Instead, the seller receives payment from the issuing bank immediately or
at a specified future date.
Opening Bank / Importer’s Bank / Issues L/C
This insures the seller against a loss should the buyer fail to make payment, because the bank as guarantor will pay the seller the amount
specified in the letter of guarantee. The issuing bank, which is usually the buyer's bank, will issue a letter of guarantee to the seller on behalf
of the buyer .This setup helps the buyer negotiate with the seller and avoids the situation where the buyer has to put up cash as a guarantee.
The bank's role is therefore that of an intermediary.
The issuing bank's liability to pay and to be reimbursed from the buyer becomes absolute upon the receipt of the documentation showing the
seller has met the terms and conditions of the letter of credit. If the issuing bank is not satisfied with the creditworthiness of the buyer or with
the terms and conditions of the request, it may refuse to issue a letter of credit addressed to the seller.
Even in cases where the bank is satisfied, it will usually send the letter of credit through an advising/confirming bank in the seller's country.
The letter of credit will then be issued in accordance with the information provided by the buyer in the request form.
Advising Bank/ Exporter’s Bank/Advises L/C
Advising bank as a country bank usually a foreign correspondent bank of the issuing bank. Advising bank verifies the authenticity of the L/C,
thereby providing the seller with protection against the receipt of a fraudulent L/C, advising bank in a transaction cannot advise the seller as to
credit worth of issuing bank.
Confirming Bank/ Advising Bank or 3rd Party Bank/Confirms L/C
Confirming bank agree to honor a L/C issued by another bank.
Negotiating Bank
It is nominated by the seller, allows the seller to make payment to a local bank instead of having dealing with a foreign bank with which they
may be unfamilier.Issuing Bank usually choose a negotiating Bank with international operations.
Paying Bank/ Any Bank as Specified in L/C >> Pays the Draft
Is the bank named in the L/C as being authorized to make payment.
Flow of transaction
The sales contract is entered between buyer and seller.
If the buyer bank approves the credit risk of the buyer, it issues the LC.
The issuing bank approaches the corresponding bank/advising bank in the sellers country to process the letter of credit.
The seller is informed of the letter of credit by the confirming / advising bank.
The seller ships the good and presents the documents at the advising / confirming bank.
The advising / confirming bank examines the documents for compliance.
If confirmed, confirming bank pays the seller according to the method outlined in letter of credit.
Issuing bank examines the documents and debit the buyer account if they are in order.
The issuing bank forwards the documents to the buyer.
The buyer presents the documents and takes the possession of goods.
Required Information
To open a letter of credit in favor of the seller, the buyer must fill in an application form to their issuing bank.
1. Name of the buyer
2. Name and address of the seller
3. Name and address of the advising bank (usually chosen by the issuing bank) Name of the person(s) on whom any of the following
payment mechanisms are to be drawn:
a) bill of exchange
b) draft
c) check
4. Amount and currency (ISO currency code) of the credit
5. Amount of the letter of credit in words and figures
6. The buyer must specify the:
a) exact total amount
b) maximum amount
c) approximate amount
7. Details of the documents required
8. Quantity and description of the goods
9. Place, destination, latest date, and terms of shipment
10. Types of letters of credit:
a) revocable
b) irrevocable
c) irrevocable confirmed
11. Whether the letter of credit is settled by
a) payment acceptance
b) negotiation
12. How the letter of credit is to be advised – by (air) mail or otherwise
13. Whether partial shipment or transshipment is allowed
14. Whether the letter of credit is to be transferable
15. Expiry date (last date for receipt of documents)
16. Period of time after the issuance date of the transport document(s) within which the document(s) must be presented.
Activities and Terms:
Advice – review and approval of L/C
Amendment – change to L/C
Confirmed – the commercial, political and economic risk of the transaction absorbed by the confirming bank
Discrepancy – mistake in the documentation
Documentation – documents required within L/C
Draft – negotiable order to pay
o Sight Draft – payment assured upon shipment and presentation of documents in compliance with its terms
o Time Draft – bank assurance of payment at the maturity of the banker’s acceptance with option of obtaining immediate funds
by discounting the BA (30, 60, 90 days at sight or acceptance)
Irrevocable – cannot be changed without approval from beneficiary or advising bank
Issuance – opening of L/C
Negotiation – review of documents
Revocable – can be changed without approval of beneficiary or advising bank
Typically the documents requested in a Letter of Credit are the following:
Financial Documents : Bill of Exchange
Commercial Documents: Invoice is the bill for goods and services. It includes
Name and address of seller
Name and address of buyer
Description of merchandise
Price
FOB(Free on Board), CIF(Cost, Insurance and Freight ) ,DDU(Delivery duly Unpaid)
Packing list
Draft the seller draws draft on issuing, confirming / advising bank for the amount agreed under letter of credit
Clean – an order to pay
Documentary –shipping documents are attached
Shipping Documents :Transport Document, Insurance Certificate, Commercial, Official or Legal Documents
Official Documents :License, Embassy legalization, Origin Certificate, Inspection Certificate
Transport Documents
Bill of Lading: This is the document evidencing the receipt of goods for shipment the of bill of lading is to act as a recipt for merchandise
shipped and carrier oblication is to transport their good to destination.
1. Non-negotiable bill of lading: The seller consigns the goods diretly to the buyer
2. Negotiable bill of lading: The issuing bank retains title to the goods until buyer has submitted required documents and bank
satisfies all in order .
(ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, Mate Receipt,Cargo Receipt, Deliver
Challan...etc
Insurance documents: Insurance policy, or Certificate but not a cover note.
SWIFT MESSAGE TYPES
FIN 700, FIN 701 – Issue of Documentary credit
MT 707 - Amendment of Documentary credit
MT 202 - General Institutional Financial Transfers
MT 100 - Customer Transfer
MT 999 - Free format
MT 799 - Free Format –Doc.Credit
MT 420 - Tracers
MT 011 - Delivery Notification.
CHECKING OF LC DOCUMENTS
Shipment before date of LC
Name and Address of applicant for negotiation
LC expired for negotiation
LC no and date
LC amount exceeded
Description of goods, quality
Stale documents
Some documents called for not submitted.
Gross and net weight differs
Shipping marks
Port of loading / discharge
Parial /transshipment
INVOIVE
Not indicate delivery terms
Description of goods
Calculations
Charges
BILL OF LADING
On board notation
Claused BL
Short shipment
Late shipment
Full of BL
Freight indication
Signature
Class of BL not acceptable-charter party
On deck shipment
AIRWAY BILL
Flight no and date
INSURANCE
All risk
Dated later than shipment
Claims payable
Endorsement
Under insurance
Currency of LC
RELATING TO EXPORTS
1. I/E CODE NUMBER (IEC) - Every exporter must obtain from trade control authorities ICE number.
2. DECLARATION OF EXPORTS IN PRESCRIBED FORMS:
GR FROM – For exports made otherwise than by post (in duplicate)
PP FORM – For exports made by pp other than on VP or cod basis (in duplicate)
VP/COD FORM –For exports made by post on VP/COD basis (in one copy)
SOFTEX FORM – For export of computer software in non-physical form (in triplicate)
3. TIME LIMIT FOR REALISATION OF EXPORT PROCEEDS
Within 6 months from the date of shipment
Within 15 month for export made to India owned warehouse abroad established with the permission of R.B.I.
4. COUNTER SIGNING OF GR/PP FORMS BY Ads.
5. SUBMISSION OF EXPOTS DOCUMENTS – 21 DAYS
6. SCRUTINY OF GR/PP FORMS.
7. TRADE DISCOUNT SHOULD BR DECLARED ON RELATIVE GR.
8. AGENCY COMMISION.
1 Substitute Products
2 Bankers' Acceptances
Bankers' acceptances (also known as bank bills) are short-term finance instruments to facilitate international trade. A bankers' acceptance is
created when one person signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time
to another person, usually to finance the shipment or temporary storage of goods. The unconditional written order, also known as a time draft,
is stamped 'accepted' by the bank.
By accepting the draft, the bank agrees to pay the face value of the obligation if the buyer (the 'issuer' – the party who drew the draft) fails to
make payment. Since the accepting bank is taking on the risk of the buyer defaulting, it makes it easier for a buyer or seller to undertake
international trade.
In general, a bankers' acceptance is a less expensive form of short-term financing than a loan. Bankers' acceptances may be retained until
maturity for full value or sold to investors
When a bank accepts a time draft, it makes an unconditional obligation to pay a specified amount at maturity, either to the party presenting
the draft or to the holder of the draft if the manufacturer discounted the acceptance. If discounted, the manufacturer would remain
secondarily liable to the holder (purchaser/discounter) of the acceptance in the event of default by the bank.
Open Account Trading
Open account trading works as follows. A company sells goods to another. It then sends the buyer an invoice, and in due course (usually
within 30 days) it receives payment.
Open account trading allows settlement to be achieved at a lower cost – not least because credit lines will not be used to underwrite
transactions. The savings that companies make will depend on the number of transactions, the level of automation, and so on.
However, open account trading presents an administrative burden for traders, because it entails taking data from multiple sources,
consolidating it and matching commercial invoices/bills of lading against purchase orders. This manual process is both time-consuming and
subject to error. With an L/C, the issuing bank handles this administration in return for a fee. Many companies may choose to outsource this
work to banks, because of their expertise in the administration of trade documentation, and the fact that they have invested in the technology
and have the geographic coverage to facilitate global trade.
Open account trading leaves the seller fully exposed to non-payment or default on the part of buyers. Sellers may have to look at receivables
financing or factoring to manage their working capital demands. The cost of capital can be disproportionately high for small suppliers, even
offsetting the savings made through the elimination of L/C fees. Therefore, there will probably always be a need for L/Cs in many cases
Trade-Related Guarantees – Comparison with Letters of Credit
The differences between a trade-related guarantee and a standard letter of credit.
Name Trade-Related Guarantee Letter of Credit
DefinitionAn agreement between three parties whereby the first party,
the bank, guarantees the second party, the beneficiary, that the
third party, the applicant (exporter), is capable of performing
the contract.
A bank letter of credit is a cash guarantee
between three or more parties. The first, the
applicant (importer), applied to the second
party, the issuing bank, to issue a guarantee
to make payment to the third party, the
beneficiary (exporter), on the receipt of
specific documentation.
Pre-
QualificationThe banks look at the applicant's entire business operation,
checking for adequate financial resources, necessary
experience, organization, and existing workload. The bank will
also look at the applicant's profitability and whether it has the
management skills to successfully complete the transaction.
The banks examine the quality and liquidity
of the collateral available to the bank in case
there is a demand on the letter of credit. If
the banks are satisfied that the applicant can
reimburse them if demand is made upon the
letter, there is no further pre-qualification.
Borrowing
CapacityThe issuance of trade-related guarantees has no effect on the
applicant's bank's line of credit, which in some instances, can be
viewed as a credit enhancement.
Specific assets are pledged to secure a bank
letter of credit. A letter of credit can diminish
an existing line of credit and is reflected on
the applicant's financial statement as a
contingent liability.
DurationTrade-related guarantees can remain in force for the duration of
a contract.
A letter of credit is usually date-specific,
generally for up to one year.
How to
ObtainTrade-related guarantees can be obtained through banks
or through insurance companies in the form of a surety bond.
A letter of credit can be obtained through
banking or lending institution.
ClaimsIf the applicant and the beneficiary disagree on contract
performance issues and the beneficiary declares the applicant in
default, the bank must decide whether to pay the beneficiary.
The bank will pay on a letter of credit upon
demand of the beneficiary, assuming the
required documentation has been supplied.
InternationalGaining recognition Widely recognized
Changes in International Trade Practices
The growth in global trade over the past decade has put increasing demands on the financial industry to find efficient methods of making
international payments in exchange for the delivery of goods and services.
Many companies have already tried to limit their number of trading partners so as to concentrate their orders among a small few trading
partners. They can then quickly establish trust with these partners through service level agreements and so on. The advantage of this is that
when it comes to settling accounts, there is less need for expensive and slow financing arrangements such as letters of credit.
Facilitating International Trade Payments
Trade Card
There are organizations that have been trying to speed up payments in international trade. One such organization is Trade Card.
Based in the United States, Trade Card facilitates trade transactions from the initial purchase right through to settlement. It differs from other
arrangements in that it allows companies to initiate, conduct, and settle transactions completely online. For example, buyers and sellers can
create all their purchase orders and invoices in an electronic format. This means that documents may be easily compared and any
discrepancies can be quickly identified and resolved by each party being sent a discrepancy notice by e-mail. If and when the transaction is
accepted by the system, an e-mail notice is sent to the buyer, requesting the movement of the money.
The Trade Card solution aligns the documentary and financial requirements of a transaction with the physical movement of goods,
eliminating time-consuming and error-prone manual processes. Under this system sellers receive payment a lot earlier and this allows the
buyer to negotiate a more favorable price.
The seller's fee (typically USD 100) is paid for many times over because of the savings the efficiency brings. Other companies that tried to
break into this market with similar technologies were Trade Beam, CCEWeb, and UPS Capital
Bolero.net
Bolero.net was the banking industry's first commercially successful attempt at providing trade documentation in electronic format. Bolero is
partially owned by SWIFT, an organization itself owned by banks that are its members. SWIFT is both an operator of Bolero's services and a
user of Bolero as the technology developer for its own SWIFT Net Trade Services Utility (TSU).
Bolero uses the strong authentication associated with SWIFT's system so it provides a secure electronic bank-to-corporate means of
communication, effectively replacing today's traditional methods such as paper-based mail and fax communications.
Bolero delivers transaction visibility, predictability, speed, accuracy, and security. Bolero is fast becoming the dominant platform for
corporate to bank automation of the financial supply chain.
Secondary Market in Letters of Credit
Another relatively recent development in global trade finance has been the development of a secondary market in letters of credit. LTPtrade
was founded in 1999. It is a specialist provider of advisory services, process, technology, and capital modeling solutions for trade finance.
In 2001, LTPtrade.net, a dealing and information platform, completed the first ever electronic auction of a 'participation' in a letter of credit.
The auction involved a North American bank selling a participation in a USD 7.7 million letter of credit obligation of Korea Development
Bank.
Some of the largest banks now manage their trade finance risk exposure by selling on the participation in a letter of credit in the secondary
market. To explain, the holder of trade finance debt passes on the risk of non-payment to a third party but retains title to the instrument. This
is achieved using a participation contract.
The availability of a secondary market in the letter of credit market creates a greater level of liquidity in letters of credit. Greater secondary
liquidity improves banks' ability to book new business from their corporate customers. There are over 450 officers from 92 different banks,
financial institutions, and branches across 22 countries that are members of the LTPtrade.net platform.
Open Account Trading
Despite all the technological developments that have occurred in the past decade, nothing seems to be able to stop the growing popularity of
open account trading. Open account trading works as follows.
A company sells goods to another. It then sends the buyer an invoice, and in due course (usually within 30 days) it receives payment.
Open account trading allows settlement to be achieved at a lower cost – not least because credit lines will not be used to underwrite
transactions. The savings that companies make will depend on the number of transactions, the level of automation, and so on.
However, open account trading presents an administrative burden for traders, because it entails taking data from multiple sources,
consolidating it and matching commercial invoices/bills of lading against purchase orders. This manual process is both time-consuming and
subject to error. With an L/C, the issuing bank handles this administration in return for a fee. Many companies may choose to outsource this
work to banks, because of their expertise in the administration of trade documentation, and the fact that they have invested in the technology
and have the geographic coverage to facilitate global trade.
Open account trading leaves the seller fully exposed to non-payment or default on the part of buyers. Sellers may have to look at receivables
financing or factoring to manage their working capital demands. The cost of capital can be disproportionately high for small suppliers, even
offsetting the savings made through the elimination of L/C fees. Therefore, there will probably always be a need for L/Cs in many cases
Interbank Mobile Payment Service (IMPS)
IMPS facilitates person to person fund transfer on a real time 24 X 7 basis. Unique feature of the service is “instant money transfer” and both the
remitter and the beneficiary “receiving an sms of their account debited/credited within a minute of doing the transaction”.
This is how the system works I wish to send money Register your mobile number with your bank to link to your account. Share your Mobile number and MMID with the remitter Ask the remitter to send money using your Mobile number and MMID Check the confirmation sms for credit to your account from the remitter I wish to receive money
Register yourself for mobile banking service with your Bank Get your MMID and MPIN from your Bank Download and activate the mobile banking application on your mobile phone. Get beneficiary’s Mobile number and MMID Send money to the beneficiary following the menu options in the mobile banking application Check the confirmation sms for debit to your account and credit to beneficiary account
A P Hota
Managing Director & CEO
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