Page 94 - DMGT303_BANKING_AND_INSURANCE

Unit 5: Payment and Settlement System

playing this developmental role and has taken several initiatives for a safe, secure, sound and Notes
efficient payment system.
A payment system is a mechanism that facilitates transfer of value between a payer and a
beneficiary by which the payer discharges the payment obligations to the beneficiary. Payment
system enables two-way flow of payments in exchange of goods and services in the economy.

Payment systems include instruments through which payments can be made, rules, regulations
and procedures that guide these payments, institutions which facilitate payment mechanisms
and legal systems etc. that are established to facilitate transfer of funds between different
participants.

5.1 Payment and Settlement Systems in Banks

Payment systems are used by individuals, banks, companies, governments, etc. to make payments
to one another. In other words, anybody who has to make a payment to anyone else can use one
or the other form of payment system to make such a payment.

Payments can be made in India in the form of cash, cheque, demand drafts, credit cards, debit
cards and also by means of giving electronic instructions to the banker who will make such a
payment on behalf of his customers. Electronic payments can be made in the form of Electronic
Funds Transfer (EFT), Electronic Clearing Service (ECS) for small value repetitive payments and
through Real Time Gross Settlement (RTGS) System for large value payments. A few banks in
India have begun to offer certain banking services through the Internet that facilitate transfer of
funds electronically.
The process of cheque payment starts when a payer gives his personal cheque to the beneficiary.
In order to get the actual payment of funds, the receiver of the cheque has to deposit the cheque
in his bank account. If the beneficiary has an account in the same bank in the same city then the
funds are credited into his account through internal arrangement of the bank. If the beneficiary
has an account with any other bank in the same or in any other city, then his banker would
ensure that funds are collected from the payer’s banker through the means of a clearing house.
Clearing House

A clearing house is an association of banks that facilitates payments through cheque between
different bank branches within a city/place. It acts as a central meeting place for bankers to
exchange the cheque drawn on one another and claim funds for the same. Such operations are
called as clearing operations. Generally one bank is appointed as in-charge of the clearing
operations. In the four metros and a few other major cities, the Reserve Bank of India is looking
after the operations of the clearing house. Each clearing house has uniform regulations and rules
for the conduct of its operations as prescribed by RBI. There are more than a thousand clearing
houses operating all over the country facilitating cheque payments. These are managed by the
RBI, State Bank of India and other public sector banks.
Clearing Process

Generally, if a cheque is to be paid within the same city (local cheque), it would take 2-3 days. In
some large cities, there is a system called High Value Clearing which facilitates completion of
cheque clearing cycle on the same day and the customer depositing the cheque is permitted to
utilize the proceeds next day morning. However, coverage of this High Value Clearing is very
limited and usually available at the branches in the main business area; say Fort and Nariman
Point area in Mumbai and Connaught Place in New Delhi.

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