Funds Transfer Terminology in India

Funds Transfer Terminology in India

In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing of payments is necessary to turn the promise of payment (for example, in the form of a cheque or electronic payment request) into actual movement of money from one bank to another/from one account to another.

MICR : Magnetic Ink Character Recognition Code (MICR Code) is a character-recognition technology used mainly by the banking industry to ease the processing and clearance of cheques and other documents.
It consists 9 digit
First three digits denotes the city, next three digits representing the bank and the last three digits
representing the bank branch
This code is printed in Cheque Leaf, Demand Draft, Pay order etc.

IFSC : The Indian Financial System Code, is an alphanumeric code. This code innovatively identifies a bank branch that participates in two of the major electronic funds settlement in the country, RTGS and NEFT.
It consists of 11 digits.
First 4 digits show the Identity of the bank. 5th digit is kept as a default ZERO for future use i.e. 0. Last 6 Characters display the Branch Identity.

RTGS : The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). ‘Real Time’ means the processing of instructions at the time they are received without any time delay. ‘Gross Settlement’ means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
The minimum limit of Rs. 2 Lakhs and with no upper ceiling.

NEFT: National Electronic Funds Transfer (NEFT) is one of the most prominent electronic funds transfer systems of India. Started in Nov.-2005, NEFT is a facility provided to bank customers to enable them to transfer funds easily and securely on a one-to-one basis. It is done via electronic messages. This is a “net” transfer facility which is executed in hourly batches resulting in a time lag. NEFT facilities are available in 30,000 bank branches all over the country and work on a batch mode. NEFT has gained popularity due to it saving on time and the ease with which the transactions can be concluded. This reflects from the fact that 87% of all electronic transactions in the 2008 financial year were NEFT transactions.

How RTGS is different from NEFT?
NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place taking into accont all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches. [There are twelve settlements from 8 am to 7 pm on week days and six settlements from 8 am to 1 pm on Saturdays.] Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.

CTS: Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, is a project undertaken by the Reserve Bank of India (RBI) in 2008, for faster clearing of cheques. CTS is based on a cheque truncation or online image-based cheque clearing system where cheque images and magnetic ink character recognition (MICR) data are captured at the collecting bank branch and transmitted electronically.

Cheque truncation means stopping the flow of the physical cheques issued by a drawer to the drawee branch. The physical instrument is truncated at some point en-route to the drawee branch and an electronic image of the cheque is sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting bank etc. This would eliminate the need to move the physical instruments across branches, except in exceptional circumstances, resulting in an effective reduction in the time required for payment of cheques, the associated cost of transit and delays in processing, etc., thus speeding up the process of collection or realization of cheques.