Payment and Remittance Systems Objectives

In this session, you will learn to:

Understand the systems of payment and remittance

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Payment and Remittance Systems Understanding Payment and Remittance Systems

Banks perform the task of remittance of funds from one place to another. An effective payment system must be:
Safe Quick Economical

Payment and remittance system can be broadly divided as:

Paper based system Electronic payment system

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Paper based system consists of:
Demand draft Pay order or managers cheque

Electronic payment system consists of:

NEFT RTGS

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
DD is one of the oldest paper based remittance systems used in banks. Process of issuing a DD is:
1. Remitter goes to his bank and fill in the DD challan or paying-in-slip. 2. Remitter pays the full amount of the DD plus commission. 3. Counter staff fills the details of the beneficiary written on the paying-in-slip. 4. DD is printed on a special stationary. 5. Counter staff verifies the name and other details in the printed DD. 6. Counter staff signs and hand over the DD to the remitter. 7. Remitter sends the DD by post or courier to the beneficiary.

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Payment of DD can be in the form of:
Cash payment Payment in clearing

Advantages of issuing DD are:

Beneficiary can obtain cash upto Rs. 20,000/- by identifying himself at the destination branch. Beneficiary need not have his account with the bank that has issued the DD. DD can never be returned for want of funds. DDs can be issued on almost all urban and semi-urban centres across the entire country. DD can be received only by the beneficiary.

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Pay order is issued when the remitter and beneficiary are located in the same city. Banks charge lower commission for a pay order than for a demand draft. Advantages of issuing pay order and DD for banks are:
Banks earn commission for issuing these instruments. Banks get free float funds.

Advantages of issuing pay order and DD for customers are:

Hassle-free remittances. Economical remittances.

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Disadvantages of using paper based system are:
Cost of security stationery with MICR printing is high. Lost while sending from on place to another. Physical movement of paper results in delay.

Two electronic payment systems present in India are:

NEFT RTGS

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
NEFT is a nation-wide funds transfer system to facilitate transfer of funds from:
One bank branch to other bank branch of a different bank.

Disadvantages of inter-bank clearing system are:

Waiting time Settlement risk

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
In RTGS payment system:
Processing and final settlement of funds transferred take place continuously in real time. Transferring are settled individually.

Two major aspects of RTGS are:

Real time Gross

Transactions covered under RTGS are:

Inter-bank transfers Customer transactions Banks own account transactions

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Features of RTGS are:
Fastest money transfer mechanism through the banking channel. No waiting time once the request for transfer of money is received at RBI. Transactions are settled as and when received by RBI on an individual basis. Primarily used for large value transactions.

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Payment and Remittance Systems Understanding Payment and Remittance Systems (Contd.)
Benefits of RTGS to the customers are:
Remittances are faster and instantaneous. No returns due to insufficiency of funds. Remittances cannot be called back by the remitting bank. Bigger corporate can manage their working capital more efficiently.

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Payment and Remittance Systems

Check Your Understanding

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Payment and Remittance Systems

Activity

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Payment and Remittance Systems

Practice Questions

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Payment and Remittance Systems Summary

In this session, you learnt that:
Payment and remittance systems can be broadly divided into the following two categories:
Paper-based system Electronic payment system

Paper-based system can be classified as:

Demand drafts Pay orders

The two electronic payment systems in India are:

NEFT (National Electronic Funds Transfer) RTGS (Real Time Gross Settlement)

There are many advantages for banks and customers under NEFT and RTGS.

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Payment and Remittance Systems Summary (Contd.)

NEFT is a nation-wide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch, provided both branches are NEFT enabled. Each of the NEFT enabled branches of the 87 banks is given a unique code called IFS Code. The Indian Financial System Code (IFSC) is an alphanumeric code which is unique to each branch of the participating banks. RTGS is a payment system in which both processing and final settlement of funds transferred take place continuously in real time. RTGS is a gross settlement system where transfers are settled individually, that is without netting their debits against credits RTGS is primarily for large value transactions. The minimum amount is Rs. 1 lakh and there is no maximum amount specified.

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