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Methods of Making Payments


1. What is a 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.

2. What are the components of any payment system?

Payment systems comprises of 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 participant institutions.

3. Who can use payment systems to make payments?

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

4. What are the ways in which a customer can make payments through banks?

Customer can make payments by issuing paper based instruments like cheques, demand drafts, payment orders etc or by advising bank to debit his account and originate an electronic payment eg. ECS, NEFT/EFT, RTGS, etc.

Another mode of making payments is by having a letter of credit transmitted to the beneficiary's banker who releases payments on fulfillment of certain conditions laid down in the LC.

5. How is the payment made when a payer issues a cheque to the payee?

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 present the cheque to the issuing bank. If the cheque is not crossed and is payable to bearer he can receive payment at the issuing bank counters, otherwise he 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.

6. What is a Clearing House?

A clearing house is a place for exchange of cheques by banks; it facilitates transfer of funds from one bank to another, which represents the proceeds of cheques. It is as a central meeting place for bankers to exchange the cheques 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 1000 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.

7. What is the time taken for this 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 utilise 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.

In the case of outstation cheques, the time taken would vary from three to ten days. Banks generally publicise their cheque collection policy so that customers have an idea as to when the proceeds would be available for utilisation by the customer. For delay beyond the pre-announced period, the banks are required to compensate the customer (even without customer asking for the same).

Interestingly, there was a complaint filed by Shri Atul Nanda and Another in 2006 before the National Consumer Disputes Redressal Commission, New Delhi. It was alleged in the complaint (C.C. No. 82 of 2006) that there was loss to the consumers because of 'floating fund' in the cheque clearing mechanism. The National Consumer Disputes Redressal Commission, New Delhi issued a show cause notice to the Reserve Bank of India in response to which the Reserve Bank of India filed a reply affidavit on November 09, 2006. In its reply affidavit the Reserve Bank of India explained the steps it had taken in the recent times to minimise the alleged loss to the consumers because of 'floating fund'. As directed by the National Consumer Disputes Redressal Commission, New Delhi the full text of the reply affidavit filed by the Reserve Bank of India is placed here.

8. Would a bank customer incur any charges by using cheques for payments?

The person receiving payment by means of cheques would incur some charges to realise the funds through his/her bank. In case of local cheques, no charges are levied. In case of outstation cheques, the bank would take some processing / collection charges depending upon the amount of the cheque and the place from where it has to be realised. The charges levied by the banks are generally decided by the banks themselves. Banks are also required to publicise the schedule of service charges.

9. How can payments be made without use of cheques and cash?

Payments can be made between two or more parties by means of electronic instructions without the use of cheques. Retail payment mechanisms available to facilitate such payments are the Electronic Funds Transfer, Electronic Clearing Service, credit / debit cards etc.

10. Can a customer of a bank use the ATM of some other bank?

Yes, if the customer’s bank has an arrangement with the bank owning the ATM. Presently, stand alone ATMs are very few and usually such stand alone ATMs are installed at the branch premises. In case ATM of another bank is used, normally a service charge called 'inter-change fee' is levied on the customer.

11. Are ATMs used only for cash withdrawal?

In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry and several other banking transactions which the bank/s owning the ATM's might want to offer.

12. What is the role of credit / debit cards in payment systems?

Credit / Debit cards are being widely used in the country as they provide a convenient form of making payments for goods and services without the use of cheques and cash. Banks issue credit cards to their customers. The merchant establishment who accepts credit / debit card payments will claim the amount from the customer’s bank through his own bank.

13. How is a Debit Card different from Credit Card?

Debit Card is a direct account access card. (Amount transacted gets debited immediately). The amount permitted to be transacted in debit card will be to the extent of the balance standing to the credit of the card user’s account. On the other hand, a credit card involves provision of credit to the card user. The card user settles the bills on receipt either in full or partially in installments.

14. What is NEFT/EFT?

National Electronic Funds Transfer/Electronic Funds Transfer (NEFT/EFT) is a system whereby anyone who wants to make payment to another person / company etc. can approach his bank and give instructions / authorisation to transfer funds directly from his account to the bank account of the receiver / beneficiary. Complete details such as the receiver’s name, bank account number, account type (savings or current account), bank name, city, branch name, etc., should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiaries’ account correctly and faster.

15. Can I use NEFT/EFT to transfer funds anywhere in India?

As of now, NEFT/EFT facility is available for transfer of funds electronically between more than 18500 bank branches. The details of the cities and branches can be had from the respective banks as also from the RBI website.

16. How long does it take to transfer funds through NEFT/EFT?

Funds transfer normally takes place on the same day or at the most the next working day depending upon the time of requesting / effecting such funds transfers. The customer should confirm this aspect from his bank at the time of requesting the funds transfer.

17. Are there any charges for transferring funds through NEFT/EFT?

The banks generally charge some processing charges for NEFT/EFT just as in the case of other services like demand drafts, pay orders, etc. The actual charges depend upon the amount and the banker-customer relationship. However, for the present, the RBI has waived all its processing charges on NEFT/EFT that were being recovered from the banks for processing such funds transfer transactions at the clearing houses run by RBI. This has certainly reduced the processing cost for the banks also.

18. How can I make use of Electronic Clearing Service for receiving funds / making payments?

Electronic Clearing Service (ECS) is a retail payment system that can be used to make bulk payments / receipts of a similar nature especially where each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government departments to make/receive large volumes of payments rather than for funds transfers by individuals. The ECS facility is available in 64 centres across India operated by RBI at places where it manages the clearing houses and by SBI and other public sector banks in other centres. The ECS is further divided into two types – ECS (Credit) to make bulk payments to individuals/vendors and ECS (Debit) to receive bulk utility payments from individuals.

19. What is ECS (Credit)?

Under ECS (Credit) one entity / company would make payments from its bank account to a number of recipients by direct credit to their bank accounts. For instance, companies make use of ECS (Credit) to make periodic dividend / interest payments to their investors. Similarly, employers like banks, government departments, etc make monthly salary payments to their employees through ECS (Credit).Payments of repetitive nature to be made to vendors can also be made through this mode. For this purpose, the company or entity making the payment has to have the bank account details of the individual beneficiaries. The payments are affected through a sponsor bank of the Company making the payment and such bank has to ensure that there are enough funds in its accounts on the settlement day to offset the total amount for which the payment is being made for that particular settlement. Sponsor bank is generally the bank with whom the company maintains its account.

20. What is ECS (Debit)?

ECS (Debit) is mostly used by utility companies like telephone companies, electricity companies etc. to receive the bill payments directly from the bank account of their customers. Instead of making electricity bill payment through cash or by means of cheque, a consumer (individuals as well as companies) can opt to make bill payments directly into the account of the electricity provider / company / board from his own bank account. For this purpose, the consumer has to give an application to the utility company (provided the company has opted for the ECS (Debit) scheme), providing details of bank account from which the monthly / bi-monthly bill amount can be directly deducted. Such details have to be authenticated by the bank of the customer who opts for making payments through this mode. Once this option is given, the utility company would advise the consumer’s bank to debit the bill amount to his account on the due date of the bill and transfer the amount to the company’s own account. This is done by crediting the account of the sponsor bank which again is generally the bank with which the company receiving the payments maintains the account. The actual bill would be sent to the consumer as usual at his address as before.

21. Are there any charges for using the ECS?

Reserve Bank of India has exempted levy o fall charges for processing ECS at the clearing houses. The banks, however, are free to charge a fee from their corporate customers for use of this facility.

22. How can an NRI remit money into India?

As an NRI, an individual can remit funds into India through normal banking channels using the facilities provided by the overseas bank. Alternately, an NRI can also remit funds through authorised, Money Transfer Agents (MTA). Of late, a good number of banks have launched their inward remittance products which facilitate funds transfer in matter of hours.

23. How do banks make payments for their own transactions?

Ordinarily, the transactions among banks (not pertaining to customer transactions) would be for large values .Hence such transactions are called as large-value funds transfers. The actual transfer of funds will take place through the accounts which the banks maintain with the RBI. For this purpose, banks can give cheques drawn on their account maintained with RBI to one another, which will then be processed through the clearing house. Alternatively, they can also make use of large value payment system called as Real Time Gross Settlement System where funds transfer takes place instantaneously, based on electronic instructions just like NEFT/EFT in the case of individuals and companies.

24. What is Real Time Gross Settlement System?

Real Time Gross Settlement (RTGS) system, introduced in India since March 2004, is a system through which electronic instructions can be given by banks to transfer funds from their account to the account of another bank. The RTGS system is maintained and operated by the RBI and provides a means of efficient and faster funds transfer among banks facilitating their financial operations. As the name suggests, funds transfer between banks takes place on a ‘real time’ basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary’s bank has the responsibility to credit the beneficiary’s account within two hours.

25. Can individuals make payments through RTGS system?

Yes, individuals can transfer funds through RTGS system through their banks. Though the system is primarily designed for large value payments, bank customers have the choice of availing of the RTGS facility for their time critical low value payments as well. A customer who desires to use this facility should approach his bank to find out whether his own bank branch as well as the beneficiary’s bank branch is enabled to transfer funds through RTGS system. Banks may levy charges for such funds transfers at their discretion and based on the customer-bank relationship. However, RBI has decided that small value customer transaction of up to Rs. 1 lakh would be migrated to NEFT/EFT.

26. What is Cheque Truncation?

Cheque Truncation is a system of cheque clearing and settlement between banks based on electronic data/images or both without physical exchange of instrument.

27. How would Cheque Truncation benefit the bank customers?

The bank customers would get their cheques realised faster as same day (for local cheques) or next day (for outstation cheques) clearing is possible in Cheque Truncation System (CTS). As straight through processing and automated payment processing are enabled by CTS faster realisation is accompanied by a reduction in costs for the customers and the banks. It is also possible for banks to offer innovative products and services based on CTS. The banks have additional advantage of reduced reconciliation and clearing frauds.

28. What is the role of RBI in payment systems?

The RBI, apart from the role of regulator and supervisor of payment systems, plays the role of a Settlement Bank apart from being a catalyst, an operator and a user. The RBI has been taking initiatives in introducing new modes of more efficient and safe means of effecting payments in the country on a continuous basis. The RBI introduced the system of Magnetic Ink Character Recognition (MICR) based cheque clearing during late 80's for four metropolitan cities (Mumbai, New Delhi, Chennai and Kolkata). During mid 90s, electronic payment systems like ECS and NEFT/EFT were introduced. During 2004-05, RTGS was introduced. Besides introducing these newer mechanisms or systems, the RBI has also been constantly ensuring that the existing systems are upgraded / refined to increase their efficiency and to meet the requirements of customers. Taking advantage of advancements in technology, the RBI has brought in additional safety measures in these systems to make them secure and also to maintain the integrity of such transactions.

Besides operating the various components of payments systems, RBI also participates in these systems as a user. RBI also acts as a service provider. RBI has the role of regulating and supervising the various payment systems.

29. How does RBI regulate payment systems?

The Board for regulation and supervision of Payment and Settlement Systems (BPSS) is a sub-committee of the Central Board of the RBI and is the highest policy making body on payment system. The Board as well as the council are assisted by a recently created department the Department of Payment and settlement Systems (DPSS). The Board has been entrusted with the responsibility to authorise, prescribe policies and set standards for all existing and future payment systems in the country. The Board also has the powers to determine membership criteria to these systems and related policies.

30. Whom should I approach in case of any complaints relating to customer services under payment systems?

The customer may approach the bank concerned to redress the complaint. In case of lack of response / satisfactory redressal by the bank, the customer may approach the Grievance Redressal Cell in the local RBI office. The customer may also approach the office of the Banking Ombudsman for redressal of his complaint.

Terms and Words used in Payments

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Cash payment is the most common payment system which is well known.


Cheque, demand draft, payment order, banker’s cheque

Paper based payments are in the form of cheques, demand drafts, payment orders, banker’s cheques, refund orders, warrants etc. These are also referred to as negotiable instruments. For simplicity, they are generally referred to as cheques.

i. Cheques are simply a payment instruction from the account holder to his/her banker directing that a certain sum of money should be paid to a specific individual or to the bearer of the instrument. On receipt of cheques, the beneficiary will deposit it with his banker who will collect the money through clearing house system, where banks in a city exchange cheques with one another and settle the payments by arriving at a net amount of payables and receivables. After exchange of cheque, the account of the issuer of the cheque is debited and the credit is passed on to the banker of the beneficiary. An account holder should ensure that a cheque is issued only when there is sufficient balance of funds in his/her account. Cheques drawn on any bank in the country can be cleared through various mechanisms available in the clearing system. The process usually takes 2 to 4 days depending on the local clearing house procedures.

In India, cheques are valid for three years from the date of issue. However, cheques are treated as stale, by practice, by banks after since months from the date of issue, but they can be revalidated by the issuer. Dividend warrants and interest warrants issued by companies are also treated as cheques which are usually valid for three months from the date of issue. In case of a cheque, the beneficiary is entitled to receive the money due only if the balance is available to clear the cheque. However, there are some pre-paid negotiable instruments eg. Demand drafts / payment order / banker's cheques.

ii. Demand drafts are used when one person wants to send or transfer money (remit) to another person who is in another city. The person wanting to send money, deposits cash in a bank or issue a cheque in favour of the issuing bank, which issues him a demand draft. The demand draft is sent to the person who is to receive the money. The receiver gives it to the branch/bank where he holds an account and receives the payment. They are valid for 6 months. Banks normally charge a commission for issuing demand drafts.

iii. Payment orders or Banker’s Cheques are similar to demand drafts but are usually issued for payments within a city. These are usually valid for 3 months. Banks may charge a commission for issuing Payment Orders and Banker’s Cheques.


Credit cards, ATM cards, debit cards, smart cards and other cards

Card based payments are made by using a credit card or a debit card

i. Credit card system is a credit facility extended to a user who is issued a plastic card which can be used in place of cash for making any type of payment/purchase. The institution which issues the card has a tie up with the concerned merchant establishment and the card issuing organization, if different, to facilitate this arrangement. The amounts charged to the customer are paid by card issuer to the merchant and subsequently billed to the customer. A credit card holder may not be an account holder in the bank which issues the credit card.

  1. Debit cards can be of two types - One which is issued by banks to account holders only and the other in which a pre-loaded amount is stored and operates in collaboration with a service provider/seller. Generally, debit cards are also ATM cards.

The mode of using debit cards and credit cards is generally the same.

Comparison between Credit and Debit Card:

Credit Card

Debit Card

Transaction amounts restricted to credit limit offered on the credit card Transaction amounts limited to permissible withdrawal out of the balance in the card holder’s bank account / cash limit / store value.
Grace period of one month to 45 days is offered after which interest/penalty may be charged. Amount is debited to the customer’s account. There is no interest / penalty involved.

iii. Special types of credit cards:

  • Kisan Credit Cards can be issued up to a limit of Rs.50,000 out of which Rs.25,000 has to be used for agricultural and allied purposes.
  • General Credit Cards are issued up to a value of Rs.25,000.

    Electronic Clearing Service, Electronic Funds Transfer, Real Time Gross Settlement System, Internet banking.

    Electronic Payments and Remittances:

    i. Electronic Clearing Services (ECS) are available for receiving or making payments. ECS for receipt is ECS (Credit). ECS for payment is ECS is ECS (Debit). The scheme is operational in 64 cities.

    a. ECS (Credit): Electronic Clearing Service for credit is a mode of payment by an institution and receipt by individuals for interest, dividend, salary, pension, etc. A large number of investors, share holders, employees, ex-employees can receive their dues electronically directly into their accounts on due dates without using paper cheques/instruments.

    b. ECS (Debit): Electronic Clearing Service for debit has been introduced so that bank customers can make small value repetitive payments such as electricity bills, telephone bills, loan installments, insurance premia, club fees, etc. The process operates on the basis of ‘large number of small debits and one consolidated credit’ from users to the service provider. The system provides the convenience of paperless payment on due dates by direct debit to the customer’s account.

    ii. NEFT/EFT (National Electronic Funds Transfer/Electronic Funds Transfer): This electronic mode of remittance of funds is available with over 18500 bank branches. The amount sent from the sender’s bank branch is credited to the receiver’s bank branch on the same day or at the most the next day. This facility saves the effort of sending a demand draft through post and the inherent delay in reaching the money to the receiver. Banks may charge commission for using NEFT/EFT.

    iii RTGS (Real Time Gross Settlement) System: The RTGS system facilitates instant transfer of money from one account to other across cities. This is basically a large value remittance system where funds are required to be transferred quickly. While all the above payment and remittance systems are settled between banks on a net basis, RTGS is settled on a gross basis which means that each transaction is settled independently. This facility is useful to banks for their funds management, for companies to transfer large amounts for individuals who require urgent payments.

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