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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