CHAPTER- 6 PAYMENT AND CLEARING SYSTEM IN BANKING SECTOR

CHAPTER- 6 PAYMENT AND CLEARING SYSTEM IN BANKING SECTOR 6.1 Sample Period 6.2 Computerization of Clearing and Settlement Operations 6.3 Electronic Payment System 6.4 Payment System in US 6.5 Initiatives Taken by the Reserve Bank of India for Effective Electronic Payment and Banking System 6.5.1 Electronic Clearing Services (ECS) 6.5.2 Real Time Gross Settlement System (RTGS) 6.5.3 Electronic Fund Transfer (EFT) 6.5.4 Credit Cards 6.5.5 Debit Cards 6.6 E-payment Method Adoption in the World 6.7 Payment System in India, its Attributes and Participants 6.8 Growth of E-payment Services in India 6.9 Comparison of Paper Based Transactions with Electronic Transactions 6.10 Real Time Gross Settlement System 6.11 Impact of E-banking on Payment and Clearing System 165

CHAPTER-VI PAYMENT AND CLEARING SYSTEM IN BANKING SECTOR The banking sector is considered to be the back-bone of Indian economy. The economic reforms and the various e-banking techniques followed by the banks during the last decade strengthened their financial position. The adoption of IT and communication made the things easier for the banks. It made the flow of information smooth. The payment and the settlement system led to greater efficiency and financial stability. E-banking services benefited the customers also. In India, implementation of Magnetic Ink Character Recognition (MICR) based clearing in 1986 and other payment systems like card based payment systems, ECS, EFT, RTGS, NEFT and CTS have offered a variety of services to the customers. The study on the performance of Indian payment system during the last three years indicates that in India, all electronic modes of payment have shown better growth than the physical cheque based system. The Reserve Bank of India is, therefore, taking necessary steps to provide efficient and integrated payment and settlement system in the country and also taking steps to mitigate the loss and risk. Development of electronic banking is facilitating the processing of large volume of transactions in an efficient and reliable manner. The payment and settlement system is part of basic infrastructure needed for the proper functioning of marketoriented economies. They are indispensable for the efficient flow of payment for goods, services and financial assets and their smooth functioning is crucial for the effective implementation of the central bank s monetary policy and stability in the economy. So, Reserve Bank of India has recognized the payment and settlement system to be critically important for broadening and developing the financial system. 6.1 Sample Period The present chapter is based on the growth of various electronic banking modes in India. The time chosen for the objective is 2002 onwards as most of the banks started implementing these modes after 2002. The data has been compiled from Trends and Progress Reports of Reserve Bank of India and various RBI Bulletins. The chapter has been divided into two parts. Part-I emphasizes on the conceptual framework of payment and transfer system. Part-II reflects the growth and trends in electronic payment and transfer system. 166

6.2 Computerization of Clearing and Settlement Operations Computerization of clearing operation was the first major step towards modernization of payment system. The introduction of technology for clearing operations began with the setting up of Claim based settlement system at Mumbai, Chennai, Calcutta and Delhi in early eighties. The system was used for generating settlement reports on the basis of input statements containing the aggregate value of claims (cheques presented) of one bank over the other banks in the clearing house. So, clearing, balancing and settlement which used to take a long time due to differences and errors in manual balancing were reduced. The next important milestone was fully automating the clearing operations. Rapid growth of cheque volumes in the 80s made the tasks of manual sorting and listing very difficult. Banks were unable to cope with huge volume of cheques which have to be physically handled prior to their presentation in the clearing house. Though the clearing and settlement became easy because of computerization, the heavy volume of paper that had to be processed, introduced delays in presentation, resulted in delayed credit to customers. So, the growth in volumes could be managed only by mechanization of entire clearing process. This problem was solved by the introduction of MICR based cheques processing technology. The cheques were to be redesigned incorporating a MICR codeline which could be read by document processing machines called reader sorters. The RBI introduced two types of reader sorter- the medium speed reader sorter that was capture of processing 300 instruments per minute for inter-city and the high speed reader sorter system (HSRS) with speed of 2400 documents per minute for clearing of local instruments. So, computerization of service branches accompanied by computerization of the clearing houses at banking centres handled the large volume of business and created a base for the introduction of automated clearing operations at other centres. This enabled the introduction of electronic payment services so that the future expansion of these services using the clearing infrastructure is possible. 6.3 Electronic Payment System The above discussion shows that by early 90s MICR computerized cheque clearing operations at 4 metropolitan cities were introduced. However, the volume in cheque clearing continued to follow an upward trend and also creating a pressure on the 167

existing work flow processes. Most of the items in clearing consist of paying interest/ dividend to the beneficiaries, and real beneficiaries were not getting that due at all. So, in all the cases such a system was needed that would (1) decrease the value of paper instruments in MICR clearing, (2) improve customer service by ensuring prompt and secure interest/ dividend to the beneficiaries. Such a system was needed which was to be cost effective, low value, greater transparency and accuracy in handling the transaction. Further for new electronic payment system to be attractive for the consumer and business, it should save money and reduce the cost current system. To make e-payment system more adaptable it should be convenient, reduce the cost and should increase the confidence of people. 6.4 Payment System in US The pattern of payment system followed in US has been changing during the past 15 years. It has been through papers, cards and electronic media. The paper based transactions have decreased from 69 per cent in 1999 to just 36 per cent in 2010.The payments through cards are increasing which were just 28 per cent in 1999, 39 per cent in 2005, and these increased to 49 per cent in 2010. The share of electronic transactions also showed an increasing trend from 3 per cent in 1999 to 15 per cent in 2010. So, overall payment system of US shows that paper based transactions still constitute 36 per cent of the payments in 2010 though this trend is decreasing. But e-payment system is becoming popular to serve the customers at minimum cost. Further, the data pertaining to the period from 2003 to 2008 regarding the online payment system has shown a great variation. The customers who paid online were just 50 per cent in the year 2003, 57 per cent in 2004, 64 per cent in 2005, 71 per cent in 2006, 78 per cent in 2007 and 85 per cent in 2008. It is evident that only 15 per cent people use any other mode of payment. It confirms that there has been tremendous growth of online banking services. 6.5 Initiatives Taken by Reserve Bank of India for Effective Electronic Payment and Banking System An efficient payment and settlement system is essential for the efficient functioning of a modern financial system. To promote a safe, secure, sound and efficient electronic payment system, the Reserve Bank of India has taken several initiatives in this regard. The Reserve Bank introduced the system of electronic clearing services (ECS) and electronic fund transfer (EFT) in 1995, RTGS in March 2003, NEFT in November 2005, and cheques truncation system in February 2008. These have been discussed in the following paragraphs. 168

Figure 6.1 Modes of E-payment System EFT CREDIT CARDS RTGS MODES OF E-PAYMENT SYSTEM DEBIT CARDS ECS DEBIT & CREDIT 6.5.1 Electronic Clearing Services (ECS) In order to bring the payment system at par with the international standards, the Reserve Bank took several initiatives which include the introduction of ECS services in India which is the counterpart of the automated clearing house. It is an electronic fund transfer mode from one bank account to another bank account using the services of a clearing house. This is used normally for bulk transfers from one account to many accounts or vice-versa. This can be used for making payments like distribution of dividend, interest, salary, pension, etc. by institutions or for collection of amounts for purposes, such as payments to utility companies like telephone, electricity, charges such as house tax, water tax, etc. or for loan installments of financial institutions/banks or regular investments of persons. Clearing services are of two types: (i) Electronic Credit Clearing (ii) Electronic Debit Clearing. 169

(i) Electronic Credit Clearing It is a simple, reliable and cost effective solution for bulk and repetitive payment transactions like salary, pension, interest, commission, dividend, etc. by public or private companies and government departments through banks. Under the said system, companies who have to make bulk payments to a large number of beneficiaries, prepare the credit instructions on the magnetic media and submit the same to RBI through their bankers. RBI processes the data, arrives at inter-bank settlement, and provides bank and branch-wise reports containing the details of payments to facilitate fast payment to the beneficiaries. The institutions which want to avail ECS facility have to get them registered with sponsor bank. The sponsor bank will forward a copy of registration form to RBI after allotting a registration number. The institution that has to make payment to a large number of customers has to prepare the payment data on a magnetic media and submit it to the bank. The bank would present the payment data to the local clearing house through its service branch in a sealed cover duty encrypted in consultation with RBI. The clearing house debits its account and credits the banks where the beneficiaries of the transaction maintain their accounts. There is no limit for making ECS credit payment. The scheme benefits to all the users especially to corporate bodies who have to print and dispatch numerous paper instruments in reconciling the figures (Sudhakar, 2006). Benefits to Corporate Body/Institution Loss of instruments in transit or fraudulent encashment thereof totally eliminated. Reconciliation of transactions is automatic. By the time the ECS cycle is completed, the user institution gets an electronic data file from its bank with the date of payment and banker s confirmation thereon. Cash management becomes easier as arrangement for funds is required to be made only on the specified date. Ensuring better customer/investor service. (ii) Electronic Debit Clearing Electronic debit clearing covers the payment to utility companies like telephone and electricity boards. Utility service providers include MTNL, Telephone/Mobile companies, Telecom Departments, State Electricity Boards, Banks, LIC, Housing Finance Companies, Intermediaries, Clubs, etc. (for collection of credit cards dues). These 170

companies collect their periodical bills from customers. Under the said scheme, the customer on the receipt of bill from the utility company and having satisfied himself for its correctness, can approach his banker and authorize the bank branch to debit his account for the amount of the bill and transfer the amount to the bank account of the utility company. Benefits under ECS (Debit) Faster collection of bills by the companies and better cash management. Eliminates the need to go to the collection centres/banks by the customers and no need to stand in long queues for payment. Automatic debiting to the accounts, to that effect cuts down the procedural delay. 6.5.2 Real Time Gross Settlement System (RTGS) RTGS was introduced by RBI on 26 March, 2004 as the ultimate architecture for online real time inter-bank payment and settlement for large value funds. The payment instructions are received online from participants and are processed individually on gross basis throughout the operating day. RTGS system operates in a credit push environment. It means transaction will take place only if there is a sufficient balance in the account of a sender. In RTGS, the customer of one bank branch can transfer the money to customer of any other branch. RTGS settles the payment on transaction by transaction basis. But it should be noted that RTGS system requires large amount of intraday liquidity for the settlement of payments. The cost of liquidity depends on the variables such as amount required, opportunity cost of maintaining liquid balances and cost of intraday credit. Salient Features of RTGS Payments are settled transaction by transaction. Settlement of funds is final and irrevocable. Settlement is done on real time. Funds settled can be further used immediately. It is a fully secured system which uses digital signatures and public key encryption (Jain 2006). Payment transaction processed by RTGS is done on the First In First Out (FIFO) basis. The transactions are maintained in RTGS in order of priority. Payments received are immediately settled. No transaction can be cancelled once it has been settled. 171

Kinds of Transactions Customer to Customer Account transfer, for example, Customer A of Bank X to Customer B of Bank X. Inter Bank transfer, for example, Customer A of Bank X to Customer B of Bank Y. Own Account transfer, for example, Customer A of Bank X to Customer A of Bank Y. Multilateral Net Settlement (Kalpana 2006). RTGS and its Effects on the Bank RTGS improved the service quality with immediate credit, transparent pricing and faster access. This is the fastest mode of fund transfer, which is secure and irrevocable. This adds to the present fund transfer channels available to the customers like EFT, ECS, SEFT, DD, etc. The usage of RTGS is less than its potential as most of the customers are not aware about this system. Moreover, the banks charge high rates while transferring funds under RTGS. So, RBI has now made it mandatory that only the high value transactions will be processed through RTGS. 6.5.3 Electronic Fund Transfer (EFT) Electronic Fund Transfer (EFT) System was established by RBI for carrying out inter-bank and intra-bank fund transfers within India, through EFT centres connected by a network and providing for settlement of payment obligations arising out of such funds transfer between participating banks or institutions. Every participating bank and admitted institution shall open and maintain in every EFT centre, a settlement account for settlement of payment obligations arising under the funds transfer executed under the EFT system. Payment obligation between the participants shall be settled on by debiting or crediting the settlement accounts maintained with the EFT centre. This function of the EFT centre shall be discharged by the Deposit Accounts Department (DAD) on receipt of advices. Whereas the sending banks' settlement accounts would be debited on the day of transaction (Day-One) at the originating centre, the beneficiary banks' accounts would be credited on Day-Two at the destination centre. The EFT system, presently, covers all the branches of the 27 public sector banks and 55 scheduled commercial banks at the 15 centres. Funds transfer is possible from any branch of these banks at these centres to other branch of any bank both inter-city and 172

intra-city. There is one EFT settlement every day at 2 P.M. There is no value limit for individual transactions (Sudhakar 2006). Benefits of EFT System The number of outstation cheques issued by customers and consequent service load on banks may decline over a period of time. Reconciliation is automatic. Banks can make use of the EFT infrastructure for introducing new payment/cash management products to their customers. 6.5.4 Credit Cards Credit cards constitute an important part of e-payment system and have shown a tremendous growth in retail e-payment system. The transactions to the tune of 60 per cent in volume are held by credit cards (RBI, 2008). It is an arrangement which enables the customer to obtain the goods and services through various shops those having the arrangement with issuing agency even though the customer does not have any balance in the customer account. It is equivalent to the loan sanctioned by the bank to its customers. Credit Card facilitates and makes possible to use first and pay later. The amount of credit varies from bank to bank. It provides the opportunity to customers to do shopping even without carrying the cash. The facility is provided to customer based upon the net worth of a client. The credit card can also be used to withdraw cash from ATMs within the cash limit approved to that client. 6.5.5 Debit Cards A Debit card provides for online electronic payment from saving or current accounts of the cardholder for purchase and access to ATMs for cash withdrawals and enquiries. ATM-cum-debit card is used both as an ATM card and as a method of payment other than cash or cheques when purchasing goods and services in India and overseas. A person desirous of getting issued an ATM-cum-debit card (smart card) in his name is required to have a savings bank account or a current account in bank whose card he intends to obtain. Thereafter, a customer is required to fill in an application form for the purpose which contains terms and conditions on which ATM-cum-debit card is issued. 6.6 E-payment Method Adoption in the World Following methods of e-payment are adopted worldwide; and these have been successfully adopted in different parts of India as well: 173

1. Western Union Money Transfer: It provides consumers and small business persons a simple and effective way to pay online from their Accounts/ 2. Octopus Card: It is used in Hong Kong for making transportation services in the country. This card can be used to make payment for subway train or bus. It can also be used at a public booth, buying soft drinks and making a local call. 3. Health Card: This card was launched in UK in 1999 for the benefit of particular community care. It helps in cutting cost of processing claim insuring patient privacy and patient records. 4. Contactless Payment: In this, there is no necessity to swipe the card on reader physically. It helps in handling very high volume of transactions per unit of time. 5. Micro Payments: Credit cards and debit cards are used for micro payment. For increasingly small payments, merchants are feeling pressurized to accept plastic cards for purchases. 174

6.7 Payment System in India, its Attributes and Participants Table 6.1 Types Attributes Amount Location Covered Participants Restrictions Large Value Payment Systems-Physical (Paper based and Electronic Systems) Inter-bank Clearing Paper based debit instrument, Deferred net settlement system. Value same day No restrictions All 15 RBI centres Only for inter-bank transactions cleared on an intra-city basis. High Value Clearing Paper based debt instruments, deferred net settlement. Same day value INR 1,00,000 15 centres of RBI Available to wholesale and retail customers. and above Real Time Gross Settlement (RTGS) Electronic credits, interbank or intra-bank transfer transactions. No restrictions Over 700 banking centres, 1000+banks & 20,000 branches based on banks declaration of participating branches. Over 16,000 branches of over 100 banks covering over 700 banking centres and expanding. Available to wholesale customers and retail customers. 175 (Contd.)

(Table 6.3 Contd.) Retail Payment Systems-Physical (paper based) MICR clearing (Cheques, Drafts and Other Instruments) Paper based debit instruments, deferred net settlement value in T+ 2. No restrictions 39+centres (accounting of 70 per cent for cheque volume transactions) All members of local clearing house. Cleared on an intra-city basis. This will be made more efficient with the implementation of CTS in December 2006. This will bring about efficiency in outward collections. Available for all. Non MICR (Cheques, Drafts and Other Instruments) Paper based debit instruments, deferred net settlements. Value date varies. No restrictions 1020 centres All members of local clearing house. Cleared on an intra-city basis. Available for all. Retail Payment Systems-Electronic Data Transfer Based Electronic Clearing Services (ECS)- Credit Electronic, bulk transfers (1 to many transfers), value in T+3. Date to be fixed in advance for bulk INR 5,00,000 and below 43 centres-15 managed by RBI. All banks and branches in these locations are mandatory participants. All members of clearing houses at the cities where ECS-credit is offered. The credit has to be initiated by a wholesale participant who has the need to distribute 176

(Table 6.3 Contd.) Electronic Clearing Services (ECS)- Debit payments. The finality of settlement could be known only after the cycle is complete. Electronic, bulk transfers (many to 1 transfer).value in T+3. Dates to be fixed in advance for bulk debits. The finality of the settlement could be known only after the cycle is complete. INR 5,00,000 and below 43 centres-15 managed by RBI. All banks and branches in these locations are mandatory for participants. 177 funds to large set of customers salaries, dividend credits and IPO refunds. Beneficiaries are typically retail customers. There is a simplified information exchange required for credit to happen, basically account details/micr details. Centralized debit facility available for RBI clearing locations. All members of clearing houses at the cities where ECS debit is offered. The initiation is required from wholesale customers who have to receive funds from retail customers. Centralized debit facility available for RBI clearing locations.

(Table 6.3 Contd.) Electronic Funds Transfer (EFT) Special Electronic Fund Transfer (SEFT) National Electronic Fund Transfer (NEFT) Electronic, one to one transfers. Deferred net settlement system. Value in T+0 or T+1, one cycle a day. Finally, once the transaction is uploaded to RBI system, if not returned, then the settlement is final. Electronic, one to one transfers. Deferred net settlements (three settlement cycles per day) value in T+0 or T+1. Electronic, one to one transfers. Deferred net settlement of each No restrictions, banks may impose limit for per day transactions for security reasons. No restrictions, banks may impose limits for per transactions/ per day transactions for security reasons. No restrictions. Banks may impose limits for per 15 RBI clearing centres. All banks and branches in these locations are mandatory participants. 2312 branches of 29 banks in 127 cities. Specific banks based on their ability to receive payments centrally. 24 banks and more than 3800 + branches in over 100 locations. 178 Inward EFT is mandatory for all banks, while EFT is optional. Available for anyone. No sign up process and can be initiated by anyone. Inward EFT is mandatory for all banks, while outward EFT is optional. This system was introduced by RBI in 2006 and is being replaced by NEFT with similar capabilities. Replacement for SEFT. Multiple settlements in a day make it ideal for retail customers for small value

(Table 6.3 Contd.) batch. Multiple batches in a day. Value in T+0 or T+1. Finally, once the transaction is uploaded to RBI system, if not returned, then the settlement is final. Source: RBI Bulletin, March 2006. transactions/ per day transactions for security reasons. 179 payments.

PART-II 6.8 Growth of E-payment Services in India Here an attempt has been made to study the growth of various e-payment systems in India during the period 2003-08. However, the data for cheques clearing system relates to the period 2001 onwards. The volume-wise and value-wise growth of each method has been presented separately in the following table. Table 6.2 Volume-wise Growth of E-payment Services Year ECS (cr) ECS (dr) EFT Credit Cards Debit Cards 2003-04 20,300 7,900 819 1,00,179 37,757 2004-05 40,051 (97.29) 15,300 (93.67) 2,549 (211.23) 1,29,472 (29.24) 41,532 (9.99) 2005-06 44,216 (10.39) 35,958 (135.02) 3,067 (20.32) 1,56,086 (20.51) 45,686 (10.00) 2006-07 69,019 (56.04) 75,202 (109.13) 4,776 (55.72) 1,69,536 (8.61) 60,177 (31.71) 2007-08 78,365 (13.54) 1,27,120 (69.03) 13,315 (178.79) 2,28,203 (34.60) 88,306 (46.74) 2008-09 88,394 (12.79) 1,60,055 (25.90) 32,161 (141.54) 2,59,561 (13.74) 1,27,654 (44.55) Source: Compiled from Trends and Progress Report from 2003-04 to2008-09 Note: The figures given in parentheses shows the growth percentages There has been a tremendous growth of electronic payment system during the period 2003-04 to 2008-09. The volume-wise ECR (cr) growth was 97.29 per cent in 2004-05 which showed a downward trend registering a growth of present only 12.79 in 2008-09. So, although the volume of ECS has constantly increased, but the growth is less. ECS (dr) recorded a maximum growth percentage of 135.02 whereas ECS (cr) was minimum with a percentage of 10.39 per cent in 2005-06. Similarly, electronic fund transfer services (EFT) showed a tremendous growth of 211.23 per cent in 2004-05 180

which declined to 20.32 per cent in 2005-06 and then increased to 55.72 per cent, 178.79 per cent in the year 2006-07 and 2007-08 respectively. The growth of Credit Cards services was less as compared to other modes of payments. It was 29.24 per cent in 2004-05 and 20.51 per cent in 2005-06 which further declined to 8.61 per cent in 2006-07. It increased to 34.60 per cent in 2007-08. Debit card services showed an increasing growth trend till the year 2007-08, but the growth rate declined from 46.74 per cent in 2007-08 to 44.55 per cent in 2008-09. So, the analysis provides that Reserve Bank of India has tried to develop and strengthen the electronic payment system by introducing services like ECS, EFT, Debit Card and Credit Card. The system has been quite useful in the faster collection of bills to the companies and in providing better cash flow management. Following table shows the value wise growth of e-payment services Table 6.3 Value-wise Growth of E-payment Services Year ECS (cr) ECS (dr) EFT Credit Cards Debit Cards 2003-04 10,228.0 2,253.58 17,124.81 17,662.72 4,873.67 2004-05 20,179.8 2,921.24 54,601.38 25,686.36 5,361.04 (97.29) (29.62) (218.84) (45.42) (10.00) 2005-06 32,324.4 12,986.50 61,288.22 33,886.47 5,897.14 (60.18) (344.55) (12.24) (31.92) (9.99) 2006-07 83,273.1 (157.61) 25,440.79 (95.90) 77,446.31 (26.36) 41,361.31 (22.05) 8,171.63 (38.56) 2007-08 7,82,222.30 (89.35) 48,937.20 (92.35) 1,40,326.48 (81.39) 57,984.73 (40.19) 12,521.22 (53.22) 2008-09 97,486.60 66,975.89 251,956.38 65,355.80 18,547.14 (N.A) (36.86) (79.55) (12.71) (48.12) Source: Compiled from Trends and Progress Report from 2003-04 to2008-09 Note: The figures given in parentheses show the growth percentages. As is evident from the above table that value-wise ECS (cr) transactions have shown the highest growth percentage of 157.61 in 2006-07. The growth increase in value was higher than volume transaction. However, the growth of ECS (dr) was maximum i.e., 344.55 per cent in 2005-06. Both the volume and value-wise, the growth in ECS (dr) was maximum in 2005-06. However, the growth in ECS (cr) was maximum in 2006-07. As far as EFT is concerned, there was a tremendous growth of 218.84 per cent in 2004-05 but it declined drastically to 12.24 per cent in 2005-06 as during this period the 181

clearing services were maximum. Value transactions show a substantial increase in debit cards. The increase in value was less as compared to volume transactions. However, growth showed an increasing trend from just 10 per cent in 2004-05 to 53.22 per cent in 2007-08, but it further declined to 48.12 per cent in 2008-09. So, there was an overall increase of more than 50 per cent during the five years period. As regards the growth of credit cards, it decreased from 45.42 per cent in 2004-05 to 31.92 per cent in 2005-06 and further declined to 22.05 per cent in 2006-07. Thereafter, it increased to 40.19 per cent in 2007-08 registering a wide fluctuation in value-wise growth trend of credit. The respective growth rates are more apparent in the charts given below. Figure 6.2 Volume and Value-wise Growth ECS (cr) 900000 800000 700000 600000 500000 400000 ECS Value ECS Volume 300000 200000 100000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Figure 6.3 Volume and Value-wise ECS (dr) 180000 160000 140000 120000 100000 80000 VOLUME VALUE 60000 40000 20000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 182

Figure 6.4 Volume and Value-wise Electronic Fund Transfer (EFT) 300000 250000 200000 150000 100000 EFT Value EFT Volume 50000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Figure 6.5 Volume and Value-wise Growth of Debit Cards 140,000 120,000 100,000 80,000 60,000 VOLUME VALUE 40,000 20,000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Figure 6.6 Volume and Value-wise Credit Cards 300,000 250,000 200,000 150,000 100,000 VOLUME VALUE 50,000 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 183

Table 6.4 Cheques Clearing Data Year Total MICR Centres Total Non-MICR Centres 2001-02 5,377.0 3,638.0 2002-03 5,980.0 4,159.0 2003-04 6,241.0 3,987.0 2004-05 9,414.0 2,253.0 2005-06 10,318.0 2,549.0 2006-07 11,441.0 2,231.0 2007-08 12,229.0 2,376.0 2008-09 11623.0 2335.0 Source: Compiled from Trends and Progress Report from 2003-04 to2008-09 The above table shows the total number of Magnetic Ink Character Recognition (MICR) and Non-MICR centres in India during the period 2001-02 to 2008-09. Non- MICR refers to those centres where paper based clearing is done, and MICR centres follow electronic based clearing. It is evident from the data that MICR centres increased from 5377 in 2001-02 to 12229 in 2007-08, Non-MICR centres decreased from 3638 centres in 2001-02 to 2335 centres in 2008-09. The analysis reveals that retail electronic payment system is becoming more poplar in India as compared to paper based clearing system. Figure 6.7 Total MICR and Non-MICR Centres 14000 12000 10000 8000 6000 4000 Total MICR centres Total Non MICR centres 2000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 184

6.9 Comparison of Paper Based Transactions with Electronic Transactions Figure 6.8 Retail Electronic Transactions: Volume in Percentage 25% 7% 8% 24% ECS(cr) ECS(dr) EFT Credit cards Debit cards 36% Source: Compiled from Trends and Progress Report from 2003-04 to 2008-09 Figure 6.9 Retail Electronic Transaction: Value in Percentage 10% 4% 18% 12% ECS(cr) ECS(dr) EFT Credit cards Debit cards 56% Source: Compiled from Trends and Progress Report from 2003-04 to 2008-09 A comparison of paper based system and electronic payment system in volume and value based transactions is presented in the above diagrams. Diagram-1 clearly reveals that 36 per cent transactions are conducted through credit cards followed by 25 per cent by debit cards, 24 per cent by ECS (dr), 8 per cent by EFT and just 7 per cent by ECS (cr). So, the maximum contribution has been registered by credit cards, while the minimum by ECS (cr). Diagram-2 highlights the retail electronic value transactions. Here, EFT constitutes the largest share of 56 per cent followed by ECS (cr) 18 per cent, 185

ECS (dr) 12 per cent, credit cards 10 per cent and debit card by 4 per cent. So, the analysis presents two different observations in volume and value transactions. Credit cards constitute the maximum in volume but a sma ll share in value transactions. Similarly, fund transfer was just 8 per cent in volume transactions and 56 per cent in value transactions. 6.10 Real Time Gross Settlement System Real Time Gross Settlement System (RTGS) has been in operation since 2003-04. Any transaction having a minimum threshold of Rs.1,00,000 is routed through this channel, and the one below this amount is routed through NEFT. It mainly consists of customer remittance, inter-bank remittances and inter-bank clearing settlement. RTGS services were offered by more than 1000 banks and 20,000 branches based on banks declaration of participating branches, and the services were available for wholesale and retail customers during the period under study Year Table 6.5 Customer Remittance and Inter-bank Remittance in RTGS Customer Remittances Inter-bank Remittances Inter-bank Clearing Settlement (Number in lakh) Total Inter-bank Total 2003-04 0.001 0.001 0.001 2004-05 0.68 3.92 3.92 4.604 2005-06 7.13 10.54 10.54 17.67 2006-07 24.82 13.94 0.04 13.98 38.80 2007-08 41.46 16.94 0.14 17.08 58.54 2008-09 112.34 21.32 0.19 21.50 133.66 Source: Compiled from Trends and Progress Report from 2003-04 to 2008-09 Table 6.5 shows that the customer remittance and inter-bank remittance was nil in 2003-04 but then increased to 41.46 lakh in 2007-08 and 112.34 lakh in 2008-09. Clearing between one bank to other also increased by 0.001 per cent, 3.92 per cent, 10.54 per cent, 13.94 per cent, 16.94 per cent, 21.32 per cent during the period 2003-04 to 2008-09 respectively. Various factors have contributed to this settlement system. RTGS is very much prevalent for inter and intra-bank settlement among different banks in India for various reasons. Firstly, RTGS facilitates continuous settlement of payment on an individual order basis without netting debit and credit across the books of RBI. Secondly, it is a good source for improving non-interest income. Thirdly, RTGS has generated an additional source of revenue. Since the funds are transferred through electronic system, a 186

lot of back end work and manpower involved in such work can be utilized for other productive purposes. 6.11 Impact of E-banking on Payment and Clearing System To know the impact of e-banking on payment and clearing system, the response of customers has been also taken into account. An attempt has been made to know the satisfaction of the customers regarding e-payment system. The system has been beneficial in handling large volume of business payment/ remittances. It also provides alternative for faster delivery of banking services acceptable to wide range of customers. Table 6.6 Mean and Standard Deviation of Customers Perception Regarding Payment System Statements Mean S.D. E-payment handles a large volume of business/ payment/ 3.97 0.892 remittances. E-payment provides alternative for faster delivery of banking 3.96 0.800 services acceptable to wide range of customers. It provides convenient service to customer and reduces the 3.88 0.821 chances of frauds. It has reduced the substantial risks involved in payment system. 3.55 0.964 E-payment solves the purpose of online purchasing, online 3.92 0.840 shopping, and e-commerce. The transactions made through e-payment are faster, more 3.81 0.903 accurate, secure and user-friendly. Fees charged for e-payment are affordable. 3.81 0.865 E-payments are growing at faster speed than paper based 4.06 0.870 instruments. E-payment has helped to reduce the costs. 3.99 0.762 Customers are aware of emerging e-payment options. 3.85 0.815 Mean and standard deviation scores of all the dimensions of e-payment were calculated. The highest mean score,i.e., 4.06 was found for the dimension called e-payment growing at much faster speed than paper based instruments (4.06) followed by the cost involved in payment system with a mean score of 3.99. Customers also agree that e-payment handles a large volume of their payments and provides them faster delivery of banking services. So, the respondents are agreeing with all the benefits facilitated by the e-payment system. 187

Table 6.7 KMO and Bartlett's Test of Sphericity Kaiser-Meyer- Olkin Measure of Sampling Adequacy 0.629 Bartlett's Test of Sphericity Approx. Chi-square 335.973 d.f. 45 Sig. 0.000 The above table mentions the KMO measure of sampling adequacy and Bartlett s test of sphericity. The value of KMO is greater than 0.5, hence, all the factors are not considered equally important for the study. Further, Bartlett s test of sphericity shows the significance at 0.000 levels. Table 6.8 Factor Loading on the E-payment Dimension Dimension Initial Extraction Volume 1.000 0.706 Fast delivery 1.000 0.676 Frauds 1.000 0.568 Risk reduction 1.000 0.695 Online 1.000 0.346 Convenience 1.000 0.573 Affordable 1.000 0.607 Growth 1.000 0.261 Cost 1.000 0.538 Awareness 1.000 0.653 The above table shows the initial communalities of all the various dimensions. Some of the extractions are closer to one, while some are very less. For further study, only the factors having loadings greater than 0.4 will be considered. Out of ten factors, there are only two factors, namely, growth and online which have loadings less than 0.4. So, these will not be taken into consideration. 188

Table 6.9 Total Variance Explained Regarding E-payment Dimension Initial Eigen Values Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings Cumulative Per cent Total Percent of Variance Cumulative Per cent Total Percent of Variance Component Total Per cent of Variance 1 2.137 21.367 21.367 2.137 21.367 21.367 1.714 17.136 17.136 Cumulative Per cent 2 1.289 12.890 34.257 1.289 12.890 34.257 1.413 14.127 31.263 3 1.148 11.483 45.740 1.148 11.483 45.740 1.387 13.865 45.129 4 1.049 10.489 56.229 1.049 10.489 56.229 1.110 11.100 56.229 5 0.909 9.090 65.319 6 0.885 8.846 74.165 7 0.809 8.092 82.257 8 0.705 7.049 89.306 9 0.607 6.072 95.378 10 0.462 4.622 100.000 The above table mentions the total variance explained and the eigen values of all the variables. Only those factors will be extracted which are having eigen values greater than 1. There are four factors extracted which explained 56.22 per cent of the data. So, these four factors will explain the combination of all the variables. 189

Table 6.10 Rotated Component Matrix Component Statements 1 2 3 4 Volume 0.830 0.012 0.084 0.096 Fast delivery 0.815 0.032 0.055-0.088 Frauds -0.082 0.073 0.746-0.007 Risk reduction -0.025 0.827-0.062-0.080 Online 0.399 0.392-0.043 0.177 Convenience 0.093 0.712 0.226 0.081 Affordable 0.039-0.151 0.392 0.655 Growth 0.298 0.149 0.182 0.342 Cost 0.303 0.068 0.661 0.068 Awareness 0.052-0.111 0.374-0.705 With the help of principal component analysis varimax with Kaiser Normalization, four components were extracted: Component 1: Volume and Fast delivery Component 2: Risk reduction and convenience Component 3: Frauds and Cost Component 4: Affordable As is evident from the above table that all the statements cannot justify the electronic banking impact on payment and clearing system. So, to reduce the data for further analysis, factor analysis was done to know which statements are more relevant and depict the impact of e-banking on payment and clearing system. The KMO measure of sampling adequacy and Bartlett s test of sphericity were used to check the reliability and validity of data. The value of KMO is greater than 0.5, hence, all the factors are not considered equally important for the study. Further, Bartlett s test of sphericity shows the significance at 0.000 level. With the help of principal component analysis varimax with Kaiser Normalization, four components are extracted. First component is the combination of Volume and Fast Delivery as e-payment has reduced the large volume of transactions through online settlement of funds and fast delivery of funds through RTGS. Second component is the combination of risk reduction and convenience. Third component is having two variables, namely, frauds and cost. It helps in reduction of the cost as well as control over the fraudulent activities. Fourth component is having only one factor, that is, affordable which means that fees of e-banking services can be easily affordable by all the customers. 190

Table 6.11 Level of Satisfaction over the E-banking Services Perception Frequency Valid Per cent Cumulative Per cent Very uncomfortable 10 2.5 2.5 Somewhat uncomfortable 21 5.2 7.7 Neither comfortable nor Uncomfortable 49 12.2 19.9 Somewhat comfortable 141 35.3 55.2 Very comfortable 179 44.8 100.0 Total 400 100.0 Table 6.11 carries the data showing the level of satisfaction of the customers over the e-banking services available in the banks under study. As many as 44.8 per cent of the respondents agreed that they feel very comfortable while using the e-banking services. However, 35.3 per cent customers admitted that they feel somewhat comfortable using such services. There were another 12.3 per cent customers who explained that they feel neither comfortable nor uncomfortable while availing the e- banking services offered by the banks. However, small proportion of the customers, i.e., 5.3 per cent and 2.5 per cent were found to be somewhat comfortable and very comfortable respectively while availing the e-banking services introduced by the banks. Table 6.12 Level of Awareness among Customers Perception Frequency Per Valid Per Cumulative cent cent Per cent Very Unsatisfied 13 3.3 3.3 3.3 Somewhat Unsatisfied 21 5.3 5.3 8.5 Neither Satisfied nor Unsatisfied 35 8.8 8.8 17.3 Somewhat Satisfied 195 48.8 48.8 66.0 Very Satisfied 136 34.0 34.0 100.0 The date showing the awareness level of the respondents under study about the e- banking system introduced by the banks has been presented in table 6.12. An attempt has been made to know whether this system would gain momentum in future or not. It is evident from the table that only 34 per cent customers are found to be very satisfied with their present level of awareness about the system, whereas 48.8 per cent customers are somewhat satisfied with their current level of awareness and they need to add more to their knowledge. However, 8.8 per cent respondent customers could hardly say anything about it. However, 5.3 per cent are found to be somewhat satisfied, and 3.3 per cent very 191

unsatisfied with their present level of awareness about the new e-banking system introduced by the banks. Most of such customers are either uneducated or belong to the rural segment. Hence, in order to increase the awareness level of these customers, there is need to organize some special training programmes by the banks for them. Table 6.13 Usage of E-payment Techniques Time Period Frequency Per cent Valid Per cent Cumulative Per cent Less than 6 months 38 9.5 9.5 9.5 6-12 months 74 18.5 18.5 28.0 1-2 yrs. 85 21.3 21.3 49.3 2-4 yrs. 98 24.5 24.5 73.8 More than 4 yrs. 105 26.3 26.3 100.0 Total 400 100.0 100.0 The data presented in the table 6.13 reflects the period for which the respondent customers have been using the different modes of e-payment. As many as 26.3 per cent customers have been using the system of e-payment for the last more than four years, 21.3 per cent customers for 1-2 years, 18.5 per cent customers for 6-12 months and 9.5 per cent customers for less than six months. Table 6.14 Improvement in Quality of Service Perception Frequency Per cent Valid Per Cumulative cent Per cent Strongly Disagree 3 0.8 0.8 0.8 Disagree 14 3.5 3.5 4.3 Neutral 80 20.0 20.0 24.3 Agree 153 38.3 38.3 62.5 Strongly Agree 150 37.5 37.5 100.0 Total 400 100.0 100.0 In table 6.14, an attempt is made to know whether e-banking has improved the quality of service. The table reveals that 37.5 per cent respondents strongly agreed and 38.3 per cent respondents agreed that e-banking has certainly improved the quality of service. The response of 20.0 per cent of respondents was neutral in this regard. However, a small proportion of respondents, i.e., 3.5 per cent disagreed and 0.8 per cent strongly disagreed with the statement that e-banking has improved the quality of service. The analysis provides that a large proportion of respondents (75.8 per cent) agreed that 192

introduction of internet banking; mobile banking and ATM services have improved the quality of service to a large extent. Table 6.15 Comparative Analysis of E-payment Impact on Payment and Clearing System Statements Public Private t-value p-value E-payment handles large volume of 3.69 4.00-3.463 0.000** business/ payment/ remittances. E-Payment provides alternatives for faster delivery of banking services 3.96 3.98-0.247 0.804 acceptable to wide range of customers. It provides convenient service to 3.82 3.88 0.715 0.475 customer and reduces the chances of frauds. It has reduced the substantial risks 3.27 3.79-5.529 0.000** involved in Payment system. E-Payment solve the purpose of online purchasing, online shopping, E-commerce. 3.77 4.02-2.938 0.003** E-Payment provides accuracy, 3.65 3.94-3.288 0.001** security, transaction speed, user friendliness to customers. Fees charged for e-payment can be 3.92 3.62 3.428 0.000** easily affordable. E-Payments are growing at much 4.14 3.98 1.821 0.069 faster speed rate than paper based instruments It has reduced the cost involved in 4.00 3.95 0.649 0.516 Payment system. Customers are aware of emerging E- Payment options 3.82 3.89-0.825 0.409 ** Significant at 5 per cent level of significance statements: The statistical difference in e-payment system existed in the following E-payment handles large volume of business/ payment/ remittances (p=0.000) It has reduced the substantial risks involved in payment system(p=0.000) E-payment has solved the problem of online purchasing, online shopping and e- commerce (p=0.003) E-payment provides accuracy, security, transaction speed, user friendliness to customers (0.001) E-payment charges are affordable (p=0.000) 193

Table 6.15 indicates statistical difference between public and private sector with the help of t-test. Private sector banks are holding large volume of payments for the customers comparative to public sector and value is significant at 5 per cent level. In online shopping, online purchasing, e-commerce, convenient service to customers (0.003) and regarding accuracy, security, transaction speed, user friendliness to customers; mean score of private sector is high and significant at 5 per cent level. There is only one service in which public sector banks are better than private sector banks that is fees charged by the banks for e-payment and clearing system are easily affordable. It means the service charges of the banks in public sector are less and convenient to respondents. Therefore, out of ten services, statistical differences found in five services in which private sector banks are leading in four services and public sector bank in fees charges service. Table 6.16 Perception of Customers Regarding Level and Quality of Service Statements Public Private t-value p-value Level of comfort in choosing 4.10 4.27 1.785 0.005** e-payment services Current awareness for usage 4.14 3.90-2.461 0.014** Time period of using the 2.89 3.84 7.991 0.000** services Improvement in quality of 4.01 4.22 2.378 0.017** service ** Significant at 5 per cent level of significance Table 6.16 highlights the level of awareness and comfort among customers for e- payment services, and a statistical difference was observed in all the above statements in both public and private sector banks. As far as the level of comfort is concerned, the customers from the private sector banks (4.27) are more satisfied as these banks offer advanced and more facilitative services through internet and mobile banking. However, awareness about usage is high in public sector banks (4.14). Further private sector bank customers have been using the e-banking services for a longest time period (3.84) as compared to those from the public sector banks (2.89). the efforts made by the private sector banks (4.22) in improving the quality of service have been greater as compared to the public sector banks (4.01). 194

E-banking through various modes of payment has made it easier for the customers to transact from anywhere and anytime. Although the faster and cheaper movement of funds with the fast realization of cheques proves to be beneficial for the customers but for banks the electronic movement of funds mean less funds available for floating and they will left with lower levels of float funds. E-payment system in India has shown a tremendous growth but still there is a lot to be done to increase the usage of e- payment. Still 90 per cent of transactions are cash based. So, there is need to widen the scope of e-banking. Innovation, incentive, customer convenience and legal framework are the four factors which can contribute to strengthen the e-payment system. We can have optimal use of available funds of the banks only through this system. 195