India is rapidly abandoning its paper-based clearing mechanism, with the Reserve Bank of India introducing initiatives covering cheque-imaging, real time gross settlement and electronic fund transfer. This trend is expected to increase further with the introduction of the Information Technology Act, a clearing corporation, a centralised fund management service, and use of the Structured Financial Messaging Solution for intra and interbank messages.
India stride further into the new millennium riding on a wave of optimism. A decade of reforms has propelled the economy onto a new growth trajectory today. India is a mature and stable economy. There is now healthy competition among different Indian States to attract foreign investments, and India has joined the league of the fastest growing economies in the world, being next only to China and Korea.
The resurgence of the Indian economy has been sustained in the face of difficult international developments. Even as global growth has declined, India’s GDP growth has accelerated in 2002 and reached to 6% in the 2003 fiscal year. Despite the worst drought in two decades in 2002, inflation rates have declined further and interest rates have softened. The momentum of the record inflow of FDI has continued and foreign exchange reserves were at all-time high.
Indian economy is a market-driven economy. Due to the efforts taken by the Securities and Exchange Board of India (SEBI), the equity markets are matures, regulated and offer a wide range of equity and debt-linked products. India has a well-established legal system with an independent judiciary. Indian corporates have had increased access to global capital markets. This has driven conformity with international accounting standards, greater transparency and a focus on corporate governance. The government has accelerated the disinvestment process, demonstrating its commitment to the economy.
The banking structure in India is complex and spread over a wide geographical area. There are about 65,000 bank branches, and the central bank is the RBI.
The composition of banks in India is:
Scheduled commercial banks – 296,
Foreign banks – 42
Public sector banks – 27
Private sector banks – 31
Regional rural banks – 196
Schedule cooperative banks – 67
The Central Board of Direct Tax (CBDT) is the governing body for the direct taxes in India. Similarly, the Central Board for Customs and Excise (CBCE) is the main governing body for indirect taxes.
India had traditionally a paper based clearing system. As of 2002, India has -about 1,047 clearing houses and 65,000 bank branches. The total value of the cheques processed through these centres surpassed INR 1,21,000 bn in the year 2001-02. The paper based clearing system passes such inherent issues as a high cost of processing fragility of the system and security risks. For these reasons, the RBI has been emphasing the need for upgrading the technological infrastructure in India.
Following are some of the initiatives:
1. Cheque-Imaging:
In some countries, cheques deposited in banks are scanned and stored with the bank. Instead of sending physical cheques to the clearing house, the scanned copy of the cheques are transmitted. This level of cheque-imaging reduces clearing cycle, enables faster returns-processing better customer service and availability of images for audit trails.
In India, 15 clearing houses, now have cheque-imaging. However, the images are now stored only for reconciliation and resolving clearing house differences. The legal framework is undergoing changes to adopt cheque imaging.
The Negotiable Instruments Act was amended in 2002, and has extended the definition of a cheque to include electronic cheques and the electronic images of truncated cheques. The act now also defines the material alternation of an electronic image of a truncated cheque. Availability of adequate technical infrastructure at cleaning houses and banks is a prerequisite for expanding the network and exploiting the full benefits of cheque-imaging.
2. Real-Time Gross Settlement—(RTGS):
It is a payment mechanism that eliminates settlement risk by settling payments in real time. This is in contrast to the existing net settlement system, where interbank settlement takes place at the end of the batch.
The RBI has implemented a national RTGS system that allows all banks in India to make secure inter-bank payments across the country. The RTGS work flow involves transaction queuing and processing on a first-in-first out basis. RTGS provide significant benefits to individuals and businesses by allowing instant transfer of funds between banks thus expediting electronic payments.
3. Integration with Enterprise Resource Planning System (ERP):
Organisations are migrating from their existing accounting procedures to enterprise resource planning system. This has fuelled the need to integrate the banks cash management systems with corporates *ERP packages and key cash management providers now offer complete integration of cash management solution with ERP system.
Such integration offers the following benefits:
(a) Reduces manual processing and cost thereof.
(b) Enables comprehensive management control by setting user restrictions.
(c) Streamlines the reconciliation process.
(d) Improves management information.
(e) Allows straight-through processing (STP).
Straight-through processing (STP) has historically been regarded as an area focused on by banks for streamlining their processes. Corporates now appreciate the role of STP as an integral part of their internal accounting work flows. Manual practices involve costly multiple data reentry from paper documents and other sources that are susceptible to errors, discrepancies, delays and possible fraud. STP enables orders to be processed, confirmed, cleaned and settled in a shorter-time period, more cost effectively and with fewer errors.
4. Electronic Banking:
The Government has supported the growth of e-commerce in India by enacting the Information Technology Act 2000. There are more people connected to the Internet in India today than in past owing to improving personal computer penetration, availability of brand width and power.
However, despite the growing internet population, India is still witnessing modest e-commerce activity. E-commerce activity was estimated to be in the region of about US$ 300 m, almost half that of China. Business-to-business e-commerce implementation is low-except in certain verticals such as the automobile sector and banking and finance.
With recent technological advancements, the implementation of Internet banking and electronic banking has increased greatly. The private sector and foreign banks in India are at the forefront in offering online banking services on internet.
This service is in addition to existing offsite delivery channels such as automated letter machines, electronic banking and mobile banking. Reports for the collections products are being offered on the internet by selected banks. Customers can now view the clearing status of their cheques and cheque images over the internet.
Going forward, the utilization of electronic banking will further increase as technological advances and enabling legislation make the process more secure.
Regulatory Changes and their Impact on Cash Management:
1. Information Technology Act 2000:
Business and consumers are increasingly using computers to create, transmit and store information in electronic format instead of traditional paper documents.
Since e-commerce eliminates paper based transactions the need for legal changes became a necessity. The Indian Parliament gave its assent to the Information Technology Act on 9 June 2000.
The Act deals with defining the common terminology used in respect of computers, giving legal recognition to electronic records and digital signatures. The act further defines when digital signatures or electronic records can be termed secure for transmission over the internet.
The government has also framed the Information Technology (Certifying Authority) Regulations 2001. This regulation primarily controls the activities of certifying authorities (authorised to grant licences to issue digital signatures).
India now has four certifying authorities i.e.:
(a) Safe Scrypts.
(b) The National Information Centre.
(c) Institute for Development and Research in Banking Technology (IDRBT).
(d) Tata Consultancy Services.
2. Centralized Funds Management Service:
The Centralized Fund Management Service (CFMS) introduced by the RBI, enables commercial banks to obtain the funds position of their accounts with the RBl’s Deposits Accounts Department (DAD) at 17 locations in India.
Bank will not only be able to enquire about their funds balance in DAD accounts, but also transfer funds across their DAD accounts in different cities. CFMS allow banks to reduce their cost of fund by better management of fund flows.
3. Clearing Corporation of India LTD:
Recognised the need for upgrading the country’s financial infrastructure in respect of the clearing and settlement of debt instruments and Fx (FOREX) transactions, the RBI initiated the more to set up the Cleaning Corporation of India Limited (CCIL). The primary objective of setting up the CCIL has been to establish a safe institutional structure for the clearing and settlement of trades in Fx money, and debt markets so as to bring efficiency into the transaction settlement process, and insulate the financial system from stocks emanating from operations-related issues. The CCIL was incorporated in 2001 and commenced operations from 15 Feb. 2002.
4. Structured Financial Messaging Solution:
The Structured Financial Messaging Solution (SFMS) is the communication protocol introduced by the RBI for intra-bank and inter-bank messages within India. It incorporates templates and fixed message formats for affecting STP among member banks SFMS is broadly similar to SWIFT message formats. These message formats will be used for RTGS and other interbank communication.
SFMS protocols will facilitate STP in the Indian banking industry for domestic payments and transactions, reducing transaction costs for customers.
5. Latest Cash Management Products:
In India Cash Management has predominantly been associated with collections products. Subsequently, cash management provides have diversified their product portfolio to include payments, account services and delivery management. This enables corporate treasurers to concentrate on their core functions and outsource non-core activities to banks. Banks are increasingly shifting towards enabling their cash management operations to use more STP.
6. Electronic Fund Transfer:
The RBI introduced the Electronic Fund Transfer (EFT) system in 2001. EFT allows the electronic transfer of funds across 14 locations and 13,000 banks branches in India. It eliminates the burden of writing cheques and allows the transfer of funds within 24 hours anywhere within its current coverage.
The system eliminates virtually all incidences of fraud and forgery that are typically involved with paper-based instruments. Current RBI guidelines for EFT stipulate that all banks have to participate in inward EFT (credit to customer’s accounts for EFT payments). But participation in outward EFT (sending payments on behalf of customers) is optional.
7. Special Electronic Funds Transfer:
In April 2003 the RBI introduced the special electronic funds transfer (SEFT) system, which is the enhanced version of EFT. SEFT now covers 97 cities, 24 banks and 2,500 bank branches across India.
The coverage of SEFT is much larger than that offered by EFT. SEFT gives banks the options to select branches where they can offer SEFT. All branches that participate are SEFT need to be networked with the service branch in Mumbai, which intact as the one point of contact with the RBI for SEFT.
Since, all banks branches participating is SEFT are networked, timely credits will be available to beneficiaries (unlike for EFT, wherein there is a possibility of delayed credit of the beneficiary bank is not networked).
8. Payment Outsourcing:
Cheque and drafts remain a popular payment method in India, but involve time-consuming and laborious manual processes. Payment out servicing to banks allows corporates to focus on their core competencies, reduce overheads costs and benefit from speed, accuracy and enhanced security and fraud control.
9. Electronic Invoice Presentment & Payment:
Cash management providers in India have started offering electronic invoice presentment and payment (EIPP).
EIPP offers the facility of presenting the invoice by supplier to their client over the internet. The product also provides the facility to the client to view, dispute and pay the invoice electronically through payment gate ways.
10. Continuous Linked Settlement:
The Continuous Linked Settlement (CLS) service offered by CLS Bank provides a global infrastructure for multi-currency payment cleaning and settlement services. It is a real-time cross broader settlement system that eliminates settlement risk caused by delay arising from time-zone difference by the simultaneous setting of Fx payment instructions.
CLS enables banks to expand their Fx businesses with CLS participating contemporary banks by making it possible to increase limits due to reductions in settlement risk moreover its delivers the benefits of STP. Large foreign banks that are settlement bank for CLS have been marketing the service to major Indian banks with cross-border flows. However CLS has yet to gain momentum in India.