Payments in India – Part 1: How do Bank Transfer Work in India?

For a growing economy, it’s important monetary hindrance remains to a minimum. Fast and N2free movement of money is quintessential for the growth of an economy like India. As a quick and less expensive way of moving money, online bank transfers are a good indicator of the development of the digital economy.

When it comes to payments in India, the Reserve Bank of India has taken thoughtful and concrete steps towards improving the economy as well as the life of each and every citizen in India. These steps have emphasized the idea to make cash flow for Indians easier and less cumbersome. In fact, these steps have made India one of the most rapidly growing economies in the world.

Here is a small timeline of the growth of the Indian economy with respect to the regulations and government-based financial bodies introduced in India –

While you may be familiar with NEFT, IMPS, and UPI, some other terms like ECS, CTS, and NACH might seem unfamiliar. This is primarily because there are back end infrastructure developments which work in the background to process payments for you.

These developments over the past 20 years could be split into two versions –

1. Back-end Settlements
2. And, Front-end Settlements

The backend infrastructure

ECS

ECS or Electronic Clearing Systems were first introduced in India in the 1990s. They facilitate the electronic transfer of money from one account to another. India has a large network of local,

regional and national ECS which is being replaced by the NACH developed by the NPCI.

NPCI

National Payments Corporation of India (NPCI), an umbrella organization for operating retail payments and settlement systems in India. It is a not-for-profit organization that was formed by a consortium of leading public and private sector banks in India. NPCI has been instrumental in developing infrastructure for the digitization of payments in India. It is responsible for developing and launching products like IMPS and UPI among others.

CTS

CTS stands for Cheque Truncation System. Remember when cheques used to take 2 days at best and sometimes up to 10 days to clear? Earlier, cheques used to be physically sent to clearinghouses for processing. This was replaced in 2008 by the CTS infrastructure, which has digitized the process of cheque clearance and reduced the time for clearance to 1 day.

Rupay

You must be familiar with VISA, MasterCard or AMEX that is printed on credit and debit cards. VISA, MasterCard or AMEX aren’t financial institutions but are payment networks or technology

companies that enable the authorization and clearing of payments via credit or debit cards.

Rupay is an Indian Debit and Credit Card payment network similar to VISA or MasterCard. 

While it is new as compared to VISA or MasterCard, it is growing in popularity.

NACH

National Automated Clearing House system, developed by NPCI, is used by banks, financial

institutions, corporates, and the government to facilitate interbank high-volume electronic

transactions which are repetitive and periodic in nature. National Automated Clearing House (NACH) is a centralised system, launched to consolidate multiple ECS systems running across the country.

The front-end infrastructure

Now, let’s get down to the infrastructure you use on a daily basis. In the next section, we will discuss how FT, NEFT, IMPS, RTGS and UPI work and everything you need to know about them to use them efficiently.FT

Fund Transfer (FT) refers to the transfer of funds within the same bank. If two friends Sachin and Sourav, both have accounts in HDFC bank, and Sachin wants to transfer money to Sourav. The amount is simply debited from Sachin’s account and credited to Sourav’s account. It is the simplest form of money transfer.

FT moves money instantly and works 24×7.

RTGS

The Real-Time Gross Settlement system is used for large inter-bank fund transfers (> 2,00,000). It is ‘real-time’, which means that the payments are processed instantly and it is a ‘gross settlement’ which simply means that payments are processed one at a time.

How it works

Let us explain this through an illustration. Say Rahul wants to transfer Rs. 2,50,000 to his friend

Laxman through RTGS.

1.  Rahul goes to HDFC bank’s website, where he has an account and fills out the form with beneficiary name, beneficiary account number, beneficiary bank and amount.
2. HDFC bank receives the transfer request from Rahul.
3. Since Laxman has an account in a different bank – ICICI bank, HDFC bank will send a transfer request to RBI.
4. HDFC Bank and ICICI bank both hold RTGS settlement accounts at RBI
5. When RBI receives the request from HDFC bank, it debits 2,50,000 from HDFC’s RTGS settlement account and adds 2,50,000 to ICICI’s RTGS settlement account. 
6.  RBI then communicates the same to ICICI bank, which credits 2,50,000 to Laxman’s account.
7. Laxman receives the money and the RTGS transfer is complete.

NEFT

The National Electronic Fund Transfer (NEFT) is used for inter-bank fund transfers. The fund transfer does not take place in real-time. It happens in half-hourly batches from 8 am to 7 pm every day. Like RTGS, NEFT is also maintained by the RBI.

How it works

Let us explain this through another illustration. Suppose Mithali wants to transfer Rs. 50,000 to

Smriti through NEFT.

1. Mithali goes to HDFC bank’s website, where she has an account and fills out the form to initiate an NEFT transfer for Rs. 50,000.
2. The HDFC bank branch prepares a message for the transfer and sends it to its NEFT pooling centre.
3. The pooling centre forwards the message to the NEFT Clearing Centre (RBI) to be included for the next available batch for transfers.
4. The clearing centre receives a lot of such messages from all banks and branches. It sorts all the messages received.
5. Since all the transactions initiated from HDFC, and similarly from ICICI will be aggregated, only a net settlement amount is transferred between banks.
6. The clearing centre then sends instructions through the pooling centre to ICICI bank to complete the NEFT transfer.
7.  ICICI bank then credits Smriti’s account with the amount and the transaction is complete.

IMPS

Intermediate Payment Systems (IMPS) is a real-time payment system which works 24×7, Unlike RTGS & NEFT, which are both operated by RBI, IMPS is maintained by NPCI. IMPS has a transaction limit of Rs. 2,00,000 per transaction.

How it works

Suppose Mahendra wants to send Rs. 100 to Yuvraj.

1. Mahendra goes to HDFC bank’s website – where he has his account and fills in the IMPS transfer request form.
2. HDFC bank validates his details and sends the transfer request to NPCI. At this stage, HDFC bank debits Mahendra’s account and sends him an update message over SMS.
3. NPCI passes the transaction to ICICI bank, where Yuvraj has his account.
4. ICICI bank validates the credentials it receives from NPCI and credits Yuvraj’s account with money. It then sends a status update message to NPCI.
5. NPCI conveys the ‘transaction successful’ message back to HDFC bank which in-turn updates Yuvraj that the transaction is complete.
6. Note that in IMPS while the fund’s transfer to accounts is processed real-time, the fund transfers between banks does not happen in real-time and is processed in batches.

UPI

UPI is not a different payment mode in itself – it is a layer over IMPS. It can process instant transfers – without waiting for the beneficiary to get added and it works 24×7 just like IMPS. The UPI network has a unique VPA ID which is mapped to a bank account. So you can transfer money directly to anyone’s bank account through a UPI VPA without knowing the actual bank account details.

The daily limit for the UPI Transaction from a bank account is ₹1 lakh. You can do a maximum number of 10 transactions in 24 hours within the Rs.1,00,000/- limit. So, now you know the transaction limits of the various UPI Apps. If you find this limit insufficient, you can use the IMPS and NEFT payment system.

Why do IMPS and UPI have a transaction cap?

We mentioned above that IMPS and UPI have a transactional cap imposed on both. Let’s look as to why do we have this in place.

When an IMPS or UPI transaction is initiated the beneficiary bank is credited and the remitter bank is debited in real-time, the actual movement of funds happens via a net interbank settlement. The settlement is not real-time and is made by NPCI 4 times a day from funds maintained by banks with RBI in their RTGS settlement accounts.

If debits of very large amounts were allowed, there is a possibility that the funds in the settlement

account would run out and the transfer would fail. These limits ensure that funds do not run out and the system keeps running smoothly.

This is also the reason why a smaller bank (with a smaller float maintained in the pooling account with NPCI) will usually have tighter IMPS limits on business banking transactions.

How Much Money Are We Talking About?

A discussion regarding these various payment modes is incomplete without a discussion of their relative volumes. So, we went through the RBI and NPCI website, downloaded data and did a quick analysis. We downloaded data for an 11 month period – Apr 2018 – Feb 2019. The table below shows the cumulative numbers.

The extremely high value of RTGS is because it also takes into account bank-to-bank transfers. The ticket size reduces as we go down the table, and the average ticket size of a UPI transfer is just ₹ 1,620.

It is also interesting to see the trends in these numbers – both the number of transactions and value over the 11-month period.

As the graphs show, the number of UPI transactions has been growing as the fastest rate – more than 3x in the 11-month period between 190 million to 674 million. At the same time, RTGS and NEFT volume remained the same, begging the question, is UPI the transformation India needed to finally adopt digital payments?

Now, any discussion would be incomplete without a look into the success and failure rates of each of these transactions. In the second part next week, we will be discussing the success and failure rates of these transactions, so stay tuned.