What is Electronic Clearing Service (ECS)?
Electronic clearing service is an electronic mode of funds transfer from one bank account to another. Under this facility, any customer can 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 made to clear payments that are repetitive and periodic in nature. It is used by the various beneficiary to make bill payments such as electricity, water, loan payments or any other services enrolled by him such as periodic investments in mutual funds, insurance premium etc.
Institutions make use of ECS by making bulk payment of amounts towards the distribution of dividend, interest, salary, pension, etc. It can also be used to transfer funds to NRE and NRO accounts in the country. Although, it is subjected to the Foreign Exchange Management Act, 2000 (FEMA) provisions, and Wire Transfer Guidelines.
ECS includes transactions is processed under National Automated Clearing House (NACH) operated by National Payments Corporation of India (NPCI).
National Automated Clearing House (NACH) replaces Electronic clearing service in May 2016. It is a centralized system, launched with an aim to consolidate multiple ECS systems running across the country. NACH is a faster and more efficient clearing platform than ECS. It is launched by National Payments Corporation of India (NPCI).
Types of Electronic Clearing Service (ECS)
Electronic clearing service is of two types:- ECS can be used for both credit and debit purposes.
1. ECS credit– It is used to disburse the credit to a large number of employees or investors etc having account with the scheduled commercial bank branches at various locations that come under the jurisdiction of ECS center by merely a single debt that is raised by the user’s bank account.
Under ECS credit, the user institution can initiate the payment of amounts that are directed towards the distribution of pension, salary, dividend or interest. Furthermore, there is no amount limit in individual transactions.
2. ECS Debit -It is used by an institution to raise debits from a large number of accounts that are maintained with bank branches across different locations within the jurisdiction of ECS centre for single credit to the institution’s bank account.
It is useful for utility bill payments, tax collections, repayment of installments, or services that demands periodic investments. Like ECS Debit, there is no value limit on the amount of individual transactions.
On the basis of the geographical location of branches covered, ECS Schemes are classified into three categories:
I. Local ECS – It operates at 81 centers across the country. It is operated by RBI.
II. Regional ECS (RECS) – It operates at 9 locations across the country. The system takes advantage of the core banking system (CBS) in banks. Although the settlement between banks takes place centrally at one center in the State, the actual customers may have their accounts at various bank branches across the State or group of States. It is operated by RBI.
III. National ECS – It is the centralized version of ECS Credit currently having its operations at Mumbai facilitating the coverage of all CBS-enabled branches across the country.
Under this scheme, even though the settlement between banks takes place centrally at one location i.e., at Mumbai, the actual beneficiaries may have their accounts at various bank branches across the country.
Advantages under ECS Credit Scheme:
A. To the beneficiary
- The beneficiary need not visit his bank for depositing the paper instruments.
- He is done away with any kind of loss incurred or theft of physical instruments or the likelihood of fraudulent encashment thereof.
- Cost effective.
- He receives the funds on the due date.
B. To the User
- Savings on printing costs and administrative machinery, dispatch and reconciliation of paper instruments
- Avoid chances of loss/theft of instruments or any chances of fraudulent encashment of paper instruments, etc.
- Efficient payment mode that ensures the beneficiaries get credit on the due date.
- Cost effective method.
C. To the bank
- Freedom from paper handling and its associated disadvantages, ease of processing and return to the destination bank branches.
- The smooth process of reconciliation for the sponsor banks.
Procedure to avail ECS Scheme
To avail ECS service, one needs to inform the bank in which he holds an account. In order to initiate the process further, he would have to provide a mandate that gives the institution an authority to either credit or debit the payments through the bank and details of his / her bank branch, account particulars.
The institution is held responsible to communicate all the details relating to the amount credited or debited through any means such as mobile alerts or emails etc.
RBI has deregulated the charges to be levied by sponsor banks from institutions and destination branches too have been directed to afford ECS credit free of cost to the beneficiary account holders. Originating banks have to pay a nominal fee to the clearinghouse and the destination banks. Individuals are not charged for the ECS facility, but institutions are.
The nominal fee is 25 paise under ECS credit and for ECS debit it is 25 Paise for the clearing house and 50 paise the destination banks per transaction.
Discontinuing the ECS scheme
To initiate appropriate closure of the scheme, both the service provider who is the beneficiary of the payment and the bank, which is the channel of payment, will have to provide in a written application stating the closure of the scheme.