RBI implemented CTS in 2014 for faster clearing of cheques. But, there still are technical or operational issues in bank system leading to delay in cheque clearing. It means loss of savings account interest. Can RBI ask banks at fault to compensate for the delay by paying the interest?
Consumers depositing cheques at bank branch before the cut-off time (usually noon) should expect to get cheque clearance by following business day. The money gets debited from cheque accountholder and credited to your account on the same day so that there is no loss of savings account interest. The cheque truncation system (CTS) was introduced to eliminate the practice of physically presenting a cheque to the payee bank, thereby substantially reducing the time for cheque clearance. However, despite using the CTS, there are examples of delays in cheque clearenace. Ironically, the bank at fault keeps the money without giving interest to the customer for the delay in clearing. How much could this amount be worth?
CTS or Image-based Clearing System (ICS) is an initiative of the Reserve Bank of India (RBI) for faster clearing of cheques. CTS is an online image-based cheque clearing system where cheque images and Magnetic Ink Character Recognition (MICR) data are captured at the collecting bank branch and transmitted electronically. It eliminates the need to move the physical instruments across branches, except in exceptional circumstances. The goal is to reduce the time required for payment of cheques and to lower the cost of transit.
One of the readers of Moneylife deposited a CTS compliant cheque in Yes bank drawn on Axis bank (his own account) on 10th March. The money was debited from Axis bank on 11th March, but credited to Yes bank only on 12th March. Similarly, he deposited a CTS compliant cheque in Yes Bank drawn on Bank of Maharashtra (again his own account) on 12th March. The money was debited from Bank of Maharashtra on 13th March, but credited to Yes bank only on 14th March. The customer made complaint to Yes Bank about loss of Rs50 saving account interest due to delay in credit given by the lender.
To his surprise, he was told that the delay was from other banks. When asked for proof, he was given extract from RBI circular. It says, “This is to inform you that due to Operational / Technical Issues at below mentioned banks they are not able to participate in today’s CTS Return Clearing Session(3)-dated 11th March 2014. As per Approval from RBI, National Payments Corporation of India (NPCI) has granted an extension to following banks for one day.” There is a list of 20 bank routing numbers along with names.
It means that cheques from these specified 20 bank routing numbers were allowed one day extension in CTS clearing. Axis Bank routing number was present and hence it proves that delay was from Axis bank. But, why does the amount get deducted from bank account if there was one day extension given? It means that Axis Bank did not give interest for one day to its customer even though the money was still with the Bank. How many such accountholders lost interest for one day?
Similar proof was given for 13th March delay in clearance. There is a list of five bank routing numbers including Bank of Maharashtra. Again, Bank of Maharashtra had debited the amount on 13th March even though it did not participate in CTS clearing. A case of bank at fault keeping the customer interest for a day! Based on the number of cheques processed, this can be a sizable amount of interest the bank gets to keep without giving it to its own customers who have the right on it.
According to the latest data available from Department of Payment and Settlement Systems of RBI, as of 31 March 2013, the banking system cleared 131.4 crore instruments (cheques) worth about Rs100.2 lakh crore.
In most cases one day interest may not be sizable amount for an individual and hence the customer will not follow-up with the bank. However, in the above case, the customer did write to Bank of Maharashtra giving details of the proof given by Yes Bank. The customer was given credit of one day interest by Bank of Maharashtra, which proves that customers today are facing not just delay of cheque clearance but also loss of bank saving rate interest for a day or more. Will RBI issue a circular so that banks give necessary credit for loss of interest without the customer asking for it?
The same Moneylife reader deposited a cheque in Yes Bank drawn on Bank of Maharashtra and Saraswat Bank (both his own accounts) on 2nd April. There was the exact same issue with both cheque clearances. The complaint with Yes Bank yielded exact same answer with extract from RBI circular. Is it just a coincidence that Bank of Maharashtra appears again? This time the RBI circular has a list of 32 bank routing numbers which includes nationalised, private, foreign and co-operative banks.
Does it mean that the issue is now rampant? What is the exact operational/ technical issue the banks are facing? What actions are banks taking to solve the issue?
According to a report from DNA, during February 2014, in Ahmedabad, there were over 80,000 cheque instruments worth Rs750 crore delayed due to CTS clearances. “The system was introduced to make the clearing system faster and easier. But the existing manpower is still not fully trained to handle the new technology. In many cases, the scanned pictures of cheques are delivered as a corrupt file to NPCI,” the report says.
RBI will understand that it is impossible for customers to do follow-up with two banks to get credit of one day’s bank savings interest. One may even face ridicule from banks for asking for one day’s interest even though the bank at fault ends up keeping interest of thousands of cheques. CTS cheque clearance is facing delays and it does not seem to have made cheque clearance faster from customer viewpoint.
Is the RBI pushing bank consumers to use National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) instead of writing cheques? If you are transferring big amount from one account to other own savings account, it will be wise to do RTGS. It will avoid the situation of one-day interest loss, which can be a big loss. The cost of RTGS will be lower than the pain you will suffer in getting back your one day interest loss. Will banks even share with you the RBI circular which grants one day of extension for CTS clearance?
Will RBI make the banks pay for their operational or technical issues?
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Freedom Path was launched by backers of Utah Sen. Orrin Hatch and ran ads supporting Hatch and other Republicans in 2012. It said it suffered damages because the IRS flagged its application for extra scrutiny and disclosed its pending application to ProPublica.
A conservative non-profit sued the Internal Revenue Service Monday because the agency targeted it for extra scrutiny and disclosed the group's application for tax-exempt status to ProPublica.
The group, Freedom Path, was launched by backers of Utah Sen. Orrin Hatch and ran ads supporting Hatch and other Republicans in 2012.
Freedom Path is one of dozens of social welfare non-profits, also known as "dark money" groups, that have dumped hundreds of millions of dollars from anonymous sources into direct election ads and indirect ads that criticize or praise certain candidates since the Supreme Court's Citizen United ruling in 2010.
The groups are allowed to spend money on election activity, as long as they promise that social welfare, and not politics, is their primary purpose. The non-profits don't have to report their donors, raising concerns about possible corruption.
Freedom Path's lawsuit, filed in federal court in Dallas and sparked in part by IRS revelations last year that it targeted conservative non-profit applications for a harder look, claims that the group suffered damages from responding to the IRS requests for more information on its application to be recognized as a tax-exempt social welfare non-profit.
Freedom Path, formed in 2011, was one of many conservative groups with applications flagged by the IRS, using key words like "Tea Party" or "Patriot" or phrases like "limited government." Since the IRS' May 2013 admission that it targeted the groups, several Tea Party groups have also filed lawsuits that some experts have given little chance of prevailing.
In its lawsuit, filed against the IRS and agency officials, Freedom Path also said it was damaged by the IRS releasing its pending application to ProPublica.
In November 2012, the IRS sent ProPublica nine pending applications of conservative groups, in response to a ProPublica request for applications of 67 different non-profits. Applications are supposed to be confidential until the IRS recognizes a group. Despite a Treasury Department and congressional investigations, no one has publicly determined why the pending applications were mailed.
As part of the damages claimed by Freedom Path, the group said it "suffered actual damages in the form of legal fees associated with its communications with Defendant IRS and ProPublica, as well as public relations costs associated with the news articles resulting from the disclosure."
In its application to the IRS, Freedom Path checked "no" to the IRS question asking whether it planned to spend money to influence elections. It said it planned to spend 90 percent of its effort on doing "public education and outreach programs intended to inform the general public about current issues that may impact them, and to promote certain non-partisan causes." Freedom Path also said it would spend 10 percent of its effort on giving out grants.
The IRS still hasn't recognized Freedom Path as a tax-exempt non-profit, the lawsuit says.
An IRS spokesman told ProPublica that the IRS does not comment on pending litigation and federal law prohibits the IRS from discussing any particular taxpayer situation or case.
Lloyd Hitoshi Mayer, an expert in non-profit tax law at the University of Notre Dame law school, said that Freedom Path's biggest chance to prevail in its lawsuit was for its claim about the disclosure of its pending application.
Another group sued the IRS over releasing its pending application to ProPublica, but ProPublica never published that application because the group told the IRS it planned to spend money on politics.
Since the Supreme Court's Citizens United ruling, many new groups have exploited gaps between the IRS and the Federal Election Commission, which requires political committees to report their donors. ProPublica has documented extensively how some of these groups have managed to skirt the rules.
Freedom Path is a case in point, showing how the groups can tell the IRS one thing, then do another, and how closely some of the groups are associated with political operatives or certain causes. Freedom Path also illustrates why knowing who is behind a dark money group might be important to voters — before the election.
Lawyer Chris Gober, who's helped launch several conservative social welfare non-profits, formed Freedom Path in January 2011. Gober, Mark Emerson and J. Scott Bensing were on the group's board of directors. Emerson, a long time Republican operative, once worked to elect Hatch as the leader of the Utah Republican Party. Bensing is a Republican consultant who once worked with Hatch on the National Republican Senatorial Committee.
Although Freedom Path's donors are confidential, other records released after the 2012 election give clues of who was behind the group. Tax returns from the pharmaceutical industry's leading trade association, the Pharmaceutical Research and Manufacturers of America, or PhRMA, show that it gave $1 million in 2011 and 2012 to Freedom Path.
The fact that PhRMA was Freedom Path's biggest supporter was not disclosed until PhRMA listed the donations in its tax filings — the first was released months after Hatch won a primary in which Freedom Path ran $300,000 worth of ads directly supporting the senator. Initially, a more conservative candidate was thought to have a chance at winning the party's slot.
Freedom Path also spent another $160,000 on an indirect TV ad praising Hatch, Utah Republican Sen. Mike Lee and Republican presidential candidate Mitt Romney that was reported to the FEC. In its lawsuit, Freedom Path said the IRS deemed the ad to be political, but argues that the ad wasn't.
The group also spent an unknown amount on an ad in early 2012 urging the repeal of the Affordable Care Act and telling people to call Hatch and tell him to "keep leading the fight!" That ad didn't have to be reported to the FEC. In its lawsuit, Freedom Path again says the IRS deemed the ad to be political, but argues that it wasn't.
On its 2012 tax return, Freedom Path said it spent almost $740,000 to "educate the public through research, polling, advertising, website and issue advocacy communications about public policy issues."
It's not clear what Freedom Path did that didn't benefit Hatch, Lee, and Romney.
Freedom Path is a "front group set up to protect Orrin Hatch," Russ Walker, who worked for a super PAC supporting Hatch's leading opponent, told the Center for Public Integrity in late 2012.
The Freedom Path lawsuit also challenges the test used by the IRS to determine whether advertisements are considered political, saying that it is "unconstitutionally vague and ambiguous" and conflicts with an earlier Supreme Court ruling on issue advocacy groups.
That test, known as the "facts and circumstances" test, basically means that if an ad walks and talks like a political ad, it's a political ad. It has long been criticized by some campaign finance watchdogs, liberals and conservatives for being too vague. Others say the test gives the IRS the leeway to use common sense to determine whether a particular ad qualifies as election intervention.
Experts said it was unlikely that Freedom Path would prevail in its lawsuit. Many IRS rules on nonprofits rely on subjective, facts-and-circumstances tests, said Marcus Owens, a lawyer who used to run the IRS Exempt Organizations' division.
"The question is whether that sort of economic transaction — the speech — should be exempt from tax," he said, adding that freedom of speech was not the issue in the case. "The speech can occur. That's the key thing here, the speech can occur."
Domestic airlines still do not want to have any serious competition from "outsiders" and are scared that Air Asia and Tata-SIA will be able to perform better and possibly take away their business
The Court case filed by Bharatiya Janata Party (BJP) leader Dr Subramanian Swamy will be actually heard today (1st May) against both Air Asia and Tata-Singapore International Airlines (SIA). Dr Swamy has contended that foreign direct investment (FDI) in fresh start-ups is not permitted and his stand was that civil aviation ministry only allowed foreign airlines to invest in existing domestic airlines, and not in new enterprises like Tata-SIA!
Led by Jet Air, IndiGo, Spice Jet and GoAir, through the Federation of Indian Airlines have been lobbying to prevent the launch of the above two airlines, claiming that the airline industry is estimated to have lost, so far, Rs53,311 crore from 2006-07 and the rupee depreciation has also added to their woes financially. How and why these carriers go about giving discounts is an altogether a different matter to write about.
Simply put, these airlines do not want to have any serious competition from "outsiders" and are scared that Air Asia and Tata-SIA will be able to perform better than themselves, and possibly take away their business. Their defence for giving discounts is to ensure full occupancy of their flights, particularly during lean periods. This is partially correct.
It would be interesting to see what would be their stand, if BJP comes to power at the centre? Will they stop and over-rule the approval process that has taken place so far, as far as Air Asia and Tata-SIA are concerned? This remains to be seen.
It may be recalled that, early in April, the civil aviation ministry issued a no objection certificate (NOC) for Tata-SIA. Earlier, the Home Ministry had given security clearance to Board members of this company. As usual, the Directorate General of Civil Aviation (DGCA) will have to give clearance for various operations manuals before issuing air operators permit (AOP).
The CEO, Phee Teik Yeoh has moved from Singapore International Airlines to Tata-SIA and all preparations are afoot for this airline to take to the sky, possibly in the third quarter of this year, when the festive season will commence in the country.
Air travellers in India can look forward to good service and at competitive rates when both airlines take to the sky and give value for money!
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)