RBI slaps notices on several banks, asking them to pay crores of rupees as fine for dishonour of instruments under ECS beyond the acceptable limits

The Reserve Bank of India has written letters to several banks because they have crossed the limit of instruments dishonoured under the Electronic Clearing Service (ECS); 3%-5% is the acceptable apex bank norm—in a few cases, the percentage of dishonoured instruments under ECS has been as high as 30% to 40%. However, this move is a warning, and may not lead to punitive action 

The RBI (Reserve Bank of India) keeps a track on the percentage of dishonoured instruments cleared under the ECS of all banks.

The ECS allows paperless direct credit and debit transactions for all banks. However, if a bank crosses the limit of instruments dishonoured under the ECS, the RBI asks the respective bank for an explanation.

According to the apex bank, "3%-5% is the tolerance level on a daily basis. At times when it goes up to 30%-40%, we ask the bank to find out about the particular accountholders whose instruments are not being honoured under ECS." Often, banks are not aware about the accountholders who are repeatedly dishonouring their financial instruments as ECS is transmitted in bulk to the clearing house.

The main problem is that even if one of the ECS instruments bounces, then it affects two or three banks at a time. It affects the ECS user bank, the ECS beneficiary bank and the destination bank to which the amount has to finally get transferred.

In a letter addressed to ICICI Bank, a copy of which is with Moneylife, the RBI has said: "Please refer to paragraph 2 of the Minutes of the General Body Meeting of the Chennai Bankers Clearing House (CBCH) held on August 2, 2010 and our letter dated October 28, 2010 relating to return clearing discipline. In pursuance of the instructions contained therein, it has been decided to invoke penalty @Rs. 1000.00 per return for the month of January.

The number of MICR and as well as RECS (Dr) returns of your banks has since been generated from the system and the details are been given in annexure. After deducting the tolerance of 4% and 5% on MICR and RECS returns respectively, a penalty of Rs 39821000.00 (Rupees Three Crore Ninety Eight Lakh twenty One Thousand only) is proposed to be imposed on your bank for non-adherence to the return discipline. You are hereby advised to put forward your case as to why Rs 39821000.00 (Rupees Three Crore Ninety Eight Lakh twenty One Thousand only) shall not be imposed on your bank. Your response should reach this office on or before 15 days from the issue of this letter, failing which it shall construed that you have nothing to report and accordingly the Bank shall proceed with a suitable action."

We gather that several other banks have been pulled up in a similar fashion. Thus, the RBI has defined a definite tolerance level beyond which it would charge a bank a certain fine on each rejection. That is why the RBI has threatened to charge a Rs3.98 crore fine for ECS dishonour beyond acceptable limits on ICICI Bank.

Moneylife spoke to the RBI for clarification. The central bank spokesperson said, "There were several banks that were not adhering to what we call 'return discipline' in Chennai and the notice was issued to all of them. The fine amount, though, varied. The purpose of the show-cause notice was to shake the banks out of complacence and to ensure that the rate of 'returns' fell within our comfort zone (and not really to collect fine amounts from them). There is significant improvement in the position now and we are not pursuing the penalties with the banks."

It was only after receiving the letter from the central bank that banks started screening accounts and transactions and are stopping all ECS debits.

ECS is a mode of electronic funds transfer from one bank account to another using the services of a clearing house. This is normally utilised for bulk transfers from one account to many accounts or vice-versa. This facility can be used both 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 (telephone, electricity), or charges (house tax, water tax), etc or for loan instalments of financial institutions/banks or regular investments of individuals.

The ECS user bank is called the 'sponsor' bank under the scheme and the ECS beneficiary accountholder is called the ECS 'beneficiary' bank. The destination account holder's bank or the beneficiary's bank is called the 'destination' bank.

The beneficiaries of regular or repetitive payments can also request the paying institution to make use of the ECS (Credit) mechanism for effecting payment.



Nagesh KiniFCA

6 years ago

It is heartening to observe that the banking watch dog is at long last barring its teeth to bite rather than merely bark as it was doing in the not so distant past.

What will RBI do in case of ICICI, SBI and other bankers who have exceeded their exposure to lending to RIL?

Adi Daruwalla

6 years ago

Why will RBI not take the punitive action? What do you mean that banks are not aware of the account holders who are dishonouring their instruments under ECS? Manager accountholder nexus, no data collected, dont have manpower, these are common excuses. If RBI made the law then enforce it and use it for betterment rather than be lax.

R Krishnamurthy

6 years ago

Normally it is said that ECS credits are done within 3 days. Recently the Income Tax refund of my spouse took more than 3 weeks to get cleared in Bank of India.
The bank says they credit it immediately when the fund arrives. In these cases we as account holders feel helpless since the IT sms says they have sent the ECS on a particular date. The Bank says they have no control over this!

Govind Gopal Shanbhag

6 years ago

Dear Subrata Sir - It is not correct to blame RBI for this mess as it is trying to discipline the banks. RBI has adequate profits they need not stoop so low for such profits. Account holders are also responsible, apart from reason for technical returns (such incorrect name etc.), non maintenance of balance in the account is also the reason due to such high returns. In number of cases account holders give ECS mandate for payment of phone bills, electricity bills, loan instalments and other standing instructions and in number of cases they change the bank accounts rendering the account in operative/ dormant/ inadequate balance. This paper less scheme if implemented property can go a long way in reducing import cost as MICR paper on which cheques are printed is fully imported. In fact there is no much difference between bouncing of cheques for inadequate balance and/or return of ecs mandate and RBI is right in its move to discipline account holders for such indiscipline provided this penalty is ultimately recovered from account holders.

Nagesh KiniFCA

6 years ago

The ECS user banks need to activate their own monitoring systems to monitor their clients who issue cheques indiscriminately without funds and are chronic defaulters, they need to be disciplined with heavy penalties.

Narendra Doshi

6 years ago

I would like to bring a corollary issue to the attention relating to REJECTING of direct credits to account holders especially with Mutual Fund redemptions when there is ANY DIFFERENCE in the Full / Abbreviated name / initials, even in genuine cases (as it seems the existing system probably CANNOT differentiate).My clients have suffered EXTENSIVELY in the last one year due to this.However, it will be a great surprise to you that this has REPEATEDLY happened when HDFC AMC is making redmptions to bank a/cs with NON HDFC banks while it is NOT happening if it is to a HDFC bank a/c!!


6 years ago

The delinquent account holders in turn should be penalised suitably. This measure will not only reduce the return rate but also fake and fraudulent attempts, if any.

Subrata Das

6 years ago

As long as it is not Kite Flying I dont think RBI should intervene.
Maybe that's their way to boost the bottom line. I have not seen any innovative mechanism this RBI FY to cover their trading losses. Or is it a trading profit year ?

Realtors desperate for funds, seek to borrow at higher rates

As the sector chokes, borrowing rates are skyrocketing; but housing prices continue to remain unaffordable

The real estate sector seems to be getting desperate with a shortage of funds climbing to alarming levels. Now, several small and medium-size developers are hoping to raise money by selling risky non-convertible debentures (NCDs), much of it at an astonishingly high coupon rate of 19%. But with the big builders continuing to hold on to their housing stock, there appears to be little chance of relief for the sector.

Lily Realty, one of the companies seeking funds, is planning to raise about Rs250 crore through unlisted NCDs to fund its projects in Mumbai and Bangalore. The higher coupon rate, which is similar to the interest payable on bonds, is 19% per annum, paid quarterly. The projects are to be completed within 2-5 years. The minimum investment amount is Rs1 crore.

Sources say Lily is not the only realty company and many medium and small developers are planning to take this route. "The RBI has placed so many restrictions on fund raising and investors are opting out of the realty sector as the returns have been poor. So many developers who are not so big are opting for alternative means to raise money. They are offering NCDs in lieu of high rates. It's a risky proposition, but they have to find ways to raise cash," one expert said.

However, considering the depressing phase the market is going through, it seems unlikely that people will rush for the NCDs. Pankaj Kapoor, managing director, Liases Foras, the realty research company, said, "The market is in desperate need of cash and these are alternative ways of raising money. I don't think many people will fall for such things as NCDs, which are unlisted and cannot be sold. They are very risky investments. Such schemes will do nothing for investors."

If this scheme does not work well it will only result in further worry for developers. For, not only are sources of funding decreasing, but high prices have put off customers. Prices have remained fixed in many parts of Mumbai for the last one year; they may not have increased, but they haven't come down either.

Many builders say the demand-supply gap is enormous and, hence, prices have shot up. This, however, does not explain why completed projects remain unsold. Sales are at a two-year low, according to Liases Foras, and an estimated 88,000 flats remain unsold in Mumbai. Many brokers and investors have their hands full with available spaces, but there are no buyers.

One analyst said, "If the prices don't come down, the situation will not change. The sector will be choked further. But since the big and influential developers are not willing to bring prices down, and they continue to hold their stocks, houses and properties will remain unaffordable, and there will be no off-take."

If this trend continues, it may mean trouble for the sector as well as customers. Rental values are already shooting up, and the salaried class is finding it difficult to pay for housing. If developers don't relent, their situation will worsen too.



Shama Zaidi

6 years ago

it is rumoured that the obscene prices of housing in indian metros are due to the fact that upto 50% of the cost goes to paying bribes to the politicians, babus and police. could you let us know if this is credible?

mukesh parikh

6 years ago

Size of the flame is biggest when candlestick is near it's end.
The same hold true for Mumbai real estate market.

Share prices may rally further: Friday Closing Report

Watch out for 5,490 on the Nifty for resistance

As suspected the market rallied today adding to the over 1% gains accrued on Thursday and brushing aside fears related to rising inflation, a possible hike in diesel prices and the Reserve Bank of India's rate-tightening steps.

The Sensex and Nifty opened at 18,106 and 5,414 respectively. After hitting the intra-day low of 18,087 and 5,414 at the start of the trading session, the market gained strength as trade progressed on all-round buying support from institutional investors, taking the indices to new highs. The indices touched their day's highs in post-noon trade on a positive opening of the key European markets. The resistance of 5,470 mentioned yesterday was overcome after some effort and the market went on to hit an intra-day high of the Nifty at 5,486.

Following two days of counter-trend rally watch out for 5,490 for a slight reversal. If the market crosses this level, it may witness a strong rally up to 5600, subject to dips. The Sensex rose 221 points to close at 18,266 and Nifty gained 64 points at 5,476. The gain of 1.23% on Sensex is the maximum since 9 May 2011. The advance-decline ratio on the National Stock Exchange was a positive 1145:539.

Among the broader markets, the BSE Mid-cap index surged 1.48% and the BSE Small-cap index rose 0.89%.

Eleven of the 13 sectoral gauges on the BSE settled higher, led by BSE Realty (up 3.60%), BSE Bankex (up 2.46%), BSE Metal (up 1.98%), BSE Oil & Gas (up 1.59%) and BSE PSU (up 1.24%).  BSE Auto (down 0.85%) and BSE Consumer Durables (down 0.76%) were the losers.

Hindalco Industries (up 5.78%), Reliance Communications (up 5.66%), ICICI Bank (up 4.23%), DLF (up 4.11%) and Reliance Infrastructure (up 3.85%) were the top gainers on the Sensex. The laggards were led by Tata Motors (down 6.25%), Hindustan Unilever (down 1.27%), NTPC (down 1.03%), Hero Honda (down 0.80%) and Cipla (down 0.19%).

Most markets in Asia finished trade in the green on Friday as investors resorted to bargain hunting after the recent sell-off. On the other hand, the Chinese market ended lower on inflationary pressures while the strengthening of the yen against the dollar and a downgrade of Japan's sovereign debt outlook to negative from stable by Fitch pulled down Japanese stocks.

The Hang Seng gained 0.95%, the Jakarta Composite rose 0.46%, the KLSE Composite rose 0.50%, the Straits Times was up 0.38%, the Seoul Composite climbed 0.40% and the Taiwan Weighted added 0.25%. On the other hand, the Shanghai Composite declined 0.98% and the Nikkei 225 fell by 0.42%.

Back home, institutional investors-both foreign and domestic-were net buyers of stocks on Thursday. While foreign institutional investors invested Rs124.38 crore in shares, domestic institutional investors pumped in Rs233.53 crore in the equities segment.


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