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
Moneylife Digital Team 27 May 2011

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.

geetha ravi
4 years ago
Ecs transfer if money through fraudulent method by just dial has to be stopped. Just dial misusing this ecs sucking money from struggling class.
geetha ravi
Replied to geetha ravi comment 4 years ago
Want to stop ecs transfer to just dial through hdfc. RBI please help. So many of us are caught in the web of ECS transfer by just dial account through hdfc. So many complaints to the bank. Bank is not bothered to stop payment ti just dial. Bank did not even inform us about the ecs transfer. They have not taken our permission. Not stopping after we found and informed the bank.
Nagesh KiniFCA
1 decade 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
1 decade 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
1 decade 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
1 decade 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
1 decade 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
1 decade 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!!
1 decade 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
1 decade 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 ?
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