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.