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RBI instructs Co-operative banks to immediately discontinue all bilateral clearing arrangements
February 18, 2010:
Reserve Bank of India has observed that the bank had entered into bilateral agreements with other banks for processing and clearing of post dated cheques (PDCs) deposited with it and payable by the other banks. Under the agreement, the bank was sending such PDCs directly to the other bank for realisation and receiving proceeds thereof by credit to its current account opened with the other bank. Similar facility was extended to the other bank for clearing PDCs drawn on this bank as well.
RBI has found that a number of similar bilateral agreements exist between /among banks and in the process, significant volume of instruments was getting exchanged and cleared outside the Clearing House infrastructure.
RBI has concluded that such agreements also styled as corresponding banking arrangements by some banks undermine the existence and need of Clearing Houses and do not in any way contribute to the efficiency of the clearing system. In fact, the banks incur higher costs and take longer time to clear the cheques bilaterally. The parallel clearing arrangements vitiate the Clearing House rules, standard, minimum benchmarks and uniform practices. Malpractices and disputes between banks can exacerbate into systemic concerns.
Further, bilateral clearing arrangements attract provisions of the Payment and Settlement Systems Act, 2007 (Act) and the regulations framed thereunder. Section 2 (i) of the Act defines a payment system as a ‘system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange’. Section 4 (1) of the Act stipulates that ‘no person other than the Reserve Bank shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank under provisions of the Act’.
Operators of such payment systems are required to seek authorisation under the Act, within six months of the commencement of the Act i.e. by February 12, 2009. The bilateral arrangements between banks being inter-bank in nature fall within the ambit of payment systems and require authorisation from the Reserve Bank.
Bilateral agreements include correspondent banking arrangements, arrangements under cash management services, or any arrangement that envisages routine clearing of cheques drawn on either or both banks without routing them through the Clearing House infrastructure as also agreements for sharing of ATMs, use of electronic clearing products like ECS or any such payment system products. Continuation or commencement of bilateral clearing arrangements without authorisation is violative of the provisions of the Act and would invite strict penal action as provided under the Act.
Keeping in view the various risks involved, RBI has instructed all State and Central Co-operative banks to immediately discontinue all bilateral clearing arrangements arising out of normal banking transactions.
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