How many clearing houses are there in india

Traditional arrangements involved the exchange of cheques, computation of net payment obligations among the participating banks and settlement of claims through funds transfers in the books of the settling bank. In some countries, notably, England, the number of banks participating in clearing, the clearing banks, are limited. Other banks would route their instruments through one of the clearing members.

The place where the exchange of instruments occurs and the claims are settled is known as the Clearing House. All payment instructions made through the medium of cheques are debit transactions.

A debit transaction occurs when the intended recipient initiates the payment transaction by depositing the instrument in his bank.

During the course of a business day a number of instruments are deposited with a bank for collection by its customers. The clearing system provides a convenient and well established institutional mechanism to take care of the problem of physical delivery of instruments as well as funds transfer between different banks.

In India, the clearing system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone. The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office and a banking department , the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks.

These cover most of the major urban and semi-urban centres of economic activity. Other than the major cities and metropolitan centres, the volume and value of cheques cleared are very low. It is therefore, natural that a vast majority of the clearing houses in the country are managed by the SBI. The rest of the clearing houses are managed by the associate banks of the SBI in the areas of their concentration and in some cases by other public sector banks.

The membership of the clearing house includes both direct members and sub-members. The sub-members, who are sponsored by a member bank, participate in clearing in the same way as a branch of a member bank. The membership to the clearing house is through a joint decision of the general body of the clearing house. Clearing Structure: The dominant feature of the Indian Banking system is its branch-centered banking. The vast network of branches implies that the logistics of collection and delivery of paper payment instruments becomes formidable.

The Mumbai Bankers' Clearing House, for instance, has over members, sub-members and extends over branches. The clearing infrastructure is designed to address the movement of instruments between the presenting and drawee branches. Each member bank in a centre is represented in the clearing house by its service branch which collects all the instruments from various branches and consolidates them for presentation to all the banks in the clearing house.

Similarly, it receives and distributes among its branches all the instruments drawn upon its branches by other banks in the clearing house. The service branch of a bank performs a crucial intermediary role between the clearing house and the branch of a bank. Clearing Process: The clearing process begins with the deposit of a cheque in a bank. The cheque is passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument.

The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing. The realisation of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque Figure 4.

Settlement of Funds: The settlement of funds in clearing occurs at several levels. The aggregate amount or value of cheques presented by a bank on other banks represents the claim by that bank on other banks.

Similar claims are made by all the banks on every other bank in the clearing. A net settlement is arrived at the clearing house and the debit or credit position of the bank is determined. These are booked in their current accounts maintained by the settling bank. This represents the inter- bank settlement. The settlement of funds between the service branch and the branch concerned represents the transfer of funds to the branch level.

The payment process is completed only when the funds are debited from the drawer's account and credited to the payee's account. This occurs after the completion of the return clearing mentioned earlier Figure 4. Return Clearing: Realisation of a cheque i. The aggregate of all items unpaid is debited to the original presenting bank and credited to the drawee bank.

The same process is mirrored in the inter-branch settlement at the service branch of a bank. The credit given to the payee on account of the cheque is reversed. Inter-branch clearing: Cheques presented by customers drawn on different branches of the same bank need not be sent to the clearing house as the transfer of funds is internal to the bank. The service branch usually acts as a settlement branch for the branches and the instruments are sent to the drawee branches while the inter-branch accounts are credited or debited internally.

Time lag: The total clearing cycle including the return clearing introduces a time lag in the payments process. The need for physical presentment of the cheque at the branch where it is drawn on, requires the movement of cheques from one place to another.

As a result, the recipient of payment has to wait until the collecting banker is fully satisfied that the cheque has been paid. This time lag will continue irrespective of the level of technology and improvements in process, so long as the physical presentment of the cheque is necessary as per the banking law. Collection of outstation instruments: As the clearing jurisdiction is local, a separate procedure has evolved for the collection of cheques drawn on banks outside the clearing house area.

In this case, the cheques are sent by post for collection to the representative branch or correspondent branch for presentation in the clearing house in the outstation centre. Once the cheque is realised, the proceeds are remitted to the original presenting bank for credit to the customer account. This leads to a significant delay in the payment of these cheques and there is considerable uncertainty regarding the time of realisation.

The National Clearing system, described elsewhere, has considerably reduced the time taken for realisation at designated centres. Settlement of funds for outstation Items: Due to delays in collection of outstation cheques, various alternative forms of payments instruments are widely used to settle outstation payments. Some of the payment items such as demand drafts, payable at par warrants etc. This way, investors will not be forced to choose the clearing house which belongs to the same exchange.

Secondary Market Advisory Committee SMAC has formed three sub-committees including one on risk management, technical issues and operational issues. The committees have been tasked to submit reports in two months," said the third person. Recently, BSE said in an investor presentation that Sebi has formed four working groups to consider various aspects of interoperability among clearing corporations.

In such an instance, we would be unable to square off our open positions client and proprietary resulting in high losses. It will also rationalise margins across exchanges and products. It will also provide more competition as it eliminates the monopolising effects of network effects which are found in exchanges and clearing corporation. In the longer term, it may also pave the way for consolidation in clearing corporations," said Sandeep Parekh, managing partner, Finsec Law Advisors.

Smaller clearing houses worried that larger peers offering lower fees will take away their business, while large ones feared chaos in the market if risk management systems at smaller ones failed. However, clearing houses which have seen stable business amid fluctuating trading volumes over the past five years are now more comfortable with interoperability, two of the four people cited above said.

An email to Sebi on the matter remained unanswered. In , a Sebi panel headed by K. Kamath had suggested keeping the inter-operability option open. This is because the traders will be able to transact on other exchanges without paying additional margin," the fourth person said. Margins are imposed by exchanges and CCs to ensure that buyers bring money and sellers bring shares. The three main margins are value at risk VaR margin, extreme loss margin and mark-to-market MTM margin.

Extreme loss margin ELM is collected on the gross open position of the member. It may not be any longer required to deposit so much funds in SGF, as the money is sufficient to deal with potential settlement-related risks. The current risk management structure is robust enough to prevent any major potential default," said the fourth person.

Parekh of Finsec Law feels reduction of margins should be done with caution and they should be seen not just as security but also as a means of systemic protection against black swan events.

If the exchange is not profitable does it mean the fund does not require a larger guarantee fund. Conversely, if the exchange is highly profitable, that is in no way connected to systemic risk for which the fund is created," added Parekh. The Indian markets are moving towards one market for both equity and commodities, Sebi has allowed a unified license to brokers and clearing members to operate in commodity derivatives as well as equity markets in April , and allowed exchanges to become universal exchanges where one exchange will trade in all segments including equity, cash and commodities.