24/7 NEFT Services: Banks Face Many Challenges

While round-the-clock availability of funds transfer from December 16 under the National Electronic Funds Transfer (NEFT) is good news for customers, providing the same could prove to be a stretch for banks as they will be up against challenges relating to liquidity and cash reserve ratio (CRR) management should there be large fund flows, especially after 7 pm.

NEFT is a nation-wide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the scheme.

Bankers fear that opening up of NEFT 24X7, coupled with absence of any cap on the value per transaction, could lead to extreme flows when banks are closed. This could subject them to increased liquidity risk and possibility of breach in maintenance of CRR balances in case of fund transfers initiated between 7 pm and 12 am.

In case of default in maintenance of CRR requirement on a daily basis, the Reserve Bank recovers penal interest at the rate of 8.40 per cent (3 per cent above the bank’s rate of 5.40 per cent) on the shortfall amount for the day. If this shortfall extends beyond a day, the penal interest rate goes up to 5 per cent above the bank rate.

Currently, all outflows and inflows into a bank are considered while computing the daily CRR position.

CRR is the slice of deposits that the banks have to park with the RBI. They don’t earn any interest on this depolyment. The CRR is currently prescribed at 4 per cent of a bank’s deposits.

Any liquidity deficit is managed by banks by accessing the Marginal Standing Facility (MSF) window which is operative till 7.30 pm everyday. MSF is a facility under which eligible entities can avail liquidity support (at the bank rate) from the RBI against SLR securities — up to 2 per cent of their respective deposits.

Any liquidity surplus is managed by accessing the reverse repo window, which allows the banks to park their temporary surplus with the RBI.

Bankers are of the view that the cut-off time for CRR maintenance should continue to be 7.30 pm and any transaction post this time should not have any impact on regulatory reserve maintenance.

“The balances with RBI at cut-off time of MSF/ reverse repo window should be considered as CRR maintenance for the day. This will help banks to manage the CRR maintenance and customer payment smoothly without deploying extra resources in terms of monitoring CRR balance round the clock,” said a bank treasury head.

Since the objective of starting NEFT 24X7 is to help retail customers meet their urgent funds transfer needs after 7 pm, bankers are of the view that there should be a cap on the maximum amount of transaction.

They want a cap (such as ₹2 lakh per customer) introduced at least on NEFT transactions after 7 pm to 8 am of next day to prevent large outflows during late hours.

Bankers feel that NEFT, post 7 pm, may be extended only to personal banking customers as the working hours of corporates and institutions generally don’t exceed beyond 7 pm.