What is Bilateral Clearing?

What is Bilateral Clearing?

According to Business Dictionary.com, Bilateral Clearing Arrangement is defined as: -

http://www.businessdictionary.com/definition/bilateral-clearing-agreement.html

Government-to-government reciprocal trade agreement up to a specific amount and for a limited period. Value of these trades is expressed usually in a major currency (USdollar, for example) but the exporters in both countries are paid in their local currency. Such agreements are termed disruptive of free trade by World Trade Organization (WTO).

On similar lines, Bilateral Clearing Arrangement’s started to develop, between Individual Banks, which are outside the Normal Clearing Cycle/Process.

This arrangement was developed; to overcome the deficiencies associated with the Normal Clearing Process I our country. However, with the spectacular developments in the Indian Clearing Process, in our country, in the last decade, Reserve Bank of India, decided to re-look at Bilateral Clearing Arrangements.

Reserve Bank of India, after studying the pros and cons of Bilateral Clearing Arrangement’s, has spelt its mind in the Payment Systems in India - Vision 2009-12.

The same is re-produced here

QUOTE

6.6.10 The clearing infrastructure in place at various locations have the advantages of faster clearing cycle, low cost, uniform practices, better dispute resolution and are functioning since long. Bilateral arrangements function outside the clearing infrastructure and do not contribute to the efficiency of the system in all situations.  Therefore, all the Bilateral Clearing arrangements between banks would be reviewed and allowed to continue only where necessary.

UNQUOTE

And, as per Payments and Settlement Act, 2007

Quote

 Bilateral clearing arrangements attract provisions of the Payment and Settlement Systems Act, 2007 (Act) and the regulations framed there under. 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 authorization issued by the Reserve Bank under provisions of the Act’. Operators of such payment systems are required to seek authorization under the Act, within six months of the commencement of the Act i.e. by February 12, 2009.

UNQUOTE

Reserve Bank of India, as a first step to review the Bilateral clearing arrangements, has issued Notification No RBI/2009-10/180 UBD.CO.BPD. (PCB). Cir. No. 14/12.05.001/2009-10, dt.October 06, 2009, addressed to Chief Executive Officer - All Primary (Urban) Co-operative Banks.

The above Notification can be accessed @

http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5303.

Though this Notification is addressed to Primary(Urban) Co-operative Banks, I am sure a similar Notification in near future will be addressed to Scheduled Banks.

Reserve Bank of India, desires all Credits/Debits(i.e transactions arising out of normal banking practices)  to Customers Bank Account,  be part and parcel of a Clearing Settlement Process only i.e MICR Clearing/Speed Clearing/RTGS/NEFT/ECS-Cr/ECS-Dr/NECS-Cr/NECS-Dr, as the case might be. No parallel settlement without the specific permission of Reserve Bank of India is allowed.

I feel that this will boost the ePayments in our country, once Normal Banking Transactions outside the Clearing Process are brought inside the Clearing Process.

I repeat, the Posts in this Blog are my personal view only.