NIFT and its Role in Clearing Operations

Introduction of NIFT: • National Institutional Facilitation

Technologies (Pvt.) Limited • Incorporated in September 1995 as a joint

venture between

1. A consortium of six major banks, which includes

• Habib Bank Limited• MCB Bank Limited• National Bank of Pakistan• United Bank Limited• Allied Bank Limited• First Women Bank Limited

2. And private entrepreneurs.

Introduction of NIFT: • A licensed clearing house of Pakistan.• NIFT’s Board comprises of – 14 directors; 7 from banks and 7 from the

private sector.

• is from the nominees of shareholder Banks and

• is elected by the Board

The Chairman

• is a nominee of the private sector and

• is approved by the Board.The CEO

Introduction of NIFT:

• All Scheduled banks operating in Pakistan are – members of NIFT's clearing system and – the State Bank of Pakistan monitors the

clearinghouse operations.

• As of May 2009, 40 commercial banks and their 5571 branches in 185 major cities, 20 data centers utilize NIFT’s services.

SBP and NIFT

Role of SBP

a supervisor for NIFT operations,

and

a customer and member bank of the automated clearing house

SBP and NIFT

• The NIFT collects the financial instruments and after processing them provides the inter-banks’ position for

• Settlement to the concerned SBP-BSC office where the position of each bank is settled by making debit / credit entries in their respective current account.

Components of NIFT

Components of NIFT:

• NIFT is composed of 4 components:

1. NIFTeTRUST

• A Division of NIFT• A certified Authority in Pak & an Affiliate of

VERISIGN INC. USA• Establishes facilities to provide PKI (public

key infrastructure) based security solutions for e-business, e-commerce, e-banking and e-government

• Provides other Information Security related services to large corporations and banks

Cont…

2. ISM - Image Systems Marketing (Pvt.) Limited

• Wholly Owned Subsidiary• Offers Enterprise Content Management Services. • Unique experience to bring six large banks and

private sector on one platform to help modernize payment systems in Pakistan

3. Utility Payment Services

• NIFT, Trusted service provider to major utility companies

• Includes Gas distribution companies, telecommunication & Cellular companies

• Also provides exclusive item processing services to large corporations

4. Clearing Services

• NIFT commenced its ACH (Automated Clearing House) operations in 1996, after signing an agreement with the State Bank of Pakistan.

• ACH system is Computer based clearing and settlement facility for interchange of electronic debits and credits among Financial Institutions

Cont…

Clearing Services offered by NIFT

Services Provided:

Overnight clearing Including Return Cheque Processing (24 hour Clearing Cycle)

Same Day / High Value Clearing including return

cheque Processing (3 hour Clearing Cycle)

Inter City clearing including Return Cheque Processing (48 hour Clearing Cycle)

Countrywide Local US Dollar Clearing

(5 day Clearing Cycle)

NIFT and Clearing Operations

Need for a Clearing House

• The main operational bottlenecks faced by the banks were:

Inward Clearing:• Validation of the customer account with Core

Banking System (CBS)• Searching physical instruments for returning• Archival of all the physical instruments

Outward Clearing:• Management of physical instruments• Data entry in the CBS with physical instruments• Verification of the above• Creation of batches of physical instruments

The Clearing House• Rather than each bank working directly with every

other bank in the economy, checks are processed through centralized clearing houses.

• CLEARING has been derived from the word “CLEAR” and is defined as

a system by which banks exchange Cheques and other Negotiable instrument which are

• drawn on each other within a specified area

And thereby secure payment through the clearing house at specified time in an efficient way.

Function of Clearing

• The basic function of clearing is to facilitate the customers in collection of their cheques of other banks whether they are in city or outside city.

step 1

• collect the checks from member banks

step 2

• sort them by bank

step 3

• debit and credit each bank.

Role of Nift in Clearing Operations

Concept of Inward & Outward clearing under conventional System

• Banker’s Clearing House – All member bank’s representatives met to exchange

negotiable instruments.– Business of clearing normally conducted in two

sessions:

• Cheque payments were adjusted

• Received & delivered against each other by member banks

First Clearing

• Cheques not honored were handed over by member banks

• Adjustments made accordingly by SBP / NBP

Second Clearing

Role of NIFT• Conventional Clearing house now

replaced by NIFT• All clearing items routed through NIFT• The main changes are:

– Creation of direct relationship with each branch and dispensing with the role of the central branch at multi-branch-banks .

– Merger of intra-bank clearing or transfer delivery into inter-bank

– NIFT collects the outward clearing directly from each & every branch and arranges processing, presentment and processing of returns, providing the net position to the central bank and necessary scrolls, reports and advices for accounting entries to all banks and their branches

List Of Clients

1 Albarka Islamic Bank 21 JS Bank Limited

2 Allied Bank Ltd. 22 KASB Bank Limited

3 Arif Habib Bank Ltd 23 MCB Bank Limited

4 Askari Bank Limited 24 Meezan Bank Limited

5 Atlas Bank Limited 25 My Bank Limited

6 Bank Al-Falah Limited 26 National Bank of Pakistan

7 Bank Al-Habib Limited 27 NIB Bank Limited

8 Bank Islami Pakistan Limited 28 Oman International Bank

9 Bank Of Khyber 29 Royal Bank of Scotland

10 Citi Bank N.A. 30 SAMBA Bank

11 Deutsche Bank Asia 31 SILKBANK Limited

12 Dubai Islamic Bank Pakistan Limited 32 SME Bank

13 Emirates Global Islamic Bank 33 Soneri Bank Limited

14 Faysal Bank Limited 34 Standard Chartered Bank

15 First Dawood Islamic Bank Ltd 35 State Bank N'Nazim Abad

16 First Women Bank Limited 36 State Bank of Pakistan

17 Habib Bank Ltd 37 The Bank of Punjab

18 Habib Metropolitan Bank Limited 38 The Bank of Tokyo Mitsubishi UFJ Ltd

19 Hong Kong & Shanghai 39 United Bank Limited

20 Industrial Development Bank 40 Source:

http://www.nift.com.pk/clientsnift.htm

The Clearing Process

Receiving of Cheques and sending them to NIFT/ Outward Clearing

At the Front Office the Cheques are received. The Cheques are then stamped with the Clearing/Crossing stamps.

The amount of the cheque is then posted in the system. i.e. this amount is credited in the customer’s account. This is called factual or floating credit.

Next the Clearing Cheques and other instruments are endorsed by the Bank through the signatures of an authorized signatory.

The Cheques and the deposit slips are then separated and the Clearing Instruments are prepared in bundles.

Each bundle of Clearing Instruments is add-listed and counted and sent to NIFT

Procedure at the clearing House (NIFT)The instruments received from each bank are then passed through a scanner

Preparation of a Scroll which contains the amount and number of all the instruments received from a bank.

Cheques are separated and are bundled according to their respective branches

The main branch account will be Cr or Dr by the net difference.

Inward Clearing

• Cheques received by the bank from other banks.

• Cheques drawn by the bank customers on their account in favor of other parties.

• On Receipt: At Respectiv

e Branc

h

• Scrutinized• Posted to various Accounts

Supervisor

• Releases the Transaction• Debit the customer’s Account• Credit to Main Account

Difference Between Inward & Outward

• In Inward we are the Paying Bank whereas in Outward we will act as a Collecting Bank on behalf of customer & will launch the instrument in clearing.

Graphical Représentation of Clearing Operations

NET Settlement Procedure

Payment System-Charges of NIFT • NIFT charges a certain amount per

instrument for availing its services.

Returns through NIFT: • If Cheques are not honorred either

because of:

• Returned through nift along with a cheque returned objection memo

Reason

s

•Drawer’s account has insufficient funds / its been frozen•Cheque is stale •Mismatch of amount in words & figures, sign or Incorrect endorsement•Torn Cheque•Some kind of delay in transactional matters•Overwriting & Cutting

Cont…• Cheques are either lodged again in

outward clearing or returned to customers by canceling bank’s all stamps, based on the reasons.

1. Return in Inward Clearing

• Return to Presenting Branch• Debit customer’s Account with Cheque Return Charges

2. Return in Outward Clearing

• NIFT collect all return instruments from the designated branches, process them alongwith inward collection and then route them to the presenting branch.

• Opposite Accounting Entry

Same Day Clearing

• Payment is made on the same day the cheque is presented to the bank.

• Extra Amount Charged from customer• Bank practice some pre-requisites

Restricted to a certain amount and the instrument has to be received by a certain time e.g. 10:00 am.

The depositor must make specific request to the Branch

Restricted to the designated branches

Advantages of Adopted Procédure

For Bank !!!• The Advantages for the Bank are:

• Better customer service

• Cost saving on data storage

• Shorter clearing cycle

.

• Prevents frequent and tedious walks by a banks’ employee

• Prevent the payment of the instrument in cash and the consequent danger of loss in transit.

• Ensures convenience and economy

For the Customer

• Shorter clearing cycle

• Better response to customer queries with safe servicing

.

• Ensures convenience