ECS is an electronic mode of payment or receipt, in case of transactions that are repetitive and periodic in nature. ECS is used by institutions to make bulk payments of amounts towards distribution of dividend, interest, salary, pension etc, or for bulk collections of amounts towards telephone, electricity, water dues, loan repayments, periodic investments in mutual funds etc.

Those intending to effect payments through ECS credit have to submit details of the beneficiaries (name, bank/branch, account number of the beneficiary, MICR code of the destination bank branch etc), date on which credit is to be made to the beneficiaries etc to the bank. The bank then debits the account of the payer bank on the scheduled settlement day and credits the account of the payee bank.

ECS offers many advantages

The beneficiary need not visit his bank to deposit the paper instrument, which he would have otherwise received had he not opted for ECS credit. He need not be apprehensive of loss or theft of physical instruments or the likelihood of fraudulent encashment. It is cost effective. The beneficiary receives the funds on the due date. There is no limit on the amount of individual transactions.

The Reserve Bank of India (RBI) has deregulated charges to be levied by sponsor banks on user institutions. The sponsor banks are, however, required to disclose the charges. Destination bank branches have to make ECS credit free of charge to the beneficiary account holders.

So, even on loans, the monthly EMIs can be paid through ECS. Many borrowers prefer to repay loans electronically with a mandate to the bank for the monthly deductions from their accounts on a specified date instead of giving post-dated cheques. However, those opting for ECS need to ensure that there are sufficient funds in the account.

Insufficient funds in an account, to meet the ECS mandate for a loan repayment, is punishable. The RBI recently clarified that the same set of rules against dishonour of cheque, according to Section 138 of the Negotiable Instruments Act, will apply to dishonour of electronic fund transfer instruction. Latest Song of Amrinder Gill Yaariaan

So, the lender will have a right to take action against such defaults. So, both cheque-based payments and electronic fund transfers are to be treated on an equal footing. Till now, there was a bit of ambiguity regarding punishments in case of failure of loan repayments through ECS mandate. However, it has now been cleared, and ECS payments are treated on par with the post-dated cheque payments.