Financial Glossary starting with Alphabet N

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NEFT and RTGS NEFT and RTGS Net Present Value of Money Net Present Value of Money

NEFT and RTGS

Understanding ‘NEFT & RTGS - How does one transfer money from one bank to another? Obvious answer – By Cheque.

How long does it take for money to move into your account after depositing the Cheque? Probably a day or two or may be more. In essence it does take some time.

Is there no other option for money transfer which quickly transfers money from one bank account to another bank account? NEFT and RTGS are two convenient modes of money transfer between banks in India.

RTGS stands for “Real Time Gross Settlement” – It enables transfer of money in real time.

NEFT stands for “National Electronic Funds Transfer” which is an online system of transferring funds between financial institutions.

RTGS payment transaction will not involve any waiting period which is the true meaning of “real” time settlement

Under normal circumstances the transactions are settled as soon as they are processed by remitting bank. The transaction is settled on one to one basis. Once processed the transactions are irrevocable as the money transfer occurs in RBI records

NEFT functions on a deferred net settlement basis where transactions are completed in batches at specific times. These settlements takes place at a particular point of time and all transactions are held up till that time.

RTGS is for amounts equal or greater than or equal to Rs. 2 Lacs while NEFT is used for transactions below Rs. 2 Lacs. However there is no upper limit for either RTGS or NEFT. In RTGS the beneficiary bank credits the beneficiary’s account in a span of two hours after receiving the funds transfer message. RTGS transactions are processed throughout the working hours of the system.

NEFT is done on a net basis where the bank clubs transactions together and only the net amount is transferred. This settlement usually takes place 7 times a day on weekdays and 3 times on Saturdays. NEFT takes place within the same day if it is within the cut off time and the next working day if it is beyond the cut-off time.

Majority of commercial banks have employed RTGS and it is available in over 30472 branches. NEFT facility is available in 32407 branches of banks. These branches may be in remote corner of the country also. (Source: TATA Mutual Fund)
Net Present Value of Money

Understanding what is “net present value of money” - Two friends Shekhu and Pheku were sitting under a tree and engrossed in some discussion. They had a problem on hand.

Sheku’s father had agreed to pay him Rs 1 crore to help him settle in life. But Pheku’s father had made another arrangement. Not sure of Pheku’s maturity, he promised Rs. 1.2 crores after 3 years.

Pheku was showing off his offer to Sheku saying that his father has given a much better deal. However Sheku not ready to give up argued that his deal was better because he was getting paid immediately.

Now this argument went on for several hours till it was evening. However this problem was just not getting resolved.

This argument was taking place just in front of my office. Seeing these guys’ argument stretch across the entire day, I got curious and walked up to them to understand their problem.

When they explained their positions, I offered to intervene provided they stop their argument. I told them that in order to compare their situations it would be necessary to find out the net present value of the Rs. 1.2 crore that Pheku had been promised after 3 years.

Here it is important to understand that the purchasing power of money reduces almost every day due to the rise in price of goods and services due to inflation.

Therefore the value of Rs 1.2 crores after 3 years needs to be discounted by an assumed rate of inflation. Let’s say the rate of inflation we assume is 8%per annum

The formula for calculating the net present value or NPV = Amount/(1+R)^n. Where Amount is the Rs. 1.2 crore that Pheku would get after 3 years. “R” is the rate of assumed inflation and “n” stands for 3 year period

So using the formula we get

NPV = 1.2/(1+.08)^3 = 1.2/(1.08)^3 = Rs 95 lacs

Thus I told Pheku that the net present value of the money promised to him is Rs. 95 lacs and hence it less than what Sheku is receiving.

I thus told them that one should simply not get blindly excited by an amount being offered in the future. Inflation is our constant companion and hence it is imperative to calculate the present value of all future cash flows for comparison