Reserve Bank of India vide circular dated March 21, 2007
i. For maintenance of state government accounts and recovery of interest on delayed remittance with regard to the state government transactions
ii. To bring uniformity in the time frame for reporting the central and state government transactions to Reserve Bank.
the RBI issued an order that the existing procedure that was applicable to the central government shall be also applicable to the state government. The above order was issued with the approval of Comptroller and Auditor General of India.
The transactions applicable to central government which was similarly made applicable to the state government are as below:
1. Local transactions: where the collecting bank branch and focal point branch are in same city, the settlement of transactions with the RBI shall be made within 3 working days from the day when the money is available with that branch.
2. Outstation transaction: where the collecting bank branch and the focal point branch are in different cities then the settlement of transaction with the RBI shall be made within 5 working days from the day when the money is available with that branch.
In case of delay in the settlement by the bank branch the interest was imposed on the banks as follows:
1. The transactions below Rs.1 lakh each, the interest shall be at bank rate for the 5 calendar days and at bank rate plus 2% for delay more than 5 days.
2. The transactions of 1 lakh and above the interest shall be at bank rate plus 2% for the entire delayed period.
Further, Reserve bank of India with an intention to bring uniformity in the procedure of reporting the transactions of both Central and State government to Reserve bank, the RBI issued the notification dated September 26, 2019 advising the agency banks to ignore and exclude the petty claims of penal interest of an amount of INR 500/- or below on per transaction basis for the interest imposed on the delay in reporting the state government transactions similar to that of central government transactions. This was instructed upon obtaining approval from Comptroller and Auditor General of India.
Further based on feedback received from the Accountant General, the office of Comptroller and Auditor General of India has now reconsidered their proposal of ignoring the penal interest amount of INR 500 or below and instructed RBI that they have withdrawn the accord, based on which the RBI had issued the notification dated September 26, 2019.