The Reserve Bank of India has allowed banks to allow funds transfer from one customer's account to another customer's account of the same bank through ATMs.

This essentially means one will not need to issue a cheque any more for transferring money to another's account if both of them happen to be customers of the same bank.

The RBI decision will bring down the cost of transactions radically for banks while customer convenience will go up manifold. The banks will need to finetune their ATM software to be able to launch the facility.

The mandate and related documentation, which form the basis for effecting payments for such transactions carried out over the ATMs, is to be settled bilaterally by banks with their customers.

The rights and obligations of each party should be clearly stated in the mandate and should be valid in a court of law, the RBI said.

"As transfer of funds is restricted to customers of the same bank, there is no settlement risk involved. Further, it's a zero-sum game as far as the deposit base of the bank is concerned. One customer's account is debited and another's credited at the same time. In this case, the ATM will function more as a computer for communicating with the bank," said a senior banker.

While permitting third party payments through ATMs, banks have been asked to take appropriate steps for securing discharge of their liability.

The ATM messaging route as well as the Internet banking route allow for faster transfer of funds. This is in sharp contrast to transfer of funds through cheques. A local cheque takes a day to be cleared while an outstation cheque takes a longer time for clearance.