Real Time Gross Settlement System (RTGS)

(Introduction) The Real Time Gross Settlement (RTGS) System is an important landmark in the payment and settlement system initiatives being taken by the Reserve Bank of India (RBI) from time to time. A gift to the Indian financial system, RTGS was made operational in the Mumbai on March 26, 2004. It is expected that in a few yrs, the targeted members viz. major banks, financial institutions and primary dealers will become members of the RTGS system and bring about a major change in the payment mechanism. RTGS is a centralized payment system in which, inter-bank payment instructions are proposed and settled, transaction by transaction (one-by-one) and continuously (online) throughout the day, as and when the instructions are received and finally accepted the system. Simply stated, RTGS is inter-bank (inter-institutional) transfer of funds on a real time and gross basis. Payment instructions can be processed/ acted upon either at the end of a settlement cycle (for instance, every two hours or end of the day) or immediately on receipt of the instruction (subject to adherence to any given priority number). The former type is called settlement on a net basis, while the latter is called a gross settlement, which is a transactionby transaction settlement with reference to availability of funds in the designated account (s). This type of gross settlement eliminates counter-party / default risk in the books of the settlement bank (ordinarily, the central bank of a country) because settlement take place on a real time basis i.e. instantaneously and hence imparts stability and confidence to the financial system. It is a significant step towards creation of an integrated, robust, safe, and secure and modem payment and settlement system. The world over, RTGS has been adopted as a prime mode of settlement of financial transactions. In India also, its introduction will unfurl a lot of innovations in the financial market. The proposed T+1 securities settlement system to be introduced by SEBI for capital market transaction is critically dependent on adoption of RTGS system by a large number of users. Besides member financial institutions, individuals can also send, through an RTGS member, instruction for electronic transfer of funds from one account to another.

In short ,RTGS is a new system of payments evolved in the Indian banking environment. Its main objective is to enable online clearing and settlement of payments on a real-time basis across banks in different cities. The RTGS is an upgraded technology aimed at reducing dependence on payments through cheques. It is radically different from the present day paper-based clearing system. It not only permits net settlements between banks but also eliminates systematic risk.

Definition:

1. Real Time Gross Settlement- (RTGS) solution is a milestone in the saga of Indian Payment System. It will enhance competitiveness within the system. It gears up the banks to meet future challenges posed by the external environment. RTGS system, if implemented with due precautions and proper action plan, will certainly help the Indian Banking Industry to attain global standards.

2. An RTGS system is defined as a gross settlement system in which both processing and final settlement of funds transfer instructions can take place continuously (i.e. in real time). RTGS systems are typically electronic systems, using telecommunications networks, which transmit and process information in real time. As it is gross settlement system, transfers are settled individually, that is, without netting debits against credits. As it is a real time settlement system, the system effects final settlement continuously rather than periodically at pre-specified times provided that a sending bank has sufficient covering balances or credit. Moreover, this settlement process is based on the real time transfer of central bank money. An RTGS system can thus be characterized as a funds transfer system that is able to provide continuous intraday finality for individual transfers.

RTGS is a large value funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system effects final settlement of interbank funds transfers on a continuous, transaction- by-transaction basis throughout the processing day.

The statistics of transactions for the month of March 2004 shows that in the interbank market transactions involving 45000 instruments and aggregating Rs 1,79,000 crore were settled. High value instruments (3,17,000) settlement aggregated Rs 2, 74,000 crore. However, settlement of MICR instruments (145 lakhs) accounted for only Rs 54,000 crore. RTGS will eliminate settlement risk in the case of interbank and high value transactions.

The system went live on March 26 with State Bank of India, HDFC Bank, Standard Chartered Bank, and Saraswat Co-operative bank. The Reserve Bank of India expects 120 scheduled commercial banks and primary dealers to become part of the real time gross settlement system (RTGS) by June 2004. ICICI Bank, IndusInd Bank, BNP Paribas, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank and Union Bank of India are likely to join shortly.

Banks could use balances maintained under the cash reserve ratio (CRR) instead of the intra-day liquidity (IDL) to be supplied by the central bank for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI has fixed the IDL limit for banks to three times their net owned fund (NOF). in the early nineties, a public sector bank introduced a product into

the market called Cash Management Services (CMS), which received a phenomenal reception. Till then, entities, which had several work points had their cash parked at each of these centers to meet their needs and could not use those resources to the optimum extent. CMS changed it all and moving funds to the place of need became easy. Entities were able to maximize the leverage such instant mobility provides. Currently it is said that funds to the extent of rupees eight lakh crores get handled under the CMS product. RTGS (Real Time Gross Settlement) is a sub-product under the CMS umbrella and on a pan-India basis. This product is currently being offered through 20000 branches of various banks. RTGS would be of immense help especially in handling overseas remittances and enterprises can transfer funds to their business partners/associates with minimum loss through pipeline costs. Till now inaccessibility to funds in the pipe line or substantial access costs were putting the business entities in to enormous pressure in the global context. To these entities and especially to finance executives, CMS and RTGS have proved to be of immense value. Access, control and leverage are the significant features of this product. This article explains the features of RTGS. It has become imperative for Banks in India, in their process of adaptation to the global payments and settlement systems, to have in force a congenial transfer of payments or funds. To quote, The Committee on Payments and Settlement Systems of the Bank for International Settlements, Basle (CPSS), a payment system is a set of instruments, procedures and rules for the transfer of funds among the systems participants. This committees report is referred to as Significantly Important Payment Systems (SIPS), which is the network of major channels, for transmission of funds across domestic and international financial systems. It has been stated that by putting into operation the electronic transfer of funds systems anyone can make payments to whomsoever one likes, whenever one likes, in whatever type of currency one likes, at the cost of a few cents per transaction. There are neither settlement delays nor mountains of paper work. The value is received instantaneously. There are no distinctions in cost or nature between a domestic and foreign currency transaction. Interest is

computed on real-time, instead of on a settlement day, a practice from the ancient times when accounting was done manually. In such systems,privacy and security are guaranteed. Reserve Bank of India, in an attempt to adapt to the international practices, has recommend to the introduction of rtgs system.

The IDL will be charged at Rs 25 per transaction entered into by the bank on the RTGS platform. The marketable securities and treasury bills will have to be placed as collateral with a margin of five per cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day. A few months from now, if one wants to transfer money to friend or relative in another city, it can be done within seconds. No longer will one have to rely on a demand draft (DD) or a cheque. And no more the anxious wait for a week or a fortnight, wondering if the instrument reached safely and was duly encashed. If one is in business, and routinely faces the problem of debtors delaying their payments with perfectly legal tricks, there is some help on the way. No longer will the debtor be able to enjoy the kind of float he did by deliberately giving an outstation cheque. Nor will he be able to fob off with a cheque and then give stop payment instructions to his bank. All this is thanks to the Reserve Bank of India introducing a systemic improvement called RTGS that has begun in a limited way since March 2004. Enter RTGS... RTGS, short for Real Time Gross Settlement, is a centralised system in which inter-bank payment instructions are settled "real time". What this means is that banks can settle their payments to one another immediately and irrevocably. Now they do this at the end of the day. Why `gross' is better than `net' Banks will also be settling on a "gross" basis instead of "netting off". Under the present system of settlement, bank officials meet at a clearing house to exchange cheques and other instruments

drawn on one another. Banks pay for those instruments that have been issued by their customers and also receive money for instruments presented to other banks by their customers. For instance, Bank X may owe Rs 300 crore to Bank Y for cheques issued by its customers. And it may have dues of Rs 200 crore from Bank Y for cheques deposited by its customers. In the current `net' settlement process, at the end of the day, Bank X will pay Rs 100 crore or the `net balance' to Bank Y.

No traffic jams This, of course, is a simple example involving just two banks. In reality, there are a hundred-plus banks that do these net settlements among them every day. But given the nature of the business, a huge systemic risk is involved. For example, Bank A may owe Rs 100 crore to Bank X. On the expectation of receiving this amount, Bank X may commit Rs 75 crore to Bank Y. Similarly, Bank Y may have made some commitments to Bank Z. What happens if Bank A fails to make the payment to Bank X? The consequences of the Bank A's default will be a chain of defaults and a paralysis of the entire payments system. This, to borrow a traffic terminology, is a "gridlock". It is to avoid this kind of situation that the Reserve Bank of India is pushing for RTGS. RTGS will limit the damage to just the immediate counter parties of a transaction and not allow the risk to spread to the entire system. India joins an elite band of about 20 countries that have the RTGS system. How it works

Under RTGS, each payment is settled individually on a transaction-by-transaction basis, whereas in the existing system, each payment is linked with other payments that are settled through the netting process. If we take the above-mentioned example, under the RTGS system, Bank X would first pay Rs 300 crore to Bank Y and then receive Rs 200 crore from Bank Y. For this purpose, both banks will have to maintain a settlement account with the RBI. At the start of every day, every bank is expected to maintain a balance of Rs 100 crore. All payment instructions will be queued as per time and executed one by one. In case banks need funds/temporary accommodation, they can always get it from the RBI against pledge of government securities.

Advantages of RTGS:

Certainty of payment: all payments under RTGS are irrevocable and final. So beneficiarys account can be credited immediately. Under paper-based system, credit may not be given due to technical reasons such as incorrect account details, foreign accounts etc.

Faster collection of funds: the RTGS would provide An opportunity to collect funds at a faster rate due to improved technology. It has the effect of reducing the receivers working capital cycle.

No settlement risk: it reduces settlement risk since credit to an account is final with no possibility of subsequent returns.

Improved liquidity management: from banks point of view, the liquidity management can be improved since funds can be seamlessly transferred across banks.

Less fraud and less processing cost: the processing costs and the risk of frauds are greater in the case of paper-based clearing system. They are considerably reduced under RTGS.

Better inventory management: faster funds transfer facilitates better inventory and supply chain management. With these benefits, it is expected that volumes of transactions under RTGS will rise and the transaction volumes by cheque payment will see a decline in the coming years.

Modus Operandi ( METHOD /PROCEDURE)

Under RTGS system payments are cleared singly and bilaterally as they occur. When a payment message is moved through the clearing house, the paying banks account with the RBI is simultaneously debited and credited in the receiving banks account. There are no end-of-day procedures as in the case of paper-based clearing system. There is a certainty of payment and the receiving bank can credit the beneficiarys account immediately and allow full use of funds.

Frequently Asked Questions Q. 1. WHAT IS RTGS SYSTEM? RTGS stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a real time and on gross basis. This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Gross settlement means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable. Q. 2. IS THERE ANY MINIMUM / MAXIMUM AMOUNT STIPULATION FOR RTGS TRANSACTIONS? The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs. 1 Lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum stipulation has been fixed for NEFT transactions. Q. 3. WHAT IS THE TIME TAKEN FOR EFFECTING FUNDS TRANSFER FROM ONE ACCOUNTY TO ANOTHER UNDER RTGS? Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiarys account within two hours of receiving the funds transfer message.

Q. 4. HOW RTGS IS DIFFERENT FROM NATIONAL ELECTRONICS FUNDS TRANSFER SYSTEM (NEFT)? NEFT is also an electronic fund transfer system that operates on a deferred net settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a particular point of time. All transactions are held up till that time. For Example, Correct to: 6 times a day during the week days (9.00am, 11.00 am, 12.00 noon, 1.00 pm, 3.00 pm and 5.00 pm) and 3 times during Saturdays( 9.00 am, 11.00 am and 12.00 noon). Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS business hours.

Q. 5. WOULD THE REMITTING CUSTOMER RECEIVE AN ACKNOWLEDGEMET OF MONEY CREDITED TO THE BENEFCIARYS ACCOUNT?

The remitting bank receives a message from the Reserve Bank that money has been credited to receiving bank. Based on this the remitting bank can advise the remitting customer that money has been delivered to receiving bank.

Q. 6. WOULD THE REMITTING CUSTOMER GET BACK THE MONEY IF IT IS NOT CREDITED TO THE BENEFICIARYS ACCOUNT? WHEN?

Yes. It is expected that the receiving bank will credit the account of the beneficiary instantly. If the money cannot be credited for any reason, the receiving bank would have to return the money

to the remitting bank within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customers account is reversed.

Q. 7. WHAT ABOUT PROCESSING CHARGES / SERVICE CHARGES FOR RTGS TRANSACTIONS?

While RBI has waived its processing charges for all electronic payment products till March 31, 2009, levy of service charges by bank is left to the discretion of the respective banks. The bankwise details of charges levied are available on the RBI website- www.rbi.org.in

Q. 8. TILL WHAT TIME RTGS SERVICE WINDOW IS AVAILABLE?

The RTGS service window for customers transactions is available from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 12.00 noon on Saturdays. i.e to accept the customer transactions for settlement at the RBI during 9.00 hours to 16.30 hours on week days and between 9.00 hours and 12.00 noon on Saturday. However, the timings between these hours would vary depending on the customer timings the branches have. For inter-bank transactions, the service window is available from 9.00 hours to 18.00 hours on week days and from 9.00 hours to 14.00 hours on Saturdays.

Q. 9. WHAT IS THE ESSENTIAL INFORMATION THAT THE REMITTING CUSTOMER WOULD HAVE TO FURNISH TO A BANK FOR THE REMITTANCE TO BE EFFECTED?

The remitting customer has to furnish the following information to a bank for effecting a RTGS remittance: 1. Amount to be remitted 2. His account number which is to be debited. 3. Name of the beneficiary bank 4. Name of the beneficiary customer 5. Account number of the beneficiary customer 6. Sender to receiver information, if any. 7. The IFSC code of the receiving branch.

Q. 10. DO ALL BANK BRANCHES IN INDIA PROVIDE THE RTGS SERVICE?

No, all the bank branches in India are not RTGS enabled. As on April 30, 2008 more than 44,000 bank branches are RTGS enabled. The list of such branches is available on RBI website.

Q. 11. IS THERE ANY WAY THAT A REMITTING CUSTOMER CAN TRACK THE REMITTANCE TRANSACTION?

It would depend on the arrangement between the remitting customer and the remitting bank. Some banks with internet banking facility provide this service. Once the funds are credited to the account of the beneficiary bank, the remitting customer gets a conformation from his bank either by an email or by a short message on the mobile.

Q. 12. HOW WOULD ONE KNOW THE IFSC CODE OF THE RECEIVING BRANCH?

The beneficiary customer can obtain the IFSC code from his branch. The IFSC code is also available in the cheque leaf. This code number and bank branch details can be communicated by the beneficiary to the remitting customer. www.rbi.org.in/scripts/Bs_viewRTGS.aspx

Q. 13. HOW CAN REMITTING CUSTOMER KNOW WHETHER THE BANK BRANCH OF THE BENEFICIARY ACCEPTS REMITTANCE THROUGH RTGS?

For a funds transfer to go through RTGS, both the sending bank branch and the receiving bank branch would have to be RTGS enabled. The lists are readily available at all RTGS enabled branches. Besides, the information is available at RBI website: (http://rbidocs.rbi.org.in/rdocs/RTGS/DOCS/listofRTGSBanks.xls.) Considering that more than 44,000 branches at more than 5,000 cities / towns / taluka places are covered under the RTGS system, getting this information would not be difficult.

Q. 14. HOW MUCH VOLUME AND VALUE OF TRANSACTIONS ARE ROUTED THROUGH RTGS ON A TYPICAL DAY?

On a typical day, RTGS handles about 30,000 transactions a day for an approximate value of Rs.2, 00,000 Crore. Q. 15. WHOM DO I CAN CONTACT, IN CASE OF NON-CREDIT OR DELAY IN CREDIT TO THE BENEFICIARY ACCOUNT?

Contact your bank/ branch. If the issue is not resolved satisfactorily within a reasonable time frame, the Customer Service Department of RBI may be contacted at.