Innovations in Electronic Banking Systen: RTGS (Real Time Gross Settlement)

Presentation by :
Dr.Narinder Kumar Bhasin , Vice president & Branch Head , Axis Bank Limited , New Delhi

RTGS ?
RTGS is An inter-bank fund transfer system (settlement) Settling funds on a transaction by transaction basis (gross) As and when the transactions are triggered (real time)

Assuring finality of settlement (irrevocable funds transfer)

Primarily catering to large value funds transfer between banks

Payment Systems
Payment and settlement systems form the backbone of any economy. They are the conduits or the arteries for conducting trade, commerce and other forms of economic activities including remittances in any country. An efficient payments system can be envisaged as the lubricant which speeds up the liquidity flow in the economy, thereby creating the necessary impetus and momentum for economic growth. The payments process is a vital aspect of financial intermediation; it enables the creation and transfer of liquidity among different economic agents. A smooth, well functioning and regulated payments system thus not only ensures efficient utilization of scarce resources but also eliminates systemic risks. The payments and settlement system is, therefore, a crucial component of the financial infrastructure of any country and more so of a country like ours.

Electronic Payment Systems

This "electronic" payment system is normally maintained or controlled by the Central Bank of a country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $1000 and increasing the amount of Bank B's account by the same. The RTGS system is suited for low-volume, highvalue transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time.

Broad Framework:
With a view to rationalize the service charges levied by banks for offering various electronic products, a broad framework has been mandated as under: a) Inward transactions Free, no charge to be levied b) Outward transactions 2 lakh to `. 5 lakh - not exceeding 25 per transaction. Above ` 5 lakh not exceeding ` 50 per transaction The remitting customer has to furnish the following information to a bank for effecting a RTGS remittance: Amount to be remitted Remitting customers account number which is to be debited Name of the beneficiary bank Name of the beneficiary customer Account number of the beneficiary customer Sender to receiver information, if any The IFSC Number of the receiving branch

RTGS - Process
Real time gross settlement systems (RTGS) are funds transfer systems where transfer of money or securities takes place from one bank to another on a "real time" and on "gross" basis. 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 or netting with any other transaction. Once processed, payments are final and irrevocable. RTGS is an inter-bank fund transfer system (settlement) Settling funds on a transaction by transaction basis (gross). As and when the transactions are triggered (real time) Assuring finality of settlement (irrevocable funds transfer) .Primarily catering to large value funds transfer between banks.

RTGS -Volumes
The RTGS system was introduced in India in March 2004 and now extends to 77,093 branches as at the end of June 2011. RTGS settles gross inter-bank and customer (Rs.2 lakh and above) transactions. On an average RTGS settles 1.8 lakh transactions with a value of Rs. 4 trillion on a daily basis. Considering the importance of RTGS for settling large value payment systems, action has been initiated for putting in place a Next-Gen RTGS. RTGS in India is equivalent to the global international electronic payment systems like:

RTGS Global Payment Systems

CHIPS: Clearing House Interbank Payments System. An interbank payment system related to international trade, CHIPS is used for the transfer of international trade dollars. CHIPS is used by both Fedwire and S.W.I.F.T. CHAPS: Clearing House Automated Payments System. Operated by the Bankers Clearing House of London, CHAPS is used for interbank messaging and wire transfer involving British Pounds. BOJNET: Electronic wire transfer system overseen by the Bank of Japan. FUNDS WIRING SERVICES: Although there are many wire transfer services, they must each use the basic services such as Fedwire, S.W.I.F.T, or BOJNET. Examples of wire money transfer services are Western Union, Moneygram, Eurigro, Sterling Draft Service, and the various payment services available on the Internet.

How it Works ?
Union Bank RBI

Debit Push Transactions Can be Interbank or Customer Individual Queue Based Model Routed Through RBI Each bank can view its Payments and Receipts

SBI

Union Bank

SBI

RTGS Implementation and Operating Mechanism:

The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. RTGS does not require core banking to be implemented across participating banks, since transactions are direct, with no central processing or clearing operations. Any RTGS employs two sets of queues: one for testing outgoing funds availability on a chronological FIFO basis with the option of prioritizing specific inquiries, while the other queue is for processing debit/credit requests received from the central bank's Integrated Accounting System .The

RTGS - Features
.The main features of RTGS are: Debit Push Transactions Can be Interbank or Customer Individual Queue Based Model Routed Through RBI Each bank can view its Payments and Receipts

RTGS vis--vis the present clearing system?

The key differences are summarised below:
Settlement Basis Time of Settlement System based on Transaction initiated by Receipt of funds Present Clearing System Net At specified times Physical instruments Person receiving payment (payee) High Value: Day 0 Local Instruments: Day 1 Outstation Instruments: Depends upon the location RTGS System Gross Transactions are settled on continuous basis Electronic messages Person making payment (payer) Day 0

Finality of Settlement Returns

Settlement is immediate, Only after return clearing final and irrevocable. Can result from insufficiency of Can result from incorrect funds, instrument being stale account details etc.

The Big Picture RBIs View

RBI has for sometime now been pursuing the establishment of a modern, robust and integrated payment and settlement system. Special focus has been placed on the building up of the System, required to facilitate large value inter-bank funds transfer in secured environment.

In fact, RBI has adopted a three pronged approach consolidation, development and integration. Consolidation Computerized Cheque Clearing, ECS, EFT Development Addition of clearing houses, de-regulation and Interconnectivity through Infinet Integration of various payment and settlement systems RTGS

Bottom Line Customer Interest First !!

Why RTGS ?

It is an approach to risk reduction, RTGS aims at reducing inter-bank settlement risk. Transactions across RTGS move only where the remitter (the sending bank ) has the liquidity. This assures receivers of receiver finality both customers and the receiving Banks. This discipline will reduce domestic and international systemic risk. It is a significant step towards eliminating cross border risks associated with settlement of foreign currency transactions. This will provide Delivery versus Payment (DVP) settlements to government and commercial equities and securities systems.

General Impacts
Though impacts of the rollout of these systems tends to be specific to the banking infrastructure within each country, however certain generic impacts are enumerated below: Banking business moves from a float to a fee based revenue generation model New and existing business processes move to use the RTGS system/channel for funds transfer Customer demands change and push their banks to provide products and services which are different to those provided before RTGS implementation Change in the antiquated mechanisms that were not providing adequate support for efficient and risk-reduced funds transfer mechanisms. By implementation of operational control and STP (Straight Thorugh Processing) solutions for payments, participating banks have been able to differentiate themselves in the changing market.

Specific Impacts
Truncation of physical instruments Payments requests can be made electronically or through physical instructions to banks No distinction between high value and MICR clearing, as prevalent today Funds can be utilised throughout the clearing day against information flowing in during the day, improving float management Probable levying of transaction charges by Banks for payments as against the present float earnings route available to banks today

What it would mean to the Customer?

RTGS Payments RTGS receipts Intra Day Credit/Liquidity Seamless STP Integration with Corporate Treasury Enhanced Cash Management Services Competitive pricing

Advantage ... Customer

Quicker settlement cycles Assured finality of settlement Intra Day Credit/Liquidity Reduced operational risk of fraud and loss of cheques Secure transactions Controlled flow of transactions Wider day time window for Collection / Payment Cuts across geographical boundaries Cuts across Inter Bank and Clearing House Settlement issues

NextGen RTGS:
Steps have been initiated to replace the existing RTGS system with the Next Generation Real Time Gross Settlement (NG-RTGS) by adopting the latest technology and emerging business processes. Some of the new features proposed to be implemented in the NG-RTGS system are advanced liquidity management facility; Extensible mark up language (XML) based messaging system conforming to ISO 20022; and real time information and transaction monitoring and control systems.

RTGS Settlement of Inter bank payment systems in real time on line mode ,one by one, On gross basis with Intra day finality.

Thanks
DR.Narinder Kumar Bhasin Dr.narinder.bhasin@gmail.com, smartbankers@gmail.com Mobile :9910110182