[sbinews] Will banks benefit from real time gross settlement (RTGS) ? (Business Standard)

  • From: "Rajendra S. Pai" <rajendra.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Mon, 19 Jan 2004 09:26:10 +0530

Will banks benefit from real time gross settlement?
Published : January 19, 2004
(Business Standard)

New tasks, gains for banks
DGM, Treasury,
Bank of India

Real time gross settlement (RTGS) system is a transparent method for
settlement of inter-bank transaction.

An ideal RTGS means that a cheque issued by a customer drawn on any branch
of a bank deposited in any branch of another bank gets instantly cleared.

Simultaneously, the funds position between the two banks gets settled in the
central hub of the central banking institution. It involves, intricate
communication and networking for transfer of data.

In broad terms, it involves two steps of networking: Intra-bank (networking
of branches within the bank) and inter-bank (networking of banks and other
participants through a central hub).

In Indian, perfection of networking within the bank is still a distant
possibility. In fact, it poses a considerable challenge to the public sector
banks (PSBs) with a large network of the branches.

Nonetheless, banks are on the job to accomplish this feat through core
banking solutions.

RTGS is being promoted through connectivity of banks and participants with
the central hub of Reserve Bank of India (RBI).

Having successfully implemented negotiated dealing system (NDS) through the
communication backbone of Indian Financial Network (INFINET), banks and
institutions are ready to participate in RTGS.

RTGS implies one-to-one settlement of transaction between parties in which
each party makes a separate payment on each transaction.

The settlement is immediate, final and irrevocable. Universally, RTGS
implementation is driven by central bank's initiative to reduce systemic
risk in high-value payments.

Since transactions are settled on continuous gross basis, sufficient funds
must be available in the participants' settlement account at the time of
each settlement.

RTGS will bring in new challenges. Banks' treasury will be responsible for
managing intra-day liquidity in real-time. Repo and reverse repo will need
to be managed in real-time basis.

Corporate cash management services will undergo a change and managing
operational risk will be a critical issue from the liability perspective.

The system will have a substantial impact on current operations in the
banks, particularly in the area of treasury, payment division, corporate
banking and cash management. Banks will need to implement new strategies,
processes, systems and organisation.

The new challenges also brings in new opportunities. It's true that the
implementation of RTGS will deprive banks of free float of funds but this
will be more than compensated by reduction in the operational cost and gain
out of same day deployment of stock/cash due continuous settlement.

The banks have to develop a new fee-based payment product for corporate
customers, can offer re-engineered cash management services and the bigger
banks will be in a position to extend fee based services to smaller ones who
may not become direct members of RTGS.

Trading in intra-day liquidity offers opportunity to earn revenue. So, RTGS
will offer exciting business opportunities to the banks. But it will require
business process re-engineering in the banks' to bring about procedural
(The views expressed are the author's own and in no way represents the views
of the BoI)

Full use of funds afforded
Head, cash management
StanChart, Singapore

In a real-time gross settlement (RTGS) system, payments are cleared singly
and bilaterally as they occur; as a payment message is moved through the
clearing house, so the paying bank's account with the Reserve Bank of India
(RBI) is debited and the receiving bank's account is credited.

Since there are no end-of-day procedures, such systems do not create
intra-day exposures between participants.

In other words, there is certainty of payment and the receiving bank can
credit the beneficiary's account immediately and allow full use of the

Before RTGS, electronic payments were settled on a net basis at the RBI,
typically at the end of the day. There was, therefore, a risk that a bank
might not be able to settle on their obligations made during the day.

Corporates and individuals alike will benefit from the system, particularly
in respect of high value payments.

Some of the drivers that might influence a switch from paper to electronic
and other developments underway in the payments environment are reduction in
overall payment processing and tracking costs and ability to reconcile
receivables automatically, better supplier-buyer relationships and
improvements in working capital and float reduction.

Reduction in overall payment processing and tracking costs and the ability
to reconcile receivables will entail tracking paper remittances - from the
issuance of a cheque to its dispatch and clearance is far more costly for
both the remitter and the beneficiary than for electronic payment as audit
trails are readily available, especially if the transaction is delivered and
reported electronically.

Better supplier-buyer relationships and improvements in working capital will
provide a more timely and transparent payment mode that will certainly
improve supplier relationships.

This should also result in improvements in overall working capital
management as counterparties are now able to respond faster to a payment
credit It will also help in float reduction.

Float in respect of a cheque can arise due to various factors like the mail/
courier time taken between despatch and receipt by the beneficiary; time
beneficiary takes in depositing the cheque at their bank; and the cheque
clearing time for good value to be received on the beneficiaries account.
Because of the vast geography in India, such float costs can be high.

Ignoring for the time being the bargaining power between payer and
beneficiary, the payer would appear to have some financial advantage in
paying by cheque rather than through electronic means.

First, he is probably not incurring any charges for issuing a cheque.
Secondly, the float cost mentioned above is actually in the remitter's
favour. That is to say, the remitter may get the use of funds for an
additional 10 days.

If his cash forecasting model is effective, he can make use of these funds
even if it is only to the extent of reducing his overdraft and borrowing

But if the remitter were to solely concentrate on the float cost and ignore
the other benefits associated with electronic payments he may miss the
bigger picture and the holy grail which leads to the above benefits.

The savings due to STP and its benefits will be considerably greater than
the float costs.

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