Indian Payments: A Closer Look at RTGS and Message Flow
“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 no settlement delays or mountains of paperwork and value is received instantaneously. There are no distinctions in costs or delays between a domestic and a foreign currency transaction. Interest is computed real-time rather than on a “settlement day”, a relic from the ancient times, when accounting was done manually. Finally, privacy and security are guaranteed.”
Vision of the Ultimate Payment and Settlement System – The Committee on Payment and Settlement Systems of the Bank for International Settlements, Basel
The Indian central bank – Reserve Bank of India (RBI) – in order to make the financial system more efficient, effective and secure, has undertaken a number of initiatives in the field of payment systems.
To help the growing market economy, RBI aims to build an integrated market that will enhance the effectiveness of policies and facilitate better functioning of markets with characteristics such as absence of administrative restrictions (especially on cross-border and cross-market transactions and informational barriers), and risk-adjusted returns on assets.
The idea behind recent initiatives is that payment systems will widen the participant base, improve the information base for all participants, create greater transparency and encourage good market practices, introduce efficient settlement mechanisms, rationalise tax structures, create better infrastructure to facilitate faster transactions and lower their costs.
RBI has set up the following:
The Working Group on Systematically Important Payment Systems, set up by the RBI, has identified some payment systems as systemically important.
The reason these were considered systematically important are:
The inter-bank payment systems handle large amounts of money. An estimate indicates that in the G-10 countries alone the turnover of the main systems is more than the equivalent of US$5 trillion each day. Many of these payments are for the settlement of financial market transactions between the banks themselves, such as inter-bank loans or foreign exchange deals; other payments are made by banks on behalf of their customers.
In recent years, it has been increasingly realized that the way in which many of the systems traditionally worked exposed the participating banks to substantial inter-bank risks resulting in the systemic risk that, if one bank were to fail for any reason, other banks in the system could fail as a consequence of these inter-bank exposures. Because of these concerns, countries around the world have been taking action to make their payment systems more robust. One method of doing this, and one that has been adopted in an increasing number of cases, is to introduce an RTGS system (a payment system in which payment instructions between banks are processed and settled individually and continuously throughout the day).
To initiate a funds transfer, the sending bank dispatches a payment message, which is subsequently routed to the central bank and to the receiving bank as the system processes and settles the transfer.
Arrangements for routing payment messages in the majority of RTGS systems are based on a so-called V-shaped message flow structure. In this structure, the full message with all the information about the payment (including, for example, the details of the beneficiary) is initially passed to the central bank and is sent to the receiving bank only after the transfer has been settled by the central bank.
Some RTGS systems, and particularly those that use the Swift network, apply an alternative structure, known as a Y-shaped structure.
In this case, the payment message is transmitted by the sending bank to a central processor. The central processor takes a subset of information that is necessary for settlement from the original message and routes this core subset to the central bank (the original message being kept in the central processor). Upon receipt of the core subset, the central bank checks that the sending bank has sufficient covering funds on its account and informs the central processor of the status of the transfer, for instance, queued or settled. Once settled, the full message containing the confirmation of settlement is rebuilt by the central processor and sent to the receiving bank.
The business information exchanged between the sending and receiving bank is, therefore, not known by the settlement agent.
A third structure (so far adopted only by Chaps) is L-shaped structure, which is conceptually similar to a Y-shaped structure. The payment message dispatched by the sending bank is held at a system gateway attached to the sending bank’s internal processing system and a subset of information contained in the original message (a settlement request) is sent to the central bank. If the sending bank has sufficient covering funds on its account, settlement is completed and the central bank sends back a confirmation message to the sending bank’s gateway. Upon receipt of this confirmation (and only then), the original payment message is released automatically from the gateway of the sending bank and sent to the receiving bank.
The RTGS Solution rolled out in the Indian financial environment incorporates the best international features and practices. It incorporates features and unique requirements of the financial system in India.
Robust Technologically – Technology has been the driving force for many payment system innovations in the recent past. Not surprisingly, the Indian RTGS system solution aims at being a state-of-the-art solution with the use of the Infinet as the dedicated, secure communication backbone, SFMS as the secure messaging system and IBM’s S/390 mainframe system as the robust platform at the back-end for implementation.
Y-Message Flow Structure – The solution provides for a single gateway interface (participant interface or PI) to the RTGS system for each participant. All payment messages of the participant emanate from the PI. So do other messages e.g. enquiries etc. As discussed above, the advantage of this topology is that the beneficiary is notified only after the settlement has been successful and funds have been applied to its account.
It also enables the central RTGS processor to concentrate on what it does best i.e. settle transactions, while the other housekeeping tasks are taken care of by other sub-systems.
Participant’s Dedicated Settlement Account – A single dedicated account, the RTGS settlement account for each participant for outward and inward RTGS payments, is provided by the solution, enabling easy monitoring, tracking and reconciliation of the transactions as well as more efficient liquidity management.
FIFO Processing/Transaction Priority – Payment transactions emanating from a participant’s payment systems gateway are processed by the RTGS system strictly in first-in-first-out or FIFO basis.
Payment Queues – Payment transactions, emanating from a participant are ordinarily expected to be settled immediately after it is received. This is the essence of a real time system. The system also provides for facilities to the participants to view their respective transactions held in their payment queues, cancel such transactions and even change their priority.
Own Account Transfer – The system provides for the participant-initiated movement of funds between various accounts held by it to optimise funds deployment and economise on its intra-day liquidity requirements. Such movement of funds can take place between the participants’ settlement and current account as also between two or more current accounts, held by a particular participant. This can also be used as an effective tool for liquidity management by the participants.
Transaction Types – The proposed RTGS system provides for a wide array of transaction types, which can be flexibly deployed to meet varying requirements.
Liquidity and Collateral Management – Any RTGS system entails active management of intra-day liquidity by all participants. To ensure smooth settlement of transactions and to avoid bunching of transactions and delay of credit to other participants, it is imperative that participants ensure, at the time of submission of payment instructions, that there are sufficient funds in their RTGS settlement account to settle their transactions as soon as they are submitted or within a very short interval thereafter.
Intra Day Liquidity – The RTGS system enables the provision of intra day lines of credit by the Reserve Bank of India to the participants of the RTGS system to enable them to meet their intra day liquidity requirements. The RBI at its discretion and under terms and conditions, to be specified by it from time to time, will provide such liquidity. Such intra-day liquidity will be fully collateralised and will be provided to the participants at a charge per transaction.
Gridlock Resolution Mechanism – The solution provides for an optimised gridlock resolution tool to overcome crippling liquidity problems, which have the potential to clog the entire system. This tool may be invoked periodically or at the discretion of the RBI to enable smooth settlement of the RTGS transactions.
Interface with Net Clearing Systems – The Multilateral Net Settlement batches (the new avatar of the existing Clearing batches) will also be settled in the RTGS system. This will ensure more efficient settlement of net clearing batches including the settlement of the transactions, emanating from the Clearing Corporation of India Ltd. (CCIL) and potentially other clearing and settlement agencies as also more efficient monitoring of un-cleared credit positions.