Real Time Gross Settlement Totally Explained

Everything about Real Time Gross Settlement totally explained

Real Time Gross Settlement (RTGS) is an online system for settling transactions of financial institutions, especially banks. RTGS systems are "push payment" systems with transactions initiated by the paying bank. If Bank A or one of its customers needs to pay $1000 to Bank B or one of its customers, Bank A initates the transaction and Bank B is immediately paid $1000 "electronically" by Bank A. Examples of RTGS systems include CHAPS in the UK and Fedwire in the United States.

Details

Each country has its own RTGS system. As mentioned above, CHAPS is used in the UK and Fedwire in the United States. Below is a listing of countries and their RTGS systems:

United States - Fedwire
Canada - LVTS (Large Value Transfer System)
Australia - [RITS]
UK - CHAPS
TARGET resp. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) in 26 countries of the European Union
Hong Kong SAR, China - CHATS (Clearing House Automated Transfer System)
Singapore - MEPS+ (MAS Electronic Payment System Plus)
Poland - SORB
Kuwait - KASSIP (Kuwait's Automated Settlement System for Inter-Participant Payments)
Israel - Zahav (Credit and Transfers in Real Time)
Macedonia - MIPS (Macedonian Interbank Payment System)
India - IFSC (Indian Financial System Code)
Czech Republic - CERTIS (Czech Express Real Time Interbank Gross Settlement System)

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, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time.
   Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as BACS. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. Extending the example above, say another person deposits a check drawn on Bank B in Bank A for $500. At the end of the day, Bank A will have to "electronically" pay Bank B only $500 ($1000 - $500).
   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 doesn't require Core Banking to be implemented across participating banks. Any RTGS would employ two sets of queues: one for testing funds availability, and the other for processing debit/credit requests received from the Integrated Accounting System. All transactions would be queued and submitted for funds availability testing on a FIFO+Priority basis.

RTGS in India

In India, this is initiated by Reserve Bank of India (Central Bank of India) and is available on weekdays only from 10:00am to 13:30pm. Fees for RTGS vary from bank to bank, but as mentioned earlier, both participating banks must have Core Banking in place to enter into such transactions. Core Banking enabled banks and branches have assigned RTGS 11-character alphanumeric codes, which are required for transactions along with recipient's account number.
   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).
   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 isn't paid back at the end of the day.
   AN UPDATE (11th May 2004): 19 more banks have joined RBI's online clearing and settlement system, Real Time Gross Settlement (RTGS) over the last few days. There are now a total of 23 banks conducting transactions on the new system. This include, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Overseas Bank, Central Bank of India, Dena Bank, BNP Baripas, IndusInd Bank, ING Vysya Bank. Out of the total 23 banks, the early batch of four banks State Bank of India, HDFC Bank, Standard Chartered Bank and Saraswat Bank have already embarked upon customer transactions.
   Another facility NEFT is also used in India to transfer funds.

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