real time gross settlement system

8/6/2019 Real Time Gross Settlement System

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Real Time Gross Settlement System (RTGS)

(Introduction)

The Real Time Gross Settlement (RTGS) System is an important landmark in the payment andsettlement 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 settlementeliminates 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.


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In short ,RTGS is a new system of payments evolved in the Indian banking environment. Itsmain 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 clearingsystem. 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.


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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 intooperation 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


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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


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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 havethe RTGS system.

How it works


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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:

C ertainty of payment: all payments under RTGS are irrevocable and final. So beneficiarysaccount can be credited immediately. Under paper-based system, credit may not be given due totechnical 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 beimproved since funds can be seamlessly transferred across banks.


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

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


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M odus Operandi ( ME THOD /PRO CE DUR E )

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 issimultaneously 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 thereceiving bank can credit the beneficiarys account immediately and allow full use of funds.


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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.


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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 t imes 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


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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 bank-

wise 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?


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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.


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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?


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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.

real time gross settlement system

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