The Hindu Business Line : Quiet flow the funds

COME APRIL, AND an ordinary customer will be able to send and receive funds in a jiffy through banks. Funds will move in and out of branches and between banks in seconds. An ordinary depositor need no more pick up a cheque book or buy a demand draft or stand in a queue at a post office to send funds by money order. Fund flow in double quick time has become a near reality with the Reserve Bank of India starting up the Real Time Gross Settlement (RTGS) for the ordinary man and the financial markets.

In the first phase, some 3,000 bank branches are expected to be on RTGS and it is quite likely that the first call will be made by some of the new private sector banks even as bankers whine over the evaporation of float money. The clearance process for a cheque or a demand draft takes four-five days and money order even longer allowing banks and post offices play of the funds in the interim. Such "float money is an indicator of inefficiency in a financial system," says Mr R. Gandhi, Chief General Manager-in Charge, Department of Information Technology, RBI, and the RTGS should, over a period, get rid of it. It is quite likely that banks will charge customers opting for the RTGS and one only hopes it will not be prohibitive. For a bank customer there will be no additional procedures for use of RTGS beyond checking out if his bank is on the system.

For financial markets, all inter-bank trades will shift to the RTGS on a gross settlement basis with every buy-sell transaction accounted for on a real time basis, unlike the netting system adopted by the Clearing Corporation of India. The RBI proposes to levy Rs 25 for every transaction apart from providing intra-day liquidity on a fully collateralised basis. Banks can use the RBI facility any number of times offering securities against the funds provided by the central bank on its terms and conditions. These funds need to be repaid the same day with defaults penalised at double the Bank Rate or the day's call rate. In the process, the RBI gets a micro view of the funds settlement process without bothering to look into the underlying trading transaction of government paper. Before the start of a trading day, banks will have to schedule their payments — around 40 per cent of the total cash outgo in the first phase with 30 per cent each spread out in two instalments subsequently. The RBI reserves the right to pull up participants for not sticking to the game plan. In case the fund flow gets stuck between parties, the RBI will step in with a gridlock resolution tool; the present software is capable of handling one lakh transactions a day.

When the RTGS gets going, the RBI will have a clue to the circulation of funds in the market while banks need no more sit on idle funds locked up in some rural branch. Transaction costs can come down sharply and lower interest rates albeit marginally with profits linked to volumes. Perhaps, the RTGS is the most critical innovation brought in by the RBI and its quiet launch belies the benefits bankers and customers could enjoy in the near future.

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