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Focus turns on fund transfers

Shaji Vikraman

A COUPLE of weeks ago, when the High Level Committee on Capital Markets met in New Delhi, one of the items on the agenda, which came up for review was the progress made in the setting up of the real time gross settlement systems (RTGS) and the electronic funds transfer (EFT).

One of the participants at the meeting which was chaired by the Reserve Bank of India Governor, Dr Bimal Jalan, and included the Finance Secretary, Mr Ajit Kumar, remarked that the failure to stick to deadlines was perhaps a reflection of the efficiency of some of the major players in the domestic financial sector. For, the RTGS was supposed to have been in place in mid-2000 and now the latest update is that the systems would be ready for use by early 2002.

The Finance Minister had also listed the RTGS and the EFT in this year's Budget initiatives.

Hence, after a recent internal meeting of the Finance Ministry, when a check-list was done on the Budget pronouncements and the progress achieved, it was decided that nothing short of a seminar involving the Ministry officials and the RBI would do to put heads together and carry out the Budget initiatives.

Apart from the RTGS, the EFT and the clearing corporation for settlement of forex transactions, the list of do's include the setting up of an electronic negotiated settling system for transparent electronic bidding in auctions and dealings in Government securities.

If the Government sounds a bit pushy on this, there are reasons for that. On July 2, when more scrips move into the rolling settlement mode, the efficiency of inter-bank funds transfer will be crucial to ensure a smooth transition, compared to the earlie r settlement systems.

As a few market experts have pointed out, as the volumes in the rolling settlement mode are insignificant now, there is no strain which is felt on inter-bank liquidity. Gradually, when volumes rise and also when the capital market moves towards shorter s ettlement systems such as T+3 and subsequently, T+1 and also when index futures and other cash settled products take off, these systems will be put to real test. That is when funds transfer will have to be swift and efficient.

This alone is hardly the driving factor. For as the RBI itself has said, the RTGS, besides providing a real-time fund settlement environment, is critical to an effective risk control strategy for preventing domino effects of individual defaults. Access t o major financial centres and cross-border payment systems also will hinge on the availability of a full-fledged domestic RTGS.

The going is not going to be easy, however, as the Finance Ministry is likely to realise shortly. A host of issues have to be addressed on the way. These include sorting out the issue of intra-day liquidity in the banks.

For instance, what happens when a bank does not have enough funds. Should liquidity then be provided by the central bank after transferring securities from the Public Debt Office to the Deposit Accounts Department (DAD). What should be the interest rate to be charged for this facility to the bank and the treatment in case of insolvency.

There are technical problems to be tackled also like ensuring back-ups in the event of glitches in the satellite and so on.

The EFT, on the other hand, is functional now for retail transactions up to Rs 5 lakh, which is expected to be doubled to Rs 10 lakh shortly.

The proposed Government-RBI interface will be focussing on some of the other Budget initiatives aimed at ushering in reforms in the debt market, in tandem with RBI.

Two proposals -- one for issuing new instruments such as strips and zero coupon bonds and the other involving a new legislation for securitisation have been forwarded to the Revenue Department for its approval.

Once the babus in the Income-Tax Department obsessed now with collecting that extra penny are convinced that all these reforms will not jeopardise tax revenues and approve them, there could be some action kicking off in the debt market.

SEBI has now passed on a note on the revenue implications of securitisation to the Revenue Department. The RBI in turn, has passed on the necessary papers to them also on issuance of new debt products, based on the model prevailing in countries like the UK.