The Hindu Business Line : Quick on the draw

The real-time gross settlement (RTGS) system is set to change the banking scene. It will help banks settle accounts with each other faster. But is there anything in it for you and me? Read on...

SAW those beautiful photos of Mars in the newspapers? It's the first time we have seen the red planet at such close quarters. It's thrilling, exciting and awesome.

All those adjectives save for `exciting', probably apply to another phenomenon that is to be tried for the first time in India. If it meets its goals, then banks could pay what they owe each other within minutes, rather than wait till the end of the day to match accounts and settle payments. And why isn't it exciting? Since this sees a new way of functioning for the nation's financial services sector, there is a lot of nervousness around.

Called real-time gross settlement system (RTGS), the new system is not as intimidating as its name sounds. Here's a quick view on the system: if someone has promised you that the usual Rs 1000 and Rs 10,000 cheques, which you submit to your bank for credit, could be cashed within minutes thanks to this system, they have another think coming. Quick cashing of cheques may be immediately available for corporate customers whose dealings run to several lakhs and crores, but not for the common man. The primary aim of the new system is to ensure that banks don't wait till the end of the day to pay each other, as per accounts. Benefits for the customer are only by-products and may see light of day in stages.

Here's the rest on the matter:

What would a bank have to do to be part of this system? The system requires participant banks to hold specific settlement accounts with the Reserve Bank of India (RBI). All transaction traffic is then handled electronically using the funds in these special accounts and the settlement of each transaction is irrevocable on an individual payment-by-payment basis or gross settlement. This calls for integration of hardware, the existing technology systems in the bank and the software to meet such applications at the bank's headquarters.

According to a general manager, IT at a large bank, "The minimum that a bank has to spend on for the basic infrastructure, of which the system's electronic gateway is a primary component, is around Rs 2-3 crore." In addition to that comes the technological infrastructure that the bank would need before it allows retail customers the benefit of the real time settlement.

In July 2003, the RBI had called upon the banking sector to ensure complete readiness for the RTGS systems that called for creating a centralised, secure and an integrated payment and settlement mechanism. While the apex bank itself has handed over this mega project to LogicaCMG, a Europe-based IT company which is into services and wireless telecom, its participant banks are now readying their networks to support this application.

"As against days for a transaction to be completed, we could soon see a situation where the transaction is completed say within 2-3 minutes," Dr Jo Spencer, Functional Authority RTGS, LogicaCMG, tells eWorld.

With time ticking for the RTGS rollout, where the first phase will touch major cities before the full-fledged facility by June 2004, December alone witnessed about 20 plus enquiries from banks interested in RTGS applications, Dr Spencer says.

The same general manager, IT, at the public sector bank says that the investment required, for immediate cashing of cheques by all retail customers, is huge and that it may not be immediately possible to manage volumes of say, 20 million customers. According to him, "The benefit may reach the retail customer of public sector banks in another five years. An earlier date is difficult to imagine."

However, he says, new private banks that started operations being computerised and networked, would have an edge over the rest. "They would be able to offer quick encashment of cheques for high value transactions, such as for Rs 1 lakh and above. They may even vary their commission charges according to the time within which a customer wants the cash." This, he says, would allow these banks to make up for the loss of `float'. That is, when cheques take a day or two to be realised, banks hold the money till it is credited. Such sums in huge numbers gave banks a `float' amount that they could use for a day or two.

And, fee-based services for high value transactions may actually see a flight of customers from public sector banks to private ones whose networks are ready. According to Dr Spencer, "The new system would differentiate one bank from another in terms of being able to provide swift services." He cites the example of Turkey, where only a limited number of banks took up the new system's challenge. This, he says, this led to migration of customers to banks that had this system.

Dipak Gupte, the Executive Director of Kotak Mahindra Bank, the newest bank in the country, says that the bank is investing heavily in technology to bring in efficiencies across various banking operations. The core banking is just about one-tenth of banking technology. The Kotak Bank, which is in the process of investing about Rs 100 crore in technology, is to have ready the RTGS systems by early 2004. A lot of hardware, integration and software are being put in place. According to Rajesh Nambiar, the Head of Tata Consultancy Services, Hyderabad, banks that use an existing messaging system, could easily jump on to the RTGS bandwagon without further investments in technology. The messaging system, (also called as the structural financial messaging system or SFMS) does the job well and fast. TCS has worked on applications for the RBI and with the IDRBT (Institute for Development and Research in Banking Technology) for the messaging system.

With the implementation of SFMS, Nambiar says, users at the branch level in a bank could easily exchange messages regarding payment or non-payment within the bank as well as with other banks. This single, centralised system would also help maintain a database of information - information that wasn't available earlier due to several applications being used for as many processes. Nambiar also clarifies that where the messaging system is already working, RTGS integration would automatically be taken care of and that no further development is necessary for sending or receiving payment messages.

Now, what if the bank does not have the funds ready in its settlement account with the RBI? The payment is queued automatically within the RTGS until funds are made available. Further, if this does not happen before the end of the day, the payment is cancelled, according to Kannan Ramaswamy, Director Financial Services, LogicaCMG. This means that required funds have to be made available constantly. For this, the treasury department of every bank will have to monitor payment traffic and funds availability. Here, a liquidity management solution comes in handy. Appropriate measurement of payment and instant communication could actually allow the department to make available only the required sum, while a larger portion could be freed up for other purposes. The liquidity management system allows banks to track their settlement account balance, and their ability to make payments, as it controls the release of payments depending on the available funds. It is theoretically possible to operate only with the RTGS gateway, but this is not feasible if the bank has significant volumes (say {gt}100 outward payments a day). LogicaCMG had rolled out a readiness solution for Indian banks, for the new system. Over 200 banks and financial institutions across the country will be part of the system. . While the pilot was hosted in June 2003, the entire system will be operational shortly. Once the RBI clears the rollout, all the participatory banks will also move on to the system.

Dr Spencer says that though there is no precedent here, cases from across the seas show that banks adopting the system gained more business.

In Turkey, five banks took the initiative to provide RTGS-based products and the ensuing customer migration resulted in 80 per cent of the corporate business in the country being handled by these banks Dr Spencer says. To provide this facility, it is essential that an integrated payment processing solution be provided throughout the bank branches.

Bank studies have shown that liquidity management solutions pay for themselves within short periods, typically months, according to Dr Spencer.

What does this mean for banks?

The RTGS implementation itself is simple but calls for disparate systems to come together.

From the banks' prospective, each bank must implement the RTGS gateway, the software for which is developed by LogicaCMG and provided by the RBI. However, to be an effective member of the RTGS system, each bank will need to implement a major initiative, in addition to the liquidity management system discussed above: To be able to process any volume of payments, a fully integrated system is essential. Whether the banks have a branch banking or core-banking system is not important. What is, is that the processing of payments is done efficiently and in the necessary timeframes demanded by the rules of the system.

Further, The RBI is drawing up a list of branches that will be able to receive and send RTGS payments.It is essential on receipt of RTGS payments that the payments are validated, the accounting entries made and if necessary any return payment created (if the payment can not be credited). For this , automation is critical for, each bank would not be able to judge easily how many payments - and at what point in the day - would be received.Implementing RTGS gateways is likely before the end of January. If banks want to implement integrated payments and liquidity management systems, this could take two or three months.

All payments pass through one system. So, it is easy to implement links to fraud detection systems. The automated payment handling solution generates an audit history that occurs to a payment.

Picture by Bijoy Ghosh

eworld@thehindu.co.in

Article E-Mail :: Comment :: Syndication

Stories in this Section
Lemme in

Retrieval after system crash

Remembering passwords

Watch out for those monsters...

Net effect: Few takers

Quiz

Saying it right