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N. S.Vageesh

A FEW months from now, if you want to transfer money to your friend or relative in another city, it can be done within seconds.

No longer will you have to rely only 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 you are in business, and routinely face the problem of debtors delaying their payments to you with perfectly legal tricks, there is some help on the way. No longer will your debtor be able to enjoy the kind of "float" he did by deliberately giving you an outstation cheque. Nor will he be able to fob you 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 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 have the RTGS system.

How it works

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.

When can you expect it?

In the first phase of implementation, which is currently underway, high-value fund transfers will go through the RTGS.

Retail funds transfer between you and your friends or relatives will take longer, till all banks complete their basic infrastructure and networking. RTGS would be operational in about 3,000 branches spread across 275 locations soon. What is it going to cost you? No bank has come out with a rate card yet.

All that we know now is that the RBI will be charging banks Rs 25 per transaction. Banks have been given the freedom to charge what they want. So what are they planning to do?

Ask bank officials and they say that the charges will be on a scale similar to that of what a DD costs you now.

Some say that it may be slightly more than the DD charges to start with but would stabilise over time because of competition.

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