RTGS and STP in India assessment, issues and solutions

Abstract

The Inter-bank payment system handle large amounts of money, An estimate indicates that in the G-10 countries alone the turnover of the main systems is more than the equivalent of US $ 5 trillion each day. Many of these payments are for the settlement of financial market transactions between the banks themselves, such as Inter-bank loans or foreign exchange deals; other payments are made by banks on behalf of their customers. In recent years, it has been increasingly realized that the way in which many of the systems traditionally worked exposed the participating banks to substantial Inter-bank risks resulting in the systemic risk that, if one bank were tu fail for any reason, other banks in the system could fail as a consequence of these Inter-bank exposures, Because of these concerns, countries around the world have been taking action to make their payment systems more robust. One method of doing this, and one that has been adopted in an increasing number of cases, is to introduce an RTGS (Real Time Gross Settlement) system. An RTGS payment system is one in which paymel1t instructions between banks are processed and settled individually and continuously throughout the day. Straight through processing ("STP") is a mechanism that automates the end-ta-end processing of transactions of the financial instruments, It involves use of a single system to process or control all elements of the work-flow of a financial transaction, including what is commonly known as the Front, Middle, and Back office, and General Ledger. In other words, STP can be defined as electronically capturing and processing transactions in one pass, from the point of first 'deal' to final settlement. Part 1, of this report examines the various design aspects of an RTGS and identifies the key factors, It also delves into STP concepts in the payment cycle and securities trading. Part 2, details the current implementation of RTGS and STP in India Part 3, reviews the RTGS implementations in the US, UK, Germany and Japan Part 4, identifies the issues, risks and challenges in the Indian implementation, Part 5, suggests a possible solution in the form of a distributed e-settlement system which can make the Indian implementation one of the best in the world.