What is RTGS payment?

Answer 1

What is RTGS?

RTGS stands for Real Time Gross Settlement. RTGS is the fastest money transferring

mechanism between the banks. In RTGS, the transactions are processed and settled

in "Real time" and on "Gross" bases. Once the transaction is settled, it is irreversible.

"Real time" means as and when the transaction is processed. There is no waiting

time.

"Gross" means the transaction is settled individually without being clubbed with

other transactions.

Net Settlement Mechanism:

A well known alternative settlement mechanism is Net Settlement. In Net settlement

mechanism, the transactions are received and processed as and when it arrives.

However settlement happens in a batch process, typically at the end of the day. The

batch contains list of transactions that are net amount to be transacted between

banks. In some countries the batch may be submitted more than once in a day.

Goals of RTGS

The goals of RTGS are

1. To reduce settlement risk due to settlement lag

2. To reduce credit risk

3. Speed up the process of high value payments

4. To give accurate position of the participating bank

RTGS & Core Banking System

The RTGS does not require the participating banks to have core banking system in

place. The core banking system of banks is used to record transactions of its

customers in the banks books whereas the RTGS transactions happen for

participating banks in the books of Central Bank.

The participating banks can access RTGS system through the means provided by the

central bank. The common interfaces provided for RTGS system are Participant

Interface (PI) or Web Interface (WI).

Participant Interface

The Participant Interface is thin application that is installed in the commercial banks.

The user can enter transactions in PI which submits it to the RTGS system in central

bank through communication network. All error messages and notifications including

the settlement notification will be received by PI.

Web Interface

With the advent of technology the latest RTGS implementations are normally

provided with the Web Interface. The WI is user friendly and there is no need to

install any separate software. Web Browsers like internet Explorer and Firefox can be

used to submit transactions to the RTGS system. All error messages and notifications

including the settlement notification will be received by WI.

Straight Through Processing (STP)

If the participating bank has core banking system then it can be interfaced with the

RTGS through connecting mechanism called Straight Through Processing (STP). STP

is defined as that the payment transactions are keyed in only once and processed

until settlement. For an STP, payment transactions can come from core banking

system, trading system or any other system. The transaction request message will

be automatically routed to RTGS system and the response received from RTGS will

be processed and sent to the appropriate system that raised the transaction request.

STP is very useful when there are many RTGS transactions to be submitted and

manual entry of each transaction is difficult.

Security

The transactions that are submitted to RTGS are safe, secure and reliable. The

Central Bank takes due diligence in the matter of security of RTGS system and

address all the issues like authenticity, duplication and non-repudiation. It does not

matter what type of interface participant banks use to submit transaction to RTGS,

the security is always ensured.

Liquidity

In the Net settlement system the participating banks are to pay only the net

difference of debit and credit where as in RTGS each transaction is effected

individually. Because of this nature RTGS demands more liquidity to be available with the participating banks.

For example, say Yes-Bank is to pay No-Bank amount of 100,000 SDG and No-Bank is to pay Yes-Bank amount of 75,000 SDG. In Net Settlement System, the two transactions would be netted and one transaction from Yes-Bank to No-Bank for the amount of 25,000 SDG would be effected. Hence the total liquidity in the system needed for settling these two transactions is 25,000 SDG. On accounting entry perspective, there will be one debit and one credit entry for the amount of 25,000 SDG.

In RTGS, the mentioned two transactions would be settled as individual transactions, so two transactions, one for 100,000 SDG and another for 75,000 SDG will be effected. Hence the total liquidity in the system needed is 175,000 SDG. Though RTGS system has many advantages, the high liquidity need is a drawback of it. This is mainly due to the asynchronous nature of the payments. However, Central Banks provide additional liquidity needed by RTGS to the commercial banks. Also this additional liquidity is inbuilt in the RTGS system and takes place automatically when a commercial bank is in need of liquidity. The following are the facility by which liquidity problem is sorted out.

Intraday Repo

The repo transaction is selling of security from one bank to another bank or central bank with the agreement to repurchase it later. Incase the repurchase cannot be done as per the agreement; the sale can become a permanent trade. This is the liquidity mechanism to be used in the Sudan's RTGS system.

Settlement Queues

There are queuing mechanisms available in RTGS. In this mechanism, the transactions that cannot be settled due to lack of funds will be kept and retried later when the funds arrive. By this mechanism, the rejection of transactions due to lack of funds will be avoided.

Gridlock Mechanism

When there are multiple transactions to be settled and each transactions wait for

another transaction to settle, the situation is called gridlock. In gridlock situation no transaction settles and waits indefinitely for other transaction to settle. RTGS has gridlock solving algorithms which will consolidate those transactions and settle it as a group. The gridlock program can be scheduled to run automatically or my by manual trigger.

Transaction Value

Unlike Net settlement system which generally process transactions of any amount,

RTGS only works the high value transactions. Numerous studies have shown that few

number of transactions accounts for high value of transaction settled per day. For

example, say 100 transactions have the total value of 1M SDG, where as 900

transactions amounts for only 0.5M SDG. RTGS system is designed mainly to focus

on the 100 high value transactions.

RTGS will replace any high value clearing systems that are in practice. However, it

will not replace Net Settlement System because Net Settlement System is still

needed to process the high number of low value transactions. After the

implementation of RTGS, Net Settlement System will be able to submit more than

one batch per day.