what is rtgs payment
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7/30/2019 What is RTGS Payment
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What is RTGS payment?In:Kodak[Edit categories]
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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
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7/30/2019 What is RTGS Payment
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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)
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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 availablewith 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
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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 beeffected. 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 offunds 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 manualtrigger.
Transaction Value
Unlike Net settlement system which generally process transactions of any amount,
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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.