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Mrs. K.R.M. Siriwardane, Director, Payments and Settlements Dept.Central Bank of Sri Lanka

A secure and stable national payment system is necessary for financial system stability in any country. Therefore, Central Banks have taken the initiative to improve efficiency and reduce risks, particularly of large value inter bank payment systems. A Real Time Gross Settlement (RTGS) System has become the preferred mode of settlement of large value interbank payments all over the world, with more and more countries moving towards such systems, RTGS systems offer a powerful mechanism for reducing credit and systemic risks in large value payment and settlement since it ensures final settlement on a continuous basis during business hours.

The Central Bank of Sri Lanka (CBSL) has made arrangements to implement an RTGS System for settling large value Sri Lanka rupee payments and government securities transactions in scripless form which is known as "LankaSettle". This system will go live on September 8. Sri Lanka is the first country to move to an RTGS System in South Asia.

What is a payment?

A payment is generally a transfer of money from one party to another to settle a financial obligation incurred by a purchase of goods or services including financial instruments. Individuals, corporates and other organisations make payments either in the form of currency or by non-cash payment means.

What are the different payment modes?

Currency is the simplest payment mode. Cheques, credit and debit cards, money orders, postal orders, wire transfers and electronic fund transfers are other popular modes of payments.

What is the National Payment System?

The national payment system is an arrangement which helps individuals, corporates including financial institutions, and other organisations to transfer money smoothly from one to another to settle their financial obligations. It consists of:

* Means/instruments of payment;

* Individuals and corporates who act as payers and financial intermediaries;

* Procedures, rules, terms and conditions which provide sound infrastructure to facilitate the transfer of funds, banking operations, clearing and settlement systems; and

* Interbank clearing and settlement systems. In Sri Lanka, these are the CBSL Current Accounts Settlement System (operated by the Central Bank of Sri Lanka), cheque clearing systems and Sri Lanka Interbank Payment System (SLIPS) operated by LankaClear (Pvt.) Ltd.

What is the CBSL Current Accounts Settlement System?

The Current Accounts Settlement System is owned and operated by the Central Bank. It processes and settles mainly large value fund transfers in respect of rupee transactions in open market operations, call market operations, settlement of government securities and the rupee leg of foreign exchange transactions. All 22 licensed commercial banks maintain current accounts in this System to facilitate payments and settlements and to meet the Statutory Reserve Requirements (SRR). Nine (9) Primary Dealers also maintain current accounts to effect transactions in government securities. In addition, some government departments and agencies that maintain current accounts with the CBSL also use this System to settle their transactions.

The CBSL has given cheque books to these account holders. Cheques drawn on the CBSL are settled directly on the books of CBSL without going through the clearing systems operated by LankaClear. The net clearing balances drawn by cheques and the SLIPS clearing systems are transmitted and settled in the accounts of the CBSL Current Accounts Settlement System. All transactions in the System are netted and settled at the end of each working day.

What are the volumes and value of transaction settled per day in the CBSL Current Accounts System?

* Average daily volume of transactions = 610

* Average daily value of transactions = Rs. 80 billion

What is LankaSettle?

"LankaSettle" is the name of the fully automated Real Time Gross Settlement (RTGS) System and the Scripless Securities Settlement (SSS) system for government debt securities. The integration of the RTGS System and the SSS System will provide a uniform settlement platform for transfer of securities from one investor to another, together with a simultaneous transfer of funds.

What is the Real Time Gross Settlement (RTGS) System?

The RTGS System will be an electronic and computer based fund settlement system which will process and effect final settlement of each large value and urgent payment instruction individually and immediately upon receipt of a valid payment instruction by the System (on a real time basis). Accordingly, the RTGS System will assure simultaneous and instantaneous debiting of the Settlement Account of the paying bank and crediting the Settlement Account of the receiving bank, if the paying bank/Primary Dealer has sufficient funds to settle the said transaction. Once a transaction is settled in the RTGS System, it will be considered as final and irrevocable. This will substantially improve the way the banks and the primary dealers settle most of their high value transactions, including those in the government securities, call and foreign exchange markets.

What are the main features of the RTGS System?

* The RTGS System is an electronic gross settlement system;

* Payment orders could be initiated only by the paying participant, But the Central Bank can debit and credit participants' accounts;

* Payment instructions will be submitted by SWIFT FIN Y - copy service;

* All payment instructions sent to the RTGS System will be processed and settled individually throughout operating hours;

* Under normal circumstances, payments will be debited to the paying participant's Settlement Account and reach its receiving participant within seconds provided that a sending bank has sufficient balance in its account to make the payment. This makes the funds irrevocably available to the receiver;

* Participants may assign one of several predefined priorities to their payment orders;

* Each payment instruction will be settled individually on a first in first out basis (first come first served) in accordance with their priority and the order of arrival, without netting debits against credits;

* If the balance in the Settlement Account of the sending member is insufficient to settle the payment, payment orders will be queued;

* When the system cannot settle payments through the normal sequential settlement process, the gridlock resolution will clear backlogs of queued payment orders;

* The RTGS System will have international standards for risk control in large value fund transfer systems;

* Participants could utilise the Central Bank's Intra-day Liquidity Facility; and

* Offers premium payment and settlement services. All participants can monitor the status of their accounts and payments in real time, make enquiries and manage their queues via their participant browser workstation.

What is SWIFT FIN Y-copy service?

The SWIFT (society for Worldwide Interbank Financial Telecommunication) is a non-profit co-operative of banks which maintains a worldwide communication network. Under the FIN Y-copy mode, some of the information from the original payment order of a participant will be extracted and copied to the Central Bank. Upon authorization by the Central Bank, the original payment message will be transmitted to the receiving participant.

How does the RTGS System work?

The paying bank will send the payment message to "LankaSettle" in the Central Bank through FIN Y-copy service of the SWIFT network using a computer based terminal.

Then LankaSettle will check the technical accuracy of the payment order. If it is technically incorrect, the RTGS System will reject it. If the payment order is technically correct, it will be accepted for settlement by the RTGS System and will become irrevocable.

If there are no payment orders in the payment queue with the same or high priority and the particular participant has enough funds to settle the payment, the System will settle that payment immediately by debiting the paying participant's account and crediting the receiving participant's account simultaneously within a few seconds.

Therefore, the RTGS will settle only credit transfer payments. If the participant does not have enough funds to settle the payment, the System puts the payment in a queue. The queued payment instructions will be settled according to the first in first out (FIFO) basis. The payments remaining in the hold queue will be automatically deleted at the end of each business day.

Why go for an RTGS System?

* Settling of large value payments using a manually operated cheque based day-end settlement system entails risks. If a bank collapses during the working day, other banks who owe money to the failed bank or vice versa cannot be settled and consequently the banks which were expecting payments from the collapsed bank will not get their dues.

A failure to settle by a relatively large participant in the payment system chain may lead to a systemic risk, resulting in destabilising shocks for the banking system and the economy as a whole.

Therefore, it is important to establish modern and well tested RTGS Systems in line with international best practice to reduce inter bank credit, liquidity and systemic risks. The credit risk in the RTGS System will be reduced by settling funds in real time, using SWIFT FIN Y-copy mode, by effecting credit transfers and extending fully collateralized ILF.

* The volume of large value cheques is likely to increase substantially in the next few years with the expected increase in transactions in the money, foreign exchange and government securities markets. Such a growth in transactions would require an efficient settlement system with state-of-the-art techniques and standards.

* It provides participants with full management control of their own and their customers' payments through more sound liquidity management.

* It makes the payment and settlement system, as a whole, more robust. This will reduce risks and improve efficiency of the national payment system in general and the high value transfer system, in particular, enhancing public and investor confidence in the financial system;

* It will improve Central Bank's control on monetary aggregates; and

* It will speed up fund transfers to the customers' accounts. What types of transactions will the RTGS System settle?

The RTGS System will settle all types of transactions between participating institutions, transactions between the Central Bank and participants, and customer to customer through a participant. These transactions could be categorised as;

* General credit transfers among participating institutions (call market transactions, securities transactions etc);

* Central Bank transactions (open market operations, cash delivery to and from banks, rupee leg of forex transactions and government securities transactions);

* Multilateral net settlement balances in respect of inter-bank cheque clearing and SLIPS: and

* Any other high value and time critical payment including payments sent or received on behalf of their customers.

What are the benefits of RTGS System to banks and Primary Dealers?

* Real time settlement of transactions;

* Increased efficiency of payments and settlements;

* Reduced settlement risk;

* More efficient use of liquidity; and

* Real time monitoring of transactions in Settlement Accounts.

What are the benefits to corporates?

Any individual or a corporate who wishes to make a quick payment using the RTGS System could do so through one of the participating banks. Banks would reduce their cheque float and credit customer accounts faster than under the current system. This will increase intra day mobility of funds and reduce risks in investments. What are the benefits to individual customers and the public?

* Any individual or a business that wishes to make a payment through the RTGS System could do so through his/her commercial bank.

* The time required for debiting the paying bank's account and crediting the receiving bank's account would only be few seconds. This high speed of processing of funds will allow banks to pass on customer payments to the beneficiary immediately without delay.

* The RTGS system provides a modern, faster and efficient settlement system. This will help banks to provide a more efficient and safer payment service to their customers. 

(To be continued)

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