Introduction:
Real Time Gross Settlement Systems (RTGS) are mechanisms that
enable banks to make large-value payments to one another
in real-time using online telecommunication facilities
as well as state-of-the-art computer systems. The payments
are settled on gross basis in real time thus minimizing
the systemic risks that are inherent in large-value net
settlement systems.
The
Legacy Settlement System in Pakistan for Large Value Payments
In Pakistan banks are required to hold current accounts with
the State Bank of Pakistan (SBP) which are primarily used to
settle large value inter-bank fund transfers between Banks
and to meet certain statutory requirements. Every bank/financial
institution that has an account with SBP is issued with a paper
cheque book which is used to withdraw/transfer funds from its
account. The paper cheques were presented physically at SBP
counters daily by Banks' treasuries to settle their payment
obligations against other Banks. These cheques were then posted
into SBP’s banking system to debit the remitting Bank
and credit the beneficiary Bank usually by the end of day.
Thus the nature of settlements taking place at SBP in the legacy
system might be classified as end of day gross settlement system
assuming significant systemic importance due to the large value
of payments handled and the dependence of other payment systems
in the country on its smooth functioning. This system was prone
to various types of risks affecting the overall efficiency
of the banking system (like systemic risk, settlement risk,
liquidity risk).
To
overcome the risks of a net settlement system, the concept
of Real Time Gross Settlement Systems (RTGS) started gaining
acceptance especially in late 1990s all over the world. These
systems offered better payment systems mechanisms, for large
value payments, because of their ability to allow market
participants to monitor their positions and settle their
payments in real time. They allowed the monetary authorities
to ensure that systemic risks inherent in any netting based
payment systems is effectively minimized, if not eliminated.
And above all they allowed banks’
customers full and immediate utilization of their liquidity
by enabling them to transfer their large payments across banks
immediately.
RTGS in Pakistan
Keeping in view the global trend in payment systems development
and the growing payments market in the country, SBP took the
decision to implement the RTGS primarily with assistance from
the World Bank.
The
implementation process of the project was started in 2005
which was finalized in 2008 when the RTGS System was inaugurated
by the Prime Minister of Pakistan on 1st July 2008, the day
when the central bank celebrated its 60th birthday. From
2nd July 2008, 39 direct member institutions started making
their large value inter-bank payments via the new system
The
RTGS in Pakistan has been named as Pakistan Real-time Interbank
Settlement Mechanism (PRISM). Using this
system, the banks holding accounts at SBP are able to operate
their accounts in real time from their own premises via computerized
network between SBP and the participating Banks. With RTGS,
Banks are able to settle with finality their large value
transactions affecting their accounts at SBP (e.g. inter-bank
lending/borrowing) immediately, provided sufficient balance
is available in their account. At times, banks may face temporary
shortage of funds in their accounts during the day. This
shortage would be catered for in RTGS through the availability
of intraday repos (a form of collateralized lending). Alternatively,
the transaction can also be queued in the system until the
required liquidity becomes available.
Some
broad features of PRISM:
• Forty (40) commercial banks and DFIs are the initial
direct participant members of PRISM. Some other account holders
with SBP are the indirect members of the RTGS system.
• The participant banks have the facility of online monitoring
of their interbank payments via one settlement account and
their fate (like settled, queued, or rejected). They would
also be able to change their payment priority (if transaction
is queued) giving them more control over their funds.
• SBP departments have the ability to monitor the inter-bank
transactions and take immediate action as and when required.
• Intraday Liquidity Facility (ILF) would be offered
to banks collateralized against Government Securities so that
the payments may be cleared immediately.
• The system also has queue management features and mechanisms
for Grid Lock resolution
• The system also holds government securities portfolios
and enables securities trade matching for Delivery Vs Payment
and intra-day liquidity management
• The IT security component of the system provides PKI
infrastructure, transactional and link encryptions for data
security.
• “Centralized Multilateral Netting” of retail
clearing was a mandatory pre-launch requirement for smooth
functioning of the PRISM System. Previously the country-wide
retail clearing operations were settled in the sixteen field
offices of SBP across the country. Now with the help of NIFT
(an institution responsible for the clearing operations of
retail cheques), SBP has started country-wide multilateral
netting and centralized settlement of cheques’ clearing.