Payment Systems

 Large Value Payment Systems:

An RTGS system is defined as a gross settlement system in which both processing and final settlement of funds transfer instructions can take place continuously (i.e. in real time). As it is a real-time settlement system, the system effects final settlement continuously rather than periodically at pre-specified times provided that a sending bank has sufficient covering balances or credit. Moreover, this settlement process is based on the real-time transfer of central bank money. An RTGS system can thus be characterized as a funds transfer system that is able to provide continuous intraday finality for individual transfers.

The need for RTGS system in Pakistan was recognized as a response to the growing awareness of the need for sound risk management in large-value funds transfer systems. RTGS systems offers a powerful mechanism for limiting settlement and systemic risks in the interbank settlement process, because these risks effect final settlement of individual funds transfers on a continuous basis during the processing day. Further, RTGS can also contribute to the reduction of settlement risk in securities transactions by providing a basis for delivery-versus-payment (DVP) mechanisms. Therefore, RTGS is very much essential while considering risk management in payment and settlement systems.

The RTGS in Pakistan has been named as Pakistan Real-time Interbank Settlement Mechanism (PRISM). Pakistan Real-time Interbank Settlement Mechanism (PRISM) System is Pakistan’s is the only Large Value Payment System. It is a Real Time Gross Settlement System (RTGS) which provides a central platform for the settlement of large-value interbank funds transfers, Government Securities, retail clearing and customer transfers (over a certain minimum amount limit). It was launched in July 2008 and has expanded its operation significantly. At present there are 42 Direct Participants of PRISM comprising of Commercial Banks, Development Financial Institutions, Micro-Finance Banks and Central Depository Company (CDC).  PRISM system  Operating Rules(2009)   was  issued to   provide the level playing file to the participants.

Some broad features of PRISM system are as under:

• 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; and

• “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.
  • Large value interbank funds Transfers:

The main purpose of introducing the RTGS systems is to handle the large value interbank funds transfers on Gross Basis and in Real Time. Interbank funds transfer systems are arrangements through which funds transfers are made between banks for their own account or on behalf of their customers. Of such systems, large-value funds transfer systems are usually distinguished from retail funds transfer systems that handle a large volume of payments of relatively low value in such forms as cheque, credit transfers, automated clearing house transactions and electronic funds transfers at the point of sale.

  • Risks in Settlement of Transactions:

The payments of these interbank financial transactions are prone to Settlement risk which refers to the risk that the completion or settlement of the interbank funds transfer system as a whole, will not take place as expected. Settlement risk comprises both credit and liquidity risks. Two major sources of these risks are (a) a time-lag between the execution of the transaction and its final completion and (b) a time-lag between the completion of the two legs of the transaction i.e. any lag between payment leg and delivery leg.

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