The Legacy of Settlement Systems 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 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.
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.
About PRISM
The development of PRISM (Pakistan
Real time Interbank Settlement Mechanism)
system started as a response to the
growing awareness of the need for
sound risk management in settlement
of large-value funds transfers in
Pakistan. PRISM systems operated by
State Bank of Pakistan offers a powerful
mechanism for limiting settlement
and systemic risks in the interbank
settlement process by providing settlement
on Gross Basis and in Real Time. In
addition, PRISM also contributes to
the reduction of settlement risk in
securities transactions by providing
a basis for delivery-versuspayment
(DVP) mechanisms.
Some broad features of PRISM:
•
Forty Three(43) 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.