The Payment and Settlement System is an essential part of the financial system of a vibrant economy. Consolidation, Development and Integration of the financial infrastructure and reforms in the payment and settlement systems of the country that address the twin issues of safety and efficiency have been engaging the attention of the Central Bankers and Financial Institutions the world over. Payment and Settlement Systems are no longer the backwaters of either the banks or the Central Banks.

The Reserve Bank attaches utmost priority and importance to the establishment of an integrated payment and settlement system in the country. A number of initiatives have either already been implemented or are in an advanced stage on the drawing board. Identification and classification of the Systemically Important Payment System (SIPS) have been done and various measures have been initiated to facilitate real time or near real time large value inter-bank funds transfer in secured environment.

The Reserve Bank has started the process of putting in place a Centralised Funds Management System for the benefit of the banks in the year 1998-99.. The Centralised Funds Management System envisages connecting all the Deposit Accounts Department of the Reserve Bank located at seventeen Regional offices with the Apex Level Server located in Mumbai. The centralised funds management system (CFMS) facilitates funds and treasury managers of commercial banks, which are ready with the infrastructure for obtaining the data in a networked environment to query & obtain the consolidated and account-wise, centre-wise position of their balances with all the Deposit Accounts Departments of the RBI, installed at the various RBI locations . The system envisages periodical updation of Current Account balances in the Apex Level Server whenever a transaction is put through at the local or remote Deposit Accounts Department. The Bank Level Server will be able to query the Apex Level Server to check on its "global" or overall funds position. Eventually, funds transfer facility will be made available. While the first phase of the system covering the centralised funds enquiry system (CFES) has been made available to the users, the second phase comprising the centralised funds transfer system (CFTS) would be made available by the middle of 2003. So far, 54 banks have implemented the system at their treasuries/funds management branches

THE National Payments Council was set up by the RBI in May 1999 under the Chairmanship of Mr. S. P. Talwar, Deputy Governor, RBI, focusses on the broad policy parameters for designing and developing integrated payments and settlement systems, with the proposed Real Time Gross Settlement System (RTGS) as its core.

Reserve Bank of India launched the project to construct a Real-Time Gross Settlement System (RTGS), which will allow secure inter-bank payments throughout the country. The system is planned to eventually interface to all RBI sites, as well as other member banks across the country. This project is to provide significant benefits to individuals and businesses throughout India. By underwriting all payments with collateral held at the Reserve Bank of India, the RTGS system will reduce systemic risk in the Indian banking system, thereby providing increased integrity and security for all interbank transactions. With the progress in liberalisation in banking and financial sectors, the increasing sophistication & specialisation, emergence of a pure inter-bank call/notice and term money market, and introduction of Real Time Gross Settlement (RTGS), funds would flow freely from one market to another leading to better integration of the domestic financial markets among themselves, and with international financial markets as well requiring the banks to adopt strategies to benefit out of the developments which would be possible with a technology thrust

Speaking about RTGS, the Governor RBI, DR.Bimal Jalan has made the following obsevations at 22nd Bank Economists Conference, New Delhi, on 15th February, 2001

"Real Time Gross Settlement (RTGS) is generally regarded as the cornerstone of an integrated payments system. Setting up an RTGS environment has became the focal point of payments system reforms all over the world. Access to major financial centres and cross-border payments systems is becoming conditional to the availability of a full-fledged domestic RTGS. Apart from providing a real time funds settlement environment, RTGS is critical to an effective risk control strategy for preventing domino effects of individual defaults. In the context of internationalisation of the financial sector, RTGS provides both the technology and process controls to manage risks better.

"The preparation of the financial system for the implementation of RTGS has been a priority for the Reserve Bank. Considerable progress has already been made. The main processing system for RTGS is in place at the National Clearing Cells at the four metropolitan cities. The system would provide large value fund transfers with settlement on a gross basis. The Reserve Bank has taken a number of steps towards the development of the Payment System Generic Architecture Model for both domestic and cross-border payments. The Model conceives networking of computerised bank branches, with their controlling offices, central treasury cells and head offices with the proviso for introducing standardisation of operating system and networking platforms within the bank and a bank-level standardised gateway to INFINET. System Requirement Specifications would take into account the international best practices and the specific requirements of Indian banking. Extending the spread and coverage of the INFINET to cover all commercially important centres in the country, development of the Structured Financial Messaging backbone for exchange of financial messages based on international standards, integrating various segments of the payment and settlement system and consolidation of the various Deferred Net Clearing Settlements constitute the action plan for 2000-01."

The Real Time Gross Settlement System on implementation will be a defining moment in the history of the Payment and Settlement Systems in the country. It will be, in fact, a significant step towards the creation of an integrated, robust, safe, secure and modern Payment and Settlement System and I am sure all of you are looking forward to be part of the revolution.

The roadmap for the implementation of the RTGS System is envisaged as follows.. In June, 2003, a demonstrable RTGS package for testing and familiarization is to be ready. It will be like an induction platform for the banks to the RTGS Standalone System, which will be delivered in October, 2003. After completion of testing and acceptance, RTGS system will become operational before year-end.

RBI has been building up awareness about the RTGS System. Already a series of Workshops and Seminars have been organized for your Treasury and IT Heads. RBI has also organized a 'Seminar on Liquidity Management in RTGS Environment' to apprise you of the challenges that banks may face on the operationalisation of the RTGS System and the manner in which they have to control and co-ordinate liquidity management measures to derive optimal benefits from the RTGS System.

It cannot be disputed that that the technological innovations, in general, have been at the core of the reform process in the services sector globally and the financial sector, in particular. For the last so many decades, it has been driving the business re-engineering process in our banking industry. RBI, have been actively studying these developments and readying itself to provide for a technology framework and operating environment, conducive to the banks. Some of the initiatives that have been undertaken are -

A reliable communication backbone to facilitate improvement in financial services, the Reserve Bank of India has, through IDRBT, set up the INFINET - a 'Closed User Group' network as the exclusive domain for the applications of the entities in the banking and financial sector. As you all know, the INFINET is a blend of VSAT technology and terrestrial leased line technology based Wide Area Network. INFINET provides for the robust and reliable communication backbone for the implementation of all the Systemically Important Payment System Applications.

Reserve Bank's concerns and focused attention on the twin issues of security over the INFINET and message standards for intra/inter-bank applications have led to the development and implementation of the Structured Financial Messaging System (SFMS), a standard messaging protocol, which would be riding on the INFINET communication backbone. SFMS has adequate in-built security and with Public Key Infrastructure (PKI), provides for a security solution of international standards. SFMS will also act as an alternative for accelerating the integration of the branches of the banks.

Secondly, a state-of-the-art, robust and secure platform - IBM S-390 System with a complete standby installation -- has been made operational in Mumbai centre to ensure the availability of the requisite technical infrastructure, capable of robustness, operational resilience and redundancies to ensure Business Continuity. The Disaster Recovery Site is being set up at a geographically distanced location from Mumbai.

These efforts are incomplete without the total involvement and participation of the end-users of the payment and settlement system. The proverbial "last mile" problems will have to be resolved. In order that the benefits, as conceived of under the Integrated Payment Systems Architecture in the country, cascade down to the smallest branch of every bank and to every customer, end-users will have to be in an extremely high level of preparedness in terms of systems and operational processes, technology and human resources, to make the most of these and the newer opportunities, arising due to the fast changing canvas.

In the area of Information Technology, specific attention will have to be paid to the TEN Core Issues, which RBI has advocated. These are fundamental to the participation and realization of optimal advantages from the RTGS System round the corner.<./P>

1. A Payment System Gateway as the Single Point of Interface with the INFINET for participation in the Systemically Important Payment System Applications :

2. Connectivity between the Payment System Gateway and the Primary Site and Standby Site of the RBI.

3. Computerisation of bank branches with Connectivity.

4. Setting up of intra-bank intra-city leased line network.

5. Connectivity with the Hub at each RBI site under the 21-centre Intercity Leased Line Network of the INFINET.

6. Synchronous Systems across the bank - Hardware, Operating System and Communication Platform.

7. IDRBT CA CPS, Implementation of PKI and Creation of Registration Authority.

8. Uniformity in Message Format for Inter/Intra bank Applications across the banking sector and Implementation of SFMS

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9. Internal Applications of the bank and Interface with the RTGS System.

10. Development, Documentation and Implementation of the Information Systems Security Policy in the bank.

Quite a few of the above requirements have already been met by the majority of the banks . Most important and critical among these are the Connectivity and Security Issues. Unless all bank branches are networked, the benefits of a secured and modern Payment System will not percolate to the end-users of the banking system i.e. the ordinary public. Further, unless the security features of the entire Transaction Cycle are enhanced to the level of international standards (which is being sought to be achieved through the implementation of the PKI and use of Digital Certificates), the common man will not repose his full confidence in the Electronic System of Funds Transfer. That is why, the RBI has been emphasising 'Connectivity' and 'Security' as the Core and Critical Pre-requisites, to be duly addressed by the banking sector for participation in the RTGS System

The RTGS system will be a mode for large value inter-bank settlement, to be widely used, for enhancing your risk control measures, for faster and efficient settlement of your liabilities and for better customer services for the ultimate users in the value chain. The success of this system will be one more step towards realizing our objectives of a modern, secure, resilient and Integrated Payment and Settlement System in the country. We are sure that all of us will be partners in this step forward.

The working system & technical features of RTGS are discussed in the chapter