Real Time Gross Settlement System
In contrast to the net settlement system, in real time gross
settlement system (RTGS), both processing and final settlement of
funds transfer instructions take place simultaneously and
continuously. Transfer of funds is made individually and sequentially
on a gross basis. As it is a real time settlement system, final
settlement takes place continuously provided that a payee bank has
sufficient covering balance. The finality of gross settlement
substantially limits credit risk, thus preventing settlement failures.
Due to elimination of time lag in payment transfer, participants are
required to maintain intraday liquidity i.e. substantial money balance
to ensure the settlement process through out the day. Thus there is
liquidity constraint in RTGS environment. In case, if payer participant
does not have sufficient funds in its account with central bank, its
transfer order may be rejected and returned to payer participant.
Alternatively, there are two ways though not mutually exclusive, to
facilitate the transfer :-
a) Extension of credit facility by Central Bank to participating bank.
b) Queuing facility, wherein the transfer orders are kept pending and
payment is realised when covering funds become available, subject to
pre defined norms and standards.
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Individual and sequential settlement in RTGS makes it easier to
ensure unconditionality and irrevocability, i.e., finality of settlement.
Due to elimination of time lag in settlement, the risk that debtor
might fail can be greatly reduced. Progress in information technology
has made these RTGS feasible, easier and less costly to build and
operate. All major large value funds transfer networks in advanced
countries either have or are planning to have real time gross
settlement system.
