Ranee Jayamaha: The significance of payment reforms in financial system
stability
Opening address by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at the
seminar on "Payment systems and cheque imaging" organised by the Royalist Bankers' Club,
Colombo, 25 May 2006.
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Let me thank the President and members of the Royal Bankers' Club for inviting me to deliver the
opening remarks at the seminar on 'Payment Systems and Cheque Imaging'. I am honoured to be
speaking to this distinguished group and it is encouraging to note that the subject is of interest to a
good cross section of the financial community. In my opening remarks, I will give an overview of the
significance and rationale of payment reforms in financial stability and then set out the impact of
payment reforms on the financial system, institutional arrangements that are in place, and the need to
change payment practices of banks and the public. It may also be important to note that the term
"Payment Systems" covers payments, clearing and settlement systems.
As you are aware, the Central Bank's role in the payment system stems from its primary function of
providing payment, clearing and settlement service. Economic policy reforms, the ever increasing
complexities in the financial system and the changing role of central banks have resulted in central
banks to be at the center of payment reforms which, from the Central banks' point of view, is helpful in
achieving the objective of financial system stability.
The national payment system is the backbone of a country's monetary and financial system and it
plays a critical role in a country's economic development. It is through the payment system that money
is transferred between savers and lenders, buyers and sellers or from one point to another.
Developing a national payment system is an ongoing process. By reforming and developing the
national payment system, it is possible to reduce the overall transaction costs and expand
opportunities for commercial and financial transactions in an economy. In recent years, there has been
a rapid acceleration in fundamental reforms to national payment systems worldwide, although the
pace of implementation of reforms in different countries has been uneven. Planned outcomes have not
always been achieved in terms of expected use, benefits or costs of payment system reform projects
and many planned reforms have been unexpectedly slow to complete.
In its modernization programme which commenced in 2001, the Central Bank refocused on its core
objectives, i.e. the economic and price stability and the financial system stability. The financial system
stability objective encompasses a wide range of subjects of which, the establishment of a safe and
sound payment system was seen crucial for the development of the financial sector, which is also
complementary to the maintenance of price stability. In this context, the Central Bank examined the
adequacy and the efficiency of the payment system to satisfy the needs of an evolving economy and
decided to undertake comprehensive payment reforms. The broader objectives of the reforms were to
reduce transaction costs, increase efficiency, ensure safety and reduce credit, liquidity and systemic
risks.
Payment modes are wide ranging. Cash is the common mode of payment, because it has a finality in
settlement of a transaction and is readily and legally acceptable as a medium of exchange. However,
the inconvenience of carrying cash and increased security threats have encouraged the move towards
other payment media. Non-cash payment modes are considered to be more secured payment
instruments, but paper-based instruments like cheques, drafts and travellers cheques are also not so
convenient instruments. In modern times, card and electronic payments are treated as the most
convenient and safer instruments, although they too are subject to certain risks, card frauds in
particular and technology related issues.
There are two systemically important payment systems in Sri Lanka. They are the high value and time
critical payment system used by banks, primary dealers, the Central Bank and the corporates and the
cheque-based retail payment system which is used by all segments of the population. Reforming
these two systemically important payment systems were necessary to mitigate settlement risks,
increase efficiency and enhance accessibility. The reforms were also in line with the public policy
objectives which require attention of the Government and regulatory authorities.
The implementation of the Real Time Gross Settlement System (RTGS) and the Scripless Securities
Settlement Systems (SSSS) with a SWIFT link was the most significant reform effected in recent
times. The RTGS was implemented in September 2003 and the system facilitates large value and time
critical fund transfers and settlements electronically and on real time. In February 2004, the SSSS
module was integrated to the RTGS System. To facilitate the operations of these systems,
government securities are issued in scripless form and the system facilitates simultaneous transfer of
government securities and settlement of funds through the RTGS on a Delivery versus Payment basis.
The Central Bank continues to upgrade and enhance facilities to these two systems and in December
2005, the internet based facility called LankaSecureNet which enables the account holders of the
Scripless Securities Depository System to obtain up to date details of their investments through the
internet was introduced. While eliminating the systemic risks that was involved in the high value and
time critical transactions, the Central Bank became the owner and operator of both the RTGS and
SSS systems.
The service provider of the retail payment system is LankaClear (Pvt) Ltd which is owned jointly by the
Central Bank and the commercial banks. Two weeks ago, LankaClear (Pvt) Ltd introduced the Cheque
Imaging and Truncation System to ensure that cheques deposited in any part of the country is cleared
and settled within two days except in uncleared areas. The cheque imaging system eliminates regional
disparities in cheque clearing and establishes a common clearing schedule. In addition to these two
systemically important payment systems, there are other small scale payments and settlements
arrangements. They include the SLIPS system which is also owned and operated by LankaClear and
the US$ clearing system operated by a commercial bank. Mr Anura de Silva, General Manager
LankaClear will give you the technical details of the CIT System including some of the glitches that
have surfaced in implementing the cheque imaging project.
Let me now deal with the institutional and legal arrangements and the impact of payment reforms very
briefly. The focus will be on (i) the market arrangements for payment services (ii) the legal and
regulatory framework; (iii) the coordination of oversight of the payment system and regulation affecting
the system; and (iv) mechanisms for consultation with stakeholders.
The RTGS and SSS systems speedily transfer funds and make settlements of banks, primary dealers,
financial institutions, investors, customers, the government and the public. These two systems bring
about financial discipline among these stakeholders as they have to maintain adequate cash and
reserves in their accounts to meet payment obligations. This also improves the liquidity management
by banks as treasurers and fund managers have to produce accurate estimates of their daily liquidity
requirements. More importantly, the users of the RTGS and SSS systems can use Central Bank funds
throughout the day for settlement purposes and return them at the end of the day. Subject to the
availability of acceptable collateral, the banks and primary dealers are provided with intra day liquidity
by the Central Bank.
To underpin the payment reforms undertaken by the Central Bank and enhance integrity and safety of
such systems, a comprehensive legislation to govern payment, clearing and settlement systems in
general and to provide the Central Bank with oversight and regulatory powers over various payment
systems and money transfer service providers has been enacted through the Payment and Settlement
Systems Act of 2005. The Act empowered the Central Bank to be the authority responsible for the
national payment system, which requires oversight and continuous surveillance of all payment
systems to ensure its efficiency and effectiveness. The systemically important payment systems will
be reviewed periodically to ensure that the design and operation meet with international standards and
best practice.
Some of you may be aware that a couple of months ago, the Central Bank established a National
Payments Council which is the highest decision making body with regard to payment systems. This
committee represented by all stakeholders provides a forum for constant dialogue on payment issues
to take place within the industry. The National Payments Council is responsible for developing the
payment and settlements infrastructure in collaboration with all the relevant authorities and
stakeholders. Currently, it is in the process of finalizing a road map for the development of the national
payment system in the next five years, which will be in line with the vision of the financial sector.
In implementing the road map, it is vital that all stakeholders in the payment system understands the
significance of payment systems, their impact on financial stability and take ownership and leadership.
Most central banks at some point or other have been owners, operators, catalysts, overseers and
users of the payment system. Over the years, central banks have given up their ownership and
operator's role and, in some cases, even the catalyst role. Banks and financial institutions and even
the corporates should play an important role in shaping the national payment system in Sri Lanka.
Let me conclude now by giving an important message. Payment reforms help to adopt best practices
by all stakeholders. With or without payment system reforms, banks and financial institutions should
be able to meet their payment obligations. Some of the benefits enjoyed by banks and customers over
the years will no longer be there under the CIT system. The public too has to make adjustments in
their payment practices and ensure that there are funds in their accounts when cheques are issued.
All stakeholders should change their past practices and fall in line with reforms which are aimed at
improving facilities.
Once again, I thank the Royal Bankers Club for inviting me and extend my good wishes for all its
future activities.