Net settlement and real-time gross settlement are two different methods used in the financial industry to settle transactions.
In net settlement, multiple transactions between parties are batched together and settled at predefined intervals, typically at the end of a day. All transactions within a batch are netted out, meaning that the total amount owed by one party to another is calculated, and only the net amount is transferred. This method can reduce the number of individual transactions and the associated costs but may introduce credit and liquidity risks.
RTGS is a settlement system where each individual transaction is settled immediately and independently, as soon as it is processed. There is no netting of transactions; each transaction is settled in real-time, ensuring that the funds are transferred from the payer to the payee immediately. RTGS systems are often used for high-value and time-sensitive transactions and help minimize credit and liquidity risks.
The key difference is that net settlement batches and nets out multiple transactions, while RTGS settles each transaction individually in real time. RTGS is generally considered more secure and is used for critical financial transactions, while net settlement can be more cost-effective but may introduce some risk.