y v reddy : payment and settlement systems – select issues valedictory address by dr y v reddy, governor of the reserve bank of india, at the regional payment systems workshop, organised jointly by the reserve bank of india and the bank for international settlements, hyderabad, 20 october 2006. * * * director shri sharma, mr. hollanders, mr. o ’ connor, mr. shigang, ms. christova, mr. beau and distinguished participants and ladies and gentlemen, it is my pleasure to be with you this evening to deliver the valedictory address at the regional payment and settlement systems workshop organised jointly by the reserve bank of india ( rbi ) and the bank for international settlements ( bis ). participants from the central banks of 16 countries from africa and asia have attended this workshop and we had the privilege of having the guest speakers from the bank of canada, people ’ s bank of china, bis and bank de france, apart from the speakers from the rbi. the schedule of the workshop indicates that a wide gamut of subjects relating to the management of payment systems has been deliberated upon in the workshop from different country perspectives. the association of the bis in organising the workshop as also in providing faculty support would have certainly enriched the deliberations of the workshop. i am thankful to the organisers for giving me this opportunity to share my thoughts with you in regard to certain issues relating to the payment and settlement systems. a major challenge for countries like india relates to the need for achieving efficiency in situations where large - scale increases in the quantum and complexity of processing of financial transactions occur. consider the following scenario : today ’ s customers are more demanding than ever before ; they have access to the latest information and have a wide array of options to choose from. each customer would yearn for the best product or service at the least possible cost. against this backdrop, efficiency has become critical if the payment system has to generate a high degree of customer confidence. hence, ensuring safe and expeditious movement of funds at an optimal cost is the key to success of all payment system reforms. another challenge faced by the central banks relates to the explosion of technology which has made deep inroads into payment and settlement systems. the integration of many hitherto distinct markets is taking place at an unprecedented pace due to advancements in technology. technology implementation poses a myriad of issues and options, such as : the choice of optimal technology ; the costs of its implementation ; the high rate of technological obsol

is already a reality. this underlines the need for standards to be evolved, based on international benchmarks, but adapted to the local requirements. such benchmarks could also be quite useful in securing compliance with the know your customer ( kyc ) and anti money laundering ( aml ) norms, monitoring of intricate cross - country financial flows as also the operational efficiency of each system in a country. let me now dwell a little on certain facets of effective payment and settlement systems. the introduction of the real time gross settlement ( rtgs ) system by many countries has not only resulted in compliance with the core principles for systemically important payment systems enumerated by the bis, basle but has also paved the way for risk - free, credit push - based fund transfers settled on a real time basis and in the central bank money. however, the liquidity requirements for the rtgs are relatively high. hence, the options are being weighed as to whether the liquidity requirements can be tackled by the banks in a cost - effective manner without losing the benefits of the rtgs. a judicious mix of netting coupled with the rtgs, or a guaranteed net settlement are some of the measures which would obviate the risks involved in the deferred net settlement systems ( dns ). while the rtgs holds great promise, it is possible that the technological as well as institutional aspects may result in considerable problems during the phase of transition. our experience with rtgs shows that there are immense benefits but its popularity itself can give rise to some operational issues when the system is stabilising. recently, delays in closing the books by the end of the day have been reported. i am informed that several experts are working on the system to resolve the problems. we are according highest priority to tackle these operational issues that have cropped up in the recent past. i take this opportunity to endorse what shri narayana murthy, chairman and chief mentor, infosys said while speaking at this forum. he said : " according to the rbi, there are about 48, 000 public sector bank branches in the country, of which over 63 per cent are in semi - urban and rural areas. though over 70 per cent of the branches have attained 100 per cent computerisation, real time gross settlement ( rtgs ) is available only in 23, 500, while the national electronic funds transfer covers less than 5, 000 branches. hence, integrating semiurban and rural areas into the electronic