by P.D.J. Fernando Assistant to Governor Central Bank

1. Electronic Transactions in the Inter Banking Arena Techno - Legal Initiatives by Central Bank of Sri Lanka by P.D.J. Fernando Assistant to Governor Central Bank

2. Electronic Transactions Initiatives of the Central Bank • Establish the technical infrastructure to enable all inter-bank payments and settlements in large value transactions to be realised in real time (as and when the payment instructions are received). • Establish the legal environment to support the real time transactions by electronic means. • Change the liquidity management culture in financial institutions from an “end of the business day” management to intra-day management. • Transfer the technical, legal and operational knowledge to the staff in Central Bank, Commercial Banks and Primary Dealers, the direct participants in the inter-bank payment system. • Created awareness among the general public with regard to issue of government securities in scrip-less form, procedures involved in transacting scrip-less securities, and awareness of the Central Depository the depository and registry where the records of ownership is maintained.

3. Payment System Reforms • Implement the Real Time Gross Settlement (RTGS) System for large value inter-bank payments • Implement a settlement system for government securities issued in scrip-less form with the ownership records maintained in electronic form in a Central Depository System • Target cheques/slips for small value inter-bank payments • Reduce the Cheque Clearing schedule in outstation areas to enable clearing of cheques across a shorter time span; not exceeding 2 days, by introducing document imaging technology. • A framework is established for the regulation, supervision and oversight of payment systems. • Special rules provided for clearing and settlement systems designated as “Systemically Important”.

4. Importance of the Payment System Real Sector Economy Financial System Payment System Strong inter-relationship with the Financial System and the Real Sector Economy

5. Importance of the Payment System A disruption in the Payment System will have a systemic effect on the financial system. The liquidity and the stability of the financial market served by the payment system could be undermined leading to loss of confidence of the traders in the financial market A stress in the financial system will have an adverse impact on the National Economy with potential damage in the form of poorer economic growth and lower employment.

6. Infrastructure to achieve a stable payment system The financial infrastructure comprising of the following play an important role to achieve a stable payment system • the systems for clearing and settlement of payment transactions • systems for trading, clearing and settlement of securities transactions

7. Importance of Inter-bank Payments • In the modern economy payments are essentially made in the form of transfers between bank accounts • Accordingly the main participants in the payment system are the banks • An efficient and a secure inter-bank payment system will ensure the stability of the Payment System at large

8. Payment SystemsThe CBSL Role • Acts as the bank to the banks; • Provider of liquidity to the system by providing intra-day credit against collateral • Initiator of Payment Reforms • Leader in the design of LankaSettle system - the RTGS system in Sri Lanka and the initiator for establishing the legal infrastructure to support the inter-bank transfer of funds by electronic means

9. The Payment Structure in Sri Lanka Payments Cash Payments Non Cash Payments Cheques SLIPS Card based payments RTGS

10. Distribution of Non-Cash Payments by Value of Transactions – 1st Quarter 2004 0.9% 19.3% 80.0% Source: Payments & Settlements Department – Central Bank

11. Scope of LankaSettle The RTGS System encompass • Payments between Financial Institutions on their own account or on behalf of their customers • Payments between Financial Institutions in settlement of their principal obligations in the cheque/SLIPS clearing process • Settlement of transactions in Government Debt Securities on a DvP (Delivery vs Payment) basis • Funds disbursements related to interest payments and maturity proceeds of Treasury Bills and Treasury Bonds • Net settlement of payment obligations arising in other payment and clearing systems • Transfers between accounts of the Financial Institutions and CBSL

12. Participants in RTGS • Commercial Banks • Primary Dealers • Employees Provident Fund • Central Bank

13. LankaSettleKey Design Concepts • Designed to transfer funds between the participants of the system (banks/primary dealers) • participants maintain settlement accounts with the Central Bank for crediting incoming payments and debiting outward payments • Designed only for the participants (not their customers) to access the system through a secured data communication network and a PC-based interface at the Treasury Office of the participant institutions.

14. LankaSettleKey Design Concepts -contd The processing of funds transfer involves following key elements • Transfer of information between the payer and payee banks by transmission of a payment message requesting transfer of funds to the payee • The processing of payment messages; after going through a procedure of identification, reconciliation and confirmation of messages

15. Payment Processing and Settlement • Payment processing; one by one in the order they are received by the system. If sufficient funds are not available the transaction is placed in a queue pending the arrival of adequate funds. • Payments exchanged is subjected to RTGS discipline. Each payment is settled prior to the payment message being received by the receiving party. • The next key element is funds settlement the actual transfer of funds between the paying bank and the recipient bank ; settlement becomes irrevocable and unconditional when the transfer of value is recorded in the settlement accounts maintained with the central bank.

16. Liquidity through Intra-day Borrowing • Participants can meet their liquidity requirement by intra-day borrowing from the Central Bank. The borrowing is against collateral • Participants can borrow up to an amount corresponding to the value of the pledged collateral minus the haircut

17. Intra-day Borrowing-contd • The request for borrowings should be at the start of the business day • Additional borrowing is possible within the business day but is subject to a limited number of times. Similarly a bank can payback and release the collateral pledged

18. Advantage of RTGS to Participants • The advantage of real time gross settlement system is that participants have no exposure and therefore, no risks • Immediate transfer of funds • Reduced inconvenience due to elimination of cheques in transactions involving large value payments

19. Benefits of RTGS to Public at large • Reduced cheque float • Timely receipt of proceeds • Ability to make time critical payments

20. A Comparison of the Large Value Payment System Pre RTGS vs Post RTGS

21. Payments System Reforms-A Continuous Process • Payments and settlement systems undergo rapid change due to improvements in technology and growing complexity of financial markets • Periodic self-assessments vis-à-vis international best practices and technology developments are necessary to identify areas for improvements and reform

22. Questions?

23. Thank You!