Manual clearance of high-volume cheques poses ‘systemic risk’: NRB

- POST REPORT, Kathmandu
Manual clearance of high-volume cheques poses ‘systemic risk’: NRB

May 10, 2014-

Manual clearance of high-volume customer payment cheques poses a greater systemic risk to the financial system, an assessment of Nepal’s payment conducted by the Nepal Rastra Bank (NRB) has concluded.

Currently, cheques worth more than Rs 100 million are cleared by a special daily manual clearing session at the NRB. On an average, the central bank clears eight such cheques every day.

The current arrangement on high-volume cheque payment poses a systemic risk as it may cause problems for other banks and potentially across the financial system provided a bank has an insufficient fund in its settlement account to cover its obligations, stated the review report of National Payment System carried out with support from the International Financial Corporation (IFC).

“Measures currently in place (for example imposing penalties) do not actually address the problem, which demands immediate action to resolve the position rather than penalising the offending institution latter,” states the report made public on Friday.

NRB Executive Director Shiba Raj Shrestha said a manual clearance system for high-volume cheques was adopted considering risks associated with technology-enabled services. “We cannot fully trust technology-enabled services given infringement attempts,” said Shrestha. “The manual system is more or less risk free.”

Shrestha, however, said the manual system pay put traders’ reputation at risk if their payments are not cleared on time.

Besides, the central bank also released three other documents — drafts of the Nepal Payment System Development Strategy, Nepal Rastra Bank Payment System Oversight, and Implementation of Payment System Functions: Roadmap.

The strategy has proposed moving large-volume payment to the Real Time Gross Settlement System (RTGS) that the central bank plans to introduce. “Preparatory work has begun in this regard,” said Shrestha.

The strategy has also proposed introduction of payment amount limits, requiring banks to maintain minimum balances, or introducing a collateral pool. The establishment of settlement assurance procedures, such as cost sharing arrangements or a guarantee fund, and its associated costs, will  be studied in terms of the level of systemic importance of the automated clearing house are other recommendations.

The proposed strategy has suggested connecting Smart Choice Technologies’ (SCT) systems to the RTGS system to remove the risk in the current system where settlement is done a day after transactions through SCT.

SCT is Nepal’s largest card services provider, with 84 members and some 1.7 million cardholders (out of an approximately 2.5 million total cardholders in Nepal).

Another risk pointed out by the review report is the problem related to power supply. “While this is not directly a problem with battery-powered devices such as mobile phones and some models of point of sale terminals, it still imposes constraints  on what is possible, because batteries need to be recharged at fairly frequent  intervals,” states the report. “Also, the telecommunications networks and central servers on which innovative payment services are dependent cannot be run on battery power.”

Given the Nepal Clearing House Coming up with an idea of direct credit and direct debit facility, the proposed strategy has called for an efficient, sound and interoperable retail payment system. At present, there is no automated inter-bank payment system for electronic retail payment instruments. A number of commercial banks in Nepal have invested in automation of their internal systems, and as a result, a significant proportion of their customers’ intra-bank payments have moved from cheque to electronic means of payments.

Shrestha said individual banks have made arrangements for utility payment such as telephone bill and insurance premium payment directly from the individual’s account. “In a direct debit facility, the utility body can withdraw the amount directly from one’s bank account for services provided,” he said.

The strategy has also proposed the development of inter-bank repo market and collateralised interbank lending operations which the central bank has planned to do.

Published: 11-05-2014 08:21

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