international payment system

8/6/2019 International Payment System

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ASPA GURUKOOL

InternationalInternationalPayment SystemPayment System


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Payment Terms Adapted inPayment Terms Adapted in

Foreign TradeForeign Trade Clean Payments ( NoClean Payments ( No IntermidiationIntermidiation))

Advance or Open AccountAdvance or Open Account

OnConsignment (costlydueto consignmentOnConsignment (costlydueto consignmentcommission)commission)

DocumentaryBills (D/PDocumentaryBills (D/P--onsightdraft &onsightdraft &

D/A, AftersightDraft)D/A, AftersightDraft) Letter ofCreditLetter ofCredit

FactoringFactoring

ForfeitingForfeiting ASPA GURUKOOL


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RTGSRTGS

TheinterTheinter--bankfundstransfersystemin Indiabankfundstransfersystemin India

can beclassifiedinto the Batch Mode (Net)andcan beclassifiedinto the Batch Mode (Net)and

RealTime (Gross) System. Ina Batch Mode, theRealTime (Gross) System. Ina Batch Mode, thetransmission, processingandsettlementisdonetransmission, processingandsettlementisdone

foraset oftransactions (sayforaset oftransactions (saychequecheque clearingorclearingor

sale or purchase ofsecurities)ata particularsale or purchase ofsecurities)ata particular

point oftimeandthesettlement ona prepoint oftimeandthesettlement ona pre--fixedfixedinterval oftime (sayattheend oftheday).interval oftime (sayattheend oftheday).

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RTGSRTGS RTGS systemisafundstransfermechanism whereRTGS systemisafundstransfermechanism where

transfer ofmoneytakes placefrom one banktotransfer ofmoneytakes placefrom one banktoanother ona RealTimeand on basis.Thisistheanother ona RealTimeand on basis.Thisisthe

fastest possiblemoneytransfersystemthroughthefastest possiblemoneytransfersystemthroughthe

bankingchannel. Settlementin RealTimemeansbankingchannel. Settlementin RealTimemeans

paymenttransactionisnotsubjectedto anywaitingpaymenttransactionisnotsubjectedto anywaiting

period.Thetransactionsaresettledassoonastheyperiod.Thetransactionsaresettledassoonasthey

are processed. Gross Settlementare processed. Gross Settlement meansthemeansthe

transactio

nis

settled

on

one

to o

neb

asisw

ithou

t

transactio

nis

settled

on

one

to o

neb

asisw

ithou

tbunchingwithanyothertransaction.Consideringthatbunchingwithanyothertransaction.Consideringthat

moneytransfertakes placeinthe books ofthemoneytransfertakes placeinthe books ofthe

Reserve BankofIndia, the paymentistakenasfinalReserve BankofIndia, the paymentistakenasfinal

andirrevocable.andirrevocable. ASPA GURUKOOL


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Advantages ofRTGS :Advantages ofRTGS :

1.1. SincethefundstransferinstructionsareSincethefundstransferinstructionsare

processedandsettledinrealtime, theprocessedandsettledinrealtime, thecreditcredit andliquidityrisksareeliminated.andliquidityrisksareeliminated.

2.2. Thisleadsto aseamlessmovement offundsThisleadsto aseamlessmovement offunds

from oneendto another usingthe ITfrom oneendto another usingthe IT platformplatformandreducesthesystematicrisksintheandreducesthesystematicrisksinthe

settlementsystem.settlementsystem.

3.3. Asthefundsarereceivedinstantlyonline, inAsthefundsarereceivedinstantlyonline, inthe RTGS system, thecollectingbanksandtheirthe RTGS system, thecollectingbanksandtheir

customerscan usethefundsimmediatelycustomerscan usethefundsimmediately

withoutexposingthemselvesto settlementrisk.withoutexposingthemselvesto settlementrisk.ASPA GURUKOOL


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INDIAN SCENARIOINDIAN SCENARIO

The RealTime Gross Settlement (RTGS)systemThe RealTime Gross Settlement (RTGS)system

isacentralized paymentssystem operated bytheisacentralized paymentssystem operated bythe

Reserve BankofIndia (RBI)in India, to whichReserve BankofIndia (RBI)in India, to whichabout11330 branches of84 banksin Indiaareabout11330 branches of84 banksin Indiaare

linked.linked.

ASPA GURUKOOL


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Payment Mechanisms of BanksPayment Mechanisms of Banks

in International Payments.in International Payments. Banksaretheentitiesthat payandreceiveforBanksaretheentitiesthat payandreceivefor

and on behalfoftheclient.Thisis becauseand on behalfoftheclient.Thisis because

cu

sto

mersmaintain

an

acc

ount

with

the

cu

sto

mersmaintain

an

acc

ount

with

the

banks.

banks.

Customersmaybe payingbyCustomersmaybe payingbychequescheques oror

demanddraft oranyofthe paymentdemanddraft oranyofthe payment

mechanismsmentionedabove.mechanismsmentionedabove.

Bankershaveto effectthecreditBankershaveto effectthecredit--debitentriestodebitentriestofinallytransfercreditfrom one partyto thefinallytransfercreditfrom one partyto the

other party.other party.

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Continued.Continued.

Banks performthistaskbyeither passingcreditBanks performthistaskbyeither passingcredit--

debitmessage to its own branch.Thisisdonedebitmessage to its own branch.Thisisdone

whenthe bankhas branchesin both (payingandwhenthe bankhas branchesin both (payingand

receiving)locations. Ifthe bankdoesnothavereceiving)locations. Ifthe bankdoesnothave

branchesthen, correspondent bankshelp inbranchesthen, correspondent bankshelp in

completingthetransaction.completingthetransaction.

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:: Buyer A from India purchasesmaterialfrom Supplier BBuyer A from India purchasesmaterialfrom Supplier B

inthe United States.Thematerialis worth US$ 100.inthe United States.Thematerialis worth US$ 100.Prevailingexchange __ US$ = Rs. 46. Buyer APrevailingexchange __ US$ = Rs. 46. Buyer Amaintainsaccount with Indian SBI in Indianrupees.maintainsaccount with Indian SBI in Indianrupees.SBI (State BankofIndia)maintains US account withitsSBI (State BankofIndia)maintains US account withitscorrespondent bank,correspondent bank, BoNYBoNY (BankofNew York).(BankofNew York).Seller B hascurrentaccount withSeller B hascurrentaccount with BoNYBoNY.To effectthe.To effectthepayment, buyer A instructs SBI to debititsaccountpayment, buyer A instructs SBI to debititsaccountequivalentto Us$ 100, in Indian Rupeesi.e. Rs. 4600 Inequivalentto Us$ 100, in Indian Rupeesi.e. Rs. 4600 Ineffect SBI issuesaninstructiontoeffect SBI issuesaninstructionto BoNYBoNYto debitsitsto debitsits(SBIs)account byUS$ 100andcreditseller Bs(SBIs)account byUS$ 100andcreditseller Bsaccount withthesameamount.Thus buyerhasaccount withthesameamount.Thus buyerhaseffectivelypaidseller B, US$ 100.effectivelypaidseller B, US$ 100.

ASPA GURUKOOL


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Correspondent Banking :Correspondent Banking :

Type of Account Meaning Description ExampleNastro Our Domestic banks

account held witha foreign bank

Induslnd BankssAccount with .

Vostro Your Foreign banks

account withdomestic bank.

Scotia banks

account with SBI

Loro Their Third partyaccount.

London bank paying an amount

(to French bank)

by crediting

French banks'

account held withUS bank.

ASPA GURUKOOL


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Payment QueryPayment Query-- VehicleVehicle

CurrencyCurrency Itis obviousthat banksinalmostallthecountries oftheItis obviousthat banksinalmostallthecountries oftheworld wouldhavecorrespondent banksinallthestrongworld wouldhavecorrespondent banksinallthestrong

economies. Additionallytheyalso maintainsucheconomies. Additionallytheyalso maintainsuch

relationship withtheregionalcountries.relationship withtheregionalcountries. Inthisscenario, these banks wouldreadilyhave pricesforInthisscenario, these banks wouldreadilyhave pricesfor

thecurrencies ofthesemajoreconomies.Forinstance, Statethecurrencies ofthesemajoreconomies.Forinstance, State

BankofIndia would, ondemand, offer pricesfor US dollar,BankofIndia would, ondemand, offer pricesfor US dollar,

Pound Sterling(UK), Japanese Yen, Euro, etc. WhatPound Sterling(UK), Japanese Yen, Euro, etc. Whathappensifwe wantto exchange Indian RupeeforThaihappensifwe wantto exchange Indian RupeeforThaibaht? Itiscertainlynotcommonthat Indian banks wouldbaht? Itiscertainlynotcommonthat Indian banks would

havecorrespondentrelation withThailand.havecorrespondentrelation withThailand.

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PaymentPayment QueryQuery-- VehicleVehicle

CurrencyCurrency Certainlythough, allmajorThai banks wouldCertainlythough, allmajorThai banks would

havecorrespondent bankrelations withthe US.havecorrespondent bankrelations withthe US.Hence weshallhave onequotefor USDand INRHence weshallhave onequotefor USDand INR

andanotherfor USDand baht.Fromthesetwoandanotherfor USDand baht.Fromthesetwo

quotes wecancalculatetherequisitecurrencyquotes wecancalculatetherequisitecurrencypriceandeffectthetrade. Insuchcase, the USpriceandeffectthetrade. Insuchcase, the US

dollar would betermedas VehicleCurrency.dollar would betermedas VehicleCurrency. US dollaristhemostcommonlyusedandtheUS dollaristhemostcommonlyusedandthe

strongestvehiclecurrencyinthe Internationalstrongestvehiclecurrencyinthe International

marketso far.marketso far.ASPA GURUKOOL

international payment system

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