studies on interbanking transactions

Studies On Interbanking transactions

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Interbank transferRTGSNEFTInterbank marketSWIFTRole of interbank lending in financial systemIMPSconclusion

Summary

Inter Bank Transfer enables electronic transfer of funds from the account of the remitter in one Bank to the account of the beneficiary maintained with any other Bank branch. There are two systems of Inter Bank Transfer - RTGS and NEFT. Both these systems are maintained by Reserve Bank of India...

Inter bank transfer1. What is Inter Bank Transfer?

Inter Bank Transfer enables electronic transfer of funds from the account of the remitter in one Bank to the account of the beneficiary maintained with any other Bank branch. There are two systems of Inter Bank Transfer - RTGS and NEFT. Both these systems are maintained by Reserve Bank of India.

RTGS- Real Time Gross Settlement- This is a system where the processing of funds transfer instructions takes place at the time they are received (real time). Also the settlement of funds transfer instructions occurs individually on an instruction by instruction basis (gross settlement). RTGS is the fastest possible interbank money transfer facility available through secure banking channels in India.

NEFT- National Electronic Fund Transfer- This system of fund transfer operates on a Deferred Net Settlement basis. Fund transfer transactions are settled in batches as opposed to the continuous, individual settlement in RTGS. Presently, NEFT operates in hourly batches from 9 am to 7 pm on week days and 9 am to 1 pm on Saturdays.

What is the minimum/maximum amount for RTGS/NEFT transactions under Retail Internet Banking?TypeMinimumMaximum

RTGSRs.2 LakhsRs.5 Lakhs

NEFTNo MinimumRs.5 Lakhs

2. What is the minimum/maximum amount for RTGS/NEFT transactions under Corporate Internet Banking?TypeMinimumMaximum

RTGSRs.2 LakhsRs.50 lakhs for Vyapaar andRs.500 crores for Vistaar

NEFTNo MinimumRs.50 lakhs for Vyapaar andRs.500 crores for Vistaar

3. When does the beneficiary get the credit for a RTGS payment?Under normal circumstances the beneficiary Bank branch receives the funds in real time as soon as funds are transferred by the remitting Bank. The beneficiary Bank has to credit the beneficiary's account within two hours of receiving the funds transfer message.4. When does the beneficiary get the credit for a NEFT payment?

As stated above, NEFT operates in hourly batches. Currently there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Therefore, the beneficiary can expect to get the credit for the transactions put through between 9 am to 5 pm on weekdays (between 9 am to 12 noon on Saturdays) on the same day. For transactions settled in the 6 and 7 pm batches on week days and at 1 pm on Saturday, the credit will be afforded either on the same day or on the next working day.5. If an RTGS transaction is not credited to the beneficiary account, does the remitter get back the money?

Yes. If the beneficiary's bank is unable to credit the beneficiary's account for any reason, the former will return the money to the remitting bank within 2 hours. Once the amount is received by the remitting bank, it is credited to the remitter's account by the branch concerned.6. If an NEFT transaction is not credited to a beneficiary account, does the Remitter get back the money?

Yes. If the beneficiary's bank is unable to credit the beneficiary's account for any reason, the former will return the money to the remitting bank within 2 hours of completion of the batch in which the transaction was processed. Once the amount is received by the remitting bank, it is credited to the remitter's account by the branch concerned.7. At what time during the day/week the RTGS & NEFT services are available?

RTGS transactions are sent to RBI as per the following schedule:DayStart TimeEnd Time

Monday to Friday9:00 hrs16:30 hrs

Saturday9:00 hrs13:30 hrs

NEFT transactions will be sent to RBI based on the following schedule:DayStart TimeEnd Time

Monday to Friday8:00 hrs18:30 hrs

Saturday8:00 hrs12:30 hrs

8. RBI NEFT transactions are settled in batches based on the following timings:1. 11 settlements on weekdays - at 09:00, 10:00, 11:00, 12:00, 13:00, 14:00, 15:00, 16:00, 17:00, 18:00 and 19:00 hrs.2. 5 settlements on Saturdays - at 09:00, 10:00, 11:00, 12:00 and 13:00 hrs.

9. What is the mandatory information required to make an RTGS & NEFT payment?For effecting an RTGS/NEFT remittance the remitter has to furnish the following information: Amount to be remitted. Remitting customer's account number which is to be debited Name of the beneficiary bank. Name of the beneficiary. Account number of the beneficiary. Sender to receiver information, if any IFSC code of the destination bank branchHow to find the IFSC code of the beneficiary branch?In Onlinesbi, the remitter has the option of selecting the location of the destination Bank Branch in case the IFSC code is not known. If the correct values are selected for Bank, State and Branch, the IFSC code is automatically updated.

What are the service charges applicable for RTGS/NEFT transactions?Charges for RTGS/NEFT are as listed in the following table:RTGSTime of settlement at the Reserve Bank of IndiaCharges per Transaction for Outward Transactions.

FromTo

109:00 Hours12:00 HoursRs.2 lakhs toRs.5 lakhsRs.25/-

AboveRs.5 lakhsRs.50/-

2After 12:00 Hours15:30 ( 13:00 hrs on Saturday hours)Rs.2 lakhs toRs.5 lakhsRs.26/-


3After 15:30 Hours16:30 hrs ( On week days)Rs.2 lakhs toRs.5 lakhsRs.30/-


AmountService Charge

NEFTUptoRs.1 lakhRs.5/-

AboveRs.1 lakh toRs.2 lakhsRs.15/-


Real time gross settlementThe acronym 'RTGS' stands for real time gross settlement. TheReserve Bank of India(India's Central Bank) maintains this payment network.RTGSsystem is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable.Fees for RTGS vary from bank to bank. RBI has prescribed upper limit for the fees which can be charged by all banks both for NEFT and RTGS. Both the remitting and receiving must havecore bankingin place to enter into RTGS transactions. Core Banking enabled banks and branches are assigned anIndian Financial System Code(IFSC) for RTGS and NEFT purposes. This is an eleven digit alphanumeric code and unique to each branch of bank. The first four letters indicate the identity of the bank and remaining seven numerals indicate a single branch. This code is provided on the cheque books, which are required for transactions along with recipient's account number.RTGS is a large value (minimum value of transaction should be2,00,000) funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system effects final settlement of interbank funds transfers on a continuous, transaction-by-transaction basis throughout the processing day. Customers can access the RTGS facility between 9 am to 4:30 pm (Interbank up to 6:30 pm) on weekdays and 9 am to 2:00 pm (Interbank up to 3:00 pm) on Saturdays. However, the timings that the banks follow may vary depending on the bank branch. Time Varying Charges has been introduced w.e.f. 1 October 2011 by RBI. The basic purpose of RTGS is to facilitate the transactions which need immediate access for the completion of the transaction.Banks could use balances maintained under thecash reserve ratio(CRR) and the intra-day liquidity (IDL) to be supplied by the central bank, for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three times their net owned fund (NOF).The IDL will be charged at25 per transaction entered into by the bank on the RTGS platform. The marketable securities andtreasury billswill have to be placed as collateral with a margin of five per cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day.The RTGS service window for customer's transactions is available from 9:00 hours to 16:30 hours on week days and from 9:00 hours to 14:00 hours on Saturdays.No Transaction on weekly holidays and public holidays.RTGS systems are specialist funds transfer systems where transfer ofmoneyorsecurities[1]takes place from onebankto another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bundling or netting with any other transaction. Once processed, payments are final and irrevocable.RTGS systems are typically used for high-value transactions that require immediate clearing, in some countries the RTGS systems may be the only way to get same day cleared funds and so may be used when payments need to be settled urgently such as when purchasing a house. However most regular payments would not use a RTGS system, but instead would use a nationalpayment systemor network that allows participants to batch and net payments.RTGS systems are usually operated by a country'sCentral bankas it is seen as a critical infrastructure for a country's economy. Economists view that an efficient national payment system reduces the cost of exchanginggoods and services, and is indispensable to the functioning of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money.

Central banks and RTGSThis "electronic" payment system is normally maintained or controlled by thecentral bankof a country. There is no physical exchange of money; the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $100,000 and increasing the amount of Bank B's account by the same. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as the UKs,BACSsystem. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. The implementation of RTGS systems by central banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a central bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. The best RTGS national payment system cover up to 95% of high-value transactions within the national monetary market.TheWorld Bankhas been paying increasing attention to payment system development as a key component of the financial infrastructure of a country, and has provided various forms of assistance to over 100 countries. Most of the RTGS systems in place are secure and have been designed around international standards and best practices.[3]Several reasons exist for central banks for RTGS adoption decisions to include counterparts in the system. First, a decision to adopt is influenced by competitive pressure from the global financial markets. Second, it is more beneficial to adopt an RTGS system for central bank when this allows access to a broad system of other countries' RTGS systems. Third, it is very likely that the knowledge acquired through experiences with RTGS systems spills over to other central banks and helps them make their adoption decision. Fourth, central banks do not necessarily have to install and develop RTGS themselves. The possibility of sharing development with providers that have built RTGS systems in more than one country (Logica CMG of UK, CMA Small System of Sweden, JV Perago of South Africa and SIA SpA of Italy, Montran of USA) has presumably lowered the cost and hence made it feasible for many countries to adopt.[4]By 1985, three central banks had implemented RTGS systems. At the end of 2005, the use of RTGS systems had spread to 90 central banks.

Payments are an indispensable part of our daily transactions, be it a consumer to a business, a business to a consumer or a business to a business. Payments raise theGDPof a country thus it is mandatory that the payment systems of the country are safe, secure, sound, efficient, accessible and authorize, as states the mission statement of the Reserve Bank of Indias publication on Payment Systems in India (200912). TheReserve Bank of Indiacontinually strives towards ensuring the smooth progress of the payments system. In India it is the BPSS (Board for Regulation of Payment and Settlement Systems) which is in charge of regulating these systems.India has multiple payments and settlement systems. RBI Still continues to evolve new payment methods and slowly revamping the payments and settlement capability in India.India supports a variety of electronic payments and settlement system, both Gross as well as Net settlement systems.The Gross systems is Real Time Gross Settlement(RTGS)The Net settlement systems are; ECS - Credit ECS - debit Credit cards and Debit cards National Electronic Funds Transfer (NEFT) Indo-Nepal Remittance Facility Scheme Immediate Payment Service

Traditional methods of making paymentsTraditional methods dominating the Indian payments market have been cheques and cash.

CashCash is the most popular modes of payment especially when it comes to retail transactions because it gives the customer a sense of completion once the amount is paid in cash. There are still quite a few small business transactions that happen in cash.ChequesIndia has an evolvedchequesclearing system. There are multiple flavours of paper instruments including customer cheques, Bankers Cheque [or Pay order] and are still in use.Payments in India going the e-wayThe Reserve Bank of India is doing its best to encourage alternative methods of payments which will bring security and efficiency to the payments system and make the whole process easier for banks. The Indian banking sector has been growing successfully, innovating and trying to adopt and implement electronic payments to enhance the banking system. Though the Indian payment systems have always been dominated by paper-based transactions, e-payments are not far behind. Ever since the introduction of e-payments in India, the banking sector has witnessed growth like never before.According to a survey by Celent, the ratio of e-payments to paper based transactions has considerably increased between 2004 and 2008. This has happened as a result of advances in technology and increasing consumer awareness of the ease and efficiency of internet and mobile transactions.[1]In the case of India, the RBI has played a pivotal role in facilitating e-payments by making it compulsory for banks to route high value transactions throughReal Time Gross Settlement(RTGS) and also by introducingNEFT(National Electronic Funds Transfer) and NECS (National Electronic Clearing Services) which has encouraged individuals and businesses to switch to electronic methods of payment. With the changing times and technology so have changed the methods of payments in India. E-payments in India have been growing at a fast rate of 60% over the last 3 years.In India plastics have been fast over-taking papers. With 130 million cards in circulation currently, both credit and debit, and an increasing consumer base with disposable income, India is clearly one of the fastest growing countries for payment cards in the Asis-Pacific region. Behaviourial patterns of Indian customers are also likely to be influenced by their internet accessibility and usage, which currently is about 32 million PC users, 68% of whom have access to the net. However these statistical indications are far from the reality where customers still prefer to pay in line rather than online, with 63% payments still being made in cash. E-payments have to be continuously promoted showing consumers the various routes through which they can make these payments like ATMs, the internet, mobile phones and drop boxes.Electronic Payment and Settlement Systems in IndiaDue to the efforts of the RBI and the BPSS now over 75% of all transaction volume are in the electronic mode, including both large-value and retail payments. Out of this 75%, 98% come from the RTGS (large-value payments) whereas a meagre 2% come from retail payments. This means consumers have not yet accepted this as a regular means of paying their bills and still prefer conventional methods. Retail payments if made via electronic modes are done by ECS (debit and credit), EFT and card payments.[1]Electronic Clearing Service (ECS Credit)Known as Credit-push facility or one-to-many facility this method is used mainly for large-value or bulk payments where the receivers account is credited with the payment from the institution making the payment. Such payments are made on a timely-basis like a year, half a year, etc. and used to pay salaries, dividends or commissions. Over time it has become one of the most convenient methods of making large payments.Electronic Clearing Services (ECS Debit)Known as many-to-one or debit-pull facility this method is used mainly for small value payments from consumers/ individuals to big organizations or companies. It eliminates the need for paper and instead makes the payment through banks/corporates or government departments. It facilitates individual payments like telephone bills, electricity bills, online and card payments and insurance payments. Though easy this method lacks popularity because of lack of consumer awareness.National Electronic Funds Transfer (NEFT)NEFT is a facility provided to bank customers to enable them to transfer funds easily and securely on a one-to-one basis. It is done via electronic messages. In order to speed up the transactions there are up to 6 transactions in one day. Even though it is not on real time basis like RTGS (Real Time Gross Settlement), NEFT facilities are available in 30.000 bank branches all over the country and work on a batch mode. NEFT has gained popularity due to it saving on time and the ease with which the transactions can be concluded. This reflects from the fact that 42% of all electronic transactions in the 2008 financial year were NEFT transactions.Credit cards and Debit cardsAs mentioned above India is one of the fastest growing countries in the plastic money segment. Already there are 130 million cards in circulation, which is likely to increase at a very fast pace due to rampant consumerism. Indias card market has been recording a growth rate of 30% in the last 5 years. Card payments form an integral part of e-payments in India because customers make many payments on their card-paying their bills, transferring funds and shopping.Ever sinceDebit cardsentered India, in 1998 they have been growing in number and today they consist of nearly 3/4th of the total number of cards in circulation.Credit cardshave shown a relatively slower growth even though they entered the market one decade before debit cards. Only in the last 5 years has there been an impressive growth in the number of credit cards- by 74.3% between 2004 and 2008. It is expected to grow at a rate of about 60% considering levels of employment and disposable income. Majority of credit card purchases come from expenses on jewellery, dining and shopping.Another recent innovation in the field of plastic money is co branded credit cards, which combine many services into one card-where banks and other retail stores, airlines, telecom companies enter into business partnerships. This increases the utility of these cards and hence they are used not only in ATMs but also atPoint of sale(POS) terminals and while making payments on the net.[1]Service Charge for RTGSa) Inward transactions 1%, no charge to be levied.b) Outward transactions - For transactions of2 lakhs to5 lakhs -up to25 per transaction plus applicable Time Varying Charges (1/- to5/-); total not exceeding30 per transaction, (+ Service Tax).- Above5 lakhs -50 per transaction plus applicable Time Varying Charges (1/- to5/-); total charges not exceeding55 per transaction, (+ Service Tax).No time varying charges are applicable for RTGS transactions settled up to 12:30 hrs.From Starting Jan 2014

National electronic fund transferThe national electronic fund transfer (NEFT) system is a nation-wide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country. For being part of the NEFT funds transfer network, a bank branch has to be NEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101 banks in the country (out of around 82,400 bank branches) are NEFT-enabled. Steps are being taken to further widen the coverage both in terms of banks and branches offices.Service Charges for NEFTThe structure of charges that can bea) Inward transactions at destination bank branches (for credit to beneficiary accounts): Free, no charges to be collected from beneficiariesb) Outward transactions at originating bank branches (charges for the remitter): For transactions up to10,000: not exceeding2.50 (+ Service Tax) For transactions above10,000 up to1 lakh: not exceeding5 (+ Service Tax) For transactions above1 lakh and up to2 lakhs: not exceeding15 (+ Service Tax) For transactions above2 lakhs: not exceeding25 (+ Service Tax)Settlement TimingsCurrently, NEFT operates in hourly batches - there are twelve settlements from 8:00 AM to 6:30 PM on week days and six settlements from 8 AM to 1 PM on Saturdays.Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. As of 2013, all transactions initiated before 5 PM will be settled on same day.No transactions will be settled on weekly holidays and public holidays.

Indo-Nepal Remittance Facility SchemeIndo-Nepal Remittance Facility is a cross-border remittance scheme to transfer funds from India toNepal, enabled under the NEFT Scheme. The scheme was launched to provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit money back to their families in Nepal. A remitter can transfer funds up to50,000 (maximum permissible amount) from any of the NEFT-enabled branches in India.The beneficiary would receive funds in Nepalese Rupees.

ComparisonThe key difference between RTGS and NEFT is that while RTGS is on gross settlement basis, NEFT is on net settlement basis. Besides, RTGS facilitates real-time ("push") transfer, while NEFT involves twelve settlements from 8 am to 7 pm on week days and six settlements from 8 am to 1 pm on Saturdays. Customers can access the RTGS facility between 9 am to 4:30 pm on weekdays and 9 am to 1:30 pm on Saturday. Thus if a customer has given instruction to its bank to transfer money through NEFT to another bank in the morning hours, money would be transferred the same day, but if the instruction is given much later during the day, money may be transferred next day.RTGS facility is available in over 1,13,000 branches across India, while NEFT is available in little over 1,15,000 branches of a 100 banks.

Channels of e-paymentsIn their effort to enable customers to make payments the electronic way banks have developed many channels of payments viz. the internet, mobiles,ATMs (Automated Teller Machines) and drop boxes.The internet as a channel of payment is one of the most popular especially among the youth. Debit and credit payments are made by customers on various banks websites for small purchases,(retail payments) and retail transfers( ATM transfers).ATMs serve many other purposes, apart from functioning as terminals for withdrawals and balance inquiries, such as payment of bills through ATMs, applications for cheques books and loans can also be made via ATMs.Banks also provide telephone and mobile banking facilities. Through call agents payments can be made and as the number of telephone and mobile subscribers are expected to rise, so is this channel of payment expected to gain popularity.Drop boxes provide a solution to those who have no access to the internet or to a telephone or mobile. These drop-boxes are kept in the premises of banks and the customers can drop their bills along with the bill payment slips in these boxes to be collected by third party agents.Role of the RBI in encouraging e-paymentsAs the apex financial and regulatory institution in the country it is compulsory for the RBI to ensure that the payments system in the country is as technologically advanced as possible and in view of this aim, the RBI has taken several initiatives to strengthen the e-payments system in India and encourage people to adopt it. The Payment and Settlement Systems Act, 2007 was a major step in this direction. It enables the RBI to regulate, supervise and lay down policies involving payment and settlement space in India. Apart from some basic instructions to banks as to the personal and confidential nature of customer payments, supervising the timely payment and settlement of all transactions, the RBI has actively encouraged all banks and consumers to embrace e-payments. In pursuit of the above-mentioned goal the RBI has grantedNBFCs (Non-Banking Financial Companies) the permission to issue co branded credit cards forming partnerships with commercial banks. TheKisan Credit CardScheme was launched byNABARDin order to meet the credit needs of farmers, so that they can be free of paper money hassles and use only plastic money. A domestic card scheme known as RuPay has recently been started by the National Payments Corporation of India (NPCI),promoted by RBI and Indian Banks Association (IBA), inspired byUnionpayin China, which will be promoting the use of cards ie. plastic money. Initially functioning as an NPO, Rupay will focus on potential customers from rural and semi-urban areas of India. Rupay will have a much wider coverage than Visa, MasterCard or American Express cards which have always been used for card-based settlements. TheNREGA(National Rural Employment Guarantee Scheme) introduced by the Government will ensure rural employment in turn ensuring that the employees get wages. Each employee will have a smart card functioning as his personal identification card, drivers license, credit card which will also function as an electronic pass book, thus familiarising the rural populations with e-payments.[1]However, the Indian banking system suffers from some defects due to certain socio-cultural factors which hampers the spread of the e-payments culture even though there are many effective electronic payment channels and systems in place. Despite the infrastructure being there nearly 63% of all payments are still made in cash. A relatively small percentage of the population pays their bills electronically and most of that population is from urban India-the metropolitans. Also in some cases the transaction is done partially online and partially offline. The main reason for this apathy to switch to e-payments comes from lack of awareness of the customer despite various efforts by the Government

INTERBANK MARKETWhen seeking funds for borrowing, consumers, financial speculators, and corporations contact a bank representative to discuss the terms of the proposed credit agreement. These discussions and transactions between clients and banks take place at the retail level, where banks charge a premium over the cost of the funds acquired in the wholesale market in order to make a profit. The interbank market is the name of the wholesale market where bankstradebetween themselves in order to remain liquid and meet customer demands for deposits, withdrawals, and borrowing for many different purposes.The main difference between the interbank market and the retail market (that is, the bank counter) is the interest rate charged on borrowed funds. Since commercial banks have access to the central bank of the nation, they are able to acquire funding at a much lower cost than what it available to the end-user. By passing the low-cost money acquired through the terms and conditions set and maintained by the central bank to the consumer at a higher price, banks can make a profit, and stay in business.The interbank market is also the medium where the vast majority of forex transactions take place.

ParticipantsAs its name suggests, the main participants in the interbank market are mostly the major banks such as Deutsche Bank, UBS, Citibank, but other banks, large international corporations, hedge funds also create smaller portions of the activity in this medium. The activities of hedge funds and investment banks, while significant, are much smaller in comparison to the volume generated by the major international banks. However, since these firms are able to utilize much higher levels of leverage in comparison to commercial banks, they can play greater roles in the market from time to time. The trade-related foreign exchange volumes generated by the activities of international corporations are not very significant in comparison to the speculative activity created by major banks and financial institutions.The activities of retail forex brokers and their clients is estimated to constitute about two percent of the overall activity in the interba0nk market, and it is increasing.Forex Brokers and the Interbank MarketForex brokers are the intermediaries between clients and the interbank market. As market makers themselves, brokers pool the orders of their customers together, match buy and sell orders internally with each other, and pass the remaining balance to the interbank market in order to meet orders. Thus the amount of orders communicated by brokers to the banks is smaller than the total amount of orders received by them.Apart from the internal matching of orders, forex brokers charge a usually small fee over the prices quoted by the various banks in the interbank market before passing it to customers. This small fee is called the spread and is the main source of income for brokers.How to understand the interbank market?Understanding the interbank market can be beneficial because of its role as the circulatory system of a nations economy. Tensions in the interbank market are reflected in the various other financial markets as widening spreads, lack of liquidity, increased volatility, and currency shortages. If banks themselves are unable to obtain the funds necessary to maintain their own businesses, they will be unable to extend credit to consumers, firms, mortgage borrowers, students, and many other types of borrowers. As such, tensions and turmoil in the interbank market have important implications for general economic stability, and market trends, and they are carefully monitored by the relevant authorities. Difficulties in the interbank market are often mirrored by severe reactions in the forex market, where banks try to obtain funding for their cross-border operations.

The interbank market is decentralized, meaning that there is no central exchange quoting prices and collecting statistics. However, both national central banks, and international institutions such as the Bank of International Settlements collect data from the various participants in the interbank market on a voluntary basis in order evaluate economic developments better. The data and interpretations generated by them are widely used by traders, economists, analysts, and politicians.Overnight ratesThe maximum maturity term of most transactions in the interbank market is one month, and a majority of interbank activity is conducted through overnight unsecured lending over the real time gross settlement system (RTGS) where there is no requirement of collateral. In performing overnight transactions, banks use the main interest rates declared by the central bank of the nation. This rate is called the federal funds rate in the US, in the Eurozone it is the main refinancing rate, in Japan it is named the overnight call rate, and Bank Rate in the United Kingdom. In india this is called Call Money Rate.When funding is not readily available, the first option considered by banks is overnight borrowing, since this is the safest option for the lender, and still solves the problems of the illiquid institution. Consequently, any problem in the interbank market manifests itself first at the overnight rates which are very sensitive to illiquid conditions. In emerging markets and the third world, lending in the interbank market can evaporate completely, which leads illiquid banks to seek funding in the repo market for their immediate liquidity needs. If the quality or quantity of the required collateral is too high, bank failures can result. It is rare to see the overnight market completely shut down, and in such cases the central bank of the nation will intervene in a heavy handed manner to maintain its rate target.Banking crises, as described simplistically, and briefly above, can cause massive volatiliy in the forex market, and create great dangers as well as opportunities for traders. A trader who is able to detect a deteriorating liquidity conditions can sell the currency of the suffering nation and make great profits in the ensuing turmoil. The main tool for examining and evaluating liquidity conditions in the interbank market is the overnight libor rate.Overnight LiborThe overnight libor rate is the actual rate at which transactions in the interbank market take place, in contrast to the target rate which is the level at which transactions ought to take place, as desired by the central bank. Discrepancies between the overnight libor rate and the target rate signal conditions of laxity (abundant liquidity), or tension (liquidity shortage) in the interbank market. All else being constant, a libor rate lower than the target rate will result in a depreciating currency since there is more supply than there is demand in the interbank market, and vice versa. The relationship is in fact a lot more complex with a number of other variables influencing currency prices in the short term, however, if the gaps are too large, they can override every other concern as banks scramble to raise capital.There is no general overnight libor rate, but an average is calculated based on the data communicated by banks and later passed on to news providers. This rate is termed EONIA in the Eurozone, SONIA in the United Kingdom. These rates are calculated on the basis of locality, and not nationality. For example, a British bank operating in the U.S. will also communicatequoteswhich will be included in the calculation of the days dollar libor. Only the currency of the overnight transaction matters.Central banks explicitly aim to keep the overnight rate in line with the target rate declared, and they will never allow a large divergence to exist for long. To bring the actual rates in the interbank market in line with the target rate, central banks conduct open market operations.Open market operationsOpen market operations involve repurchase agreements (repos) and reverse repos where the central bank buys or sells government bonds in return for cash for a specified maturity. By using this tool, the central bank can control the amount of liquidity in the system, as well as the overnight rate, since it is very sensitive to liquidity conditions in the market. Central banks regularly intervene in the interbank market in order to manage routine, and insignificant reserve imbalances that arise, but they can also conduct special, unscheduled operations in response to tensions.Libor over longer maturitiesAlthough the central banks can influence conditions in the interbank market at shorter maturities by direct interventions and enforcing the target rate through open market operations, they have less influence over rates on longer maturities. Although libor values exist for maturities up to a year, these are mostly used for benchmarking purposes, and do not represent actual lending between banks. Nonetheless, the three-month dollar libor, and its equivalent in other currencies is a common indicator of difficulties and insecurity in the interbank market because of its role as a benchmark for many different kinds of contracts and agreements

SWIFT:TheSociety for Worldwide Interbank Financial Telecommunication(SWIFT) provides a network that enablesfinancial institutionsworldwide to send and receive information about financial transactions in a secure, standardized and reliable environment. Swift also sellssoftwareand services to financial institutions, much of it for use on the SWIFTNet Network, andISO 9362. Business Identifier Codes (BICs) are popularly known as "SWIFT codes".The chairman of SWIFT isYawar Shah,[1]originally fromPakistan,[2]and itsCEOisGottfried Leibbrandt, originally from theNetherlands.The majority of international interbank messages use the SWIFT network. As of September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day (compared to an average of 2.4 million daily messages in 1995).[4]SWIFT transports financial messages in a highly secure way but does not hold accounts for its members and does not perform any form ofclearingorsettlement.SWIFT does not facilitate funds transfer; rather, it sendspayment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.SWIFT hosts an annual conference every year calledSIBOSwhich is specifically aimed at thefinancial servicesindustry.SWIFT is acooperative societyunderBelgianlaw and it is owned by its member financial institutions. It has offices around the world. SWIFT headquarters, designed byRicardo BofillTaller de Arquitectura are inLa Hulpe, Belgium, nearBrussels.

HistorySWIFT was founded inBrusselsin 1973 under the leadership of its inaugural CEOCarl Reuterskild(19731983) and was supported by 239 banks in 15 countries. It started to establishcommon standardsfor financial transactions and a shared data processing system and worldwide communications network designed byLogica.[5]Fundamentaloperating procedures, rules forliability, etc., were established in 1975 and the first message was sent in 1977. SWIFT's first United States operating center was inaugurated by GovernorJohn N. Daltonof Virginia in 1979.[6]StandardsSWIFT has become the industry standard for syntax in financial messages. Messages formatted to SWIFT standards can be read by, and processed by, many well-known financial processing systems, whether or not the message traveled over the SWIFT network. SWIFT cooperates with international organizations for defining standards for message format and content. SWIFT is alsoRegistration authority(RA) for the followingISOstandards:

ISO 9362: 1994 BankingBanking telecommunication messagesBank identifier codes ISO 10383: 2003 Securities and related financial instrumentsCodes for exchanges and market identification (MIC) ISO 13616: 2003IBANRegistry ISO 15022: 1999 SecuritiesScheme for messages (Data Field Dictionary) (replaces ISO 7775) ISO 20022-1: 2004 and ISO 20022-2:2007 Financial servicesUNIversal Financial Industry message schemeInRFC3615urn:swift:was defined asUniform Resource Names(URNs) for SWIFT FIN.Operations centersThe SWIFT secure messaging network is run from two redundantdata centers, one in theUnited Statesand one in theNetherlands. These centers share information in near real-time. In case of a failure in one of the data centers, the other is able to handle the traffic of the complete network.SWIFT opened a third data center inSwitzerland, which started operating in 2009.Since then, data from European SWIFT members are no longer mirrored to the U.S. data center. The distributed architecture partitions messaging into two messaging zones: European and Trans-Atlantic.European zone messages are stored in the Netherlands and in a part of the Switzerland operating center; Trans-Atlantic zone messages are stored in the United States and in a part of the Switzerland operating center that is segregated from the European zone messages. Countries outside of Europe were by default allocated to the Trans-Atlantic zone but could choose to have their messages stored in the European zone.SWIFTNet networkSWIFT moved to its current IP network infrastructure, known as SWIFTNet, from 2001 to 2005,providing a total replacement of the previousX.25infrastructure. The process involved the development of new protocols that facilitate efficient messaging, using existing and new message standards. The adopted technology chosen to develop the protocols wasXML, where it now provides a wrapper around all messages legacy or contemporary. The communication protocols can be broken down into:InterAct SWIFTNet InterAct Realtime SWIFTNet InterAct Store and ForwardFileAct SWIFTNet FileAct Realtime SWIFTNet FileAct Store and ForwardBrowse SWIFTNet Browse

ArchitectureSWIFT provides a centralized store-and-forward mechanism, with some transaction management. For bank A to send a message to bank B with a copy or authorization with institution C, it formats the message according to standard and securely sends it to SWIFT. SWIFT guarantees its secure and reliable delivery to B after the appropriate action by C. SWIFT guarantees are based primarily on high redundancy of hardware, software, and people.SWIFTNet Phase 2During 2007 and 2008, the entire SWIFT Network migrated its infrastructure to a new protocol called SWIFTNet Phase 2. The main difference between Phase 2 and the former arrangement is that Phase 2 requires banks connecting to the network to use aRelationship Management Application (RMA)instead of the formerBilateral key exchange(BKE) system. According to SWIFT's public information database on the subject, RMA software should eventually prove more secure and easier to keep up-to-date; however, converting to the RMA system meant that thousands of banks around the world had to update their international payments systems to comply with the new standards. RMA completely replaced BKE on 1 January 2009.Products and interfacesSWIFT means several things in the financial world:1. asecure networkfor transmitting messages between financial institutions;2. a set of syntax standards for financial messages (for transmission over SWIFTNet or any other network)3. a set of connection software and services allowing financial institutions to transmit messages over SWIFT network.Under 3 above, SWIFT providesturn-keysolutions for members, consisting oflinkage clientsto facilitate connectivity to the SWIFT network andCBTs or 'computer based terminals'which members use to manage the delivery and receipt of their messages. Some of the more well-known interfaces and CBTs provided to their members are: SWIFTNet Link (SNL) software which is installed on the SWIFT customer's site and opens a connection to SWIFTNet. Other applications can only communicate with SWIFTNet through the SNL. Alliance Gateway (SAG) software with interfaces (e.g., RAHA = Remote Access Host Adapter), allowing other software products to use the SNL to connect to SWIFTNet Alliance WebStation (SAB) desktop interface for SWIFT Alliance Gateway with several usage options:1. administrative access to the SAG2. direct connection SWIFTNet by the SAG, to administrate SWIFT Certificates3. so-called Browse connection to SWIFTNet (also by SAG) to use additional services, for example Target2 Alliance Access (SAA) is the main messaging software by SWIFT, which allows message creation only forFIN messages, but routing and monitoring for FIN andMX messages. The main interfaces are FTA (files transfer automated, not FTP) and MQSA, aWebSphere MQinterface. The Alliance Workstation (SAW) is the desktop software for administration, monitoring and FIN message creation. Since Alliance Access is not yet capable of creating MX messages, Alliance Messenger (SAM) has to be used for this purpose. Alliance Web Platform (SWP) as new thin-client desktop interface provided as an alternative to existing Alliance WebStation, Alliance Workstation (soon) and Alliance Messenger. Alliance Integrator built onOracle'sJava Capswhich enables customer's back office applications to connect to Alliance Access or Alliance Entry. Alliance Lite2 is a secure and reliable, cloud-based way to connect to the SWIFT network which is a Lite version of Alliance Access specifically targeting customers with low volume of traffic.ServicesThere are four key areas that SWIFT services fall under in the financial marketplace:Securities,Treasury&Derivatives,Trade ServicesandPayments & Cash Management.Securities SWIFTNet FIX (obsolete) SWIFTNet Data Distribution SWIFTNet Funds SWIFTNet Accord for SecuritiesTreasury & Derivatives SWIFTNet Accord for Treasury SWIFTNet Affirmations SWIFTNet CLS Third Party ServiceCash Management SWIFTNet Bulk Payments SWIFTNet Cash Reporting SWIFTNet Exceptions and InvestigationsTrade Services SWIFTNetTrade Services Utility

SWIFTREFSWIFTRef, the global payments reference data utility, is SWIFTs unique reference data service. SWIFTRef sources data direct from data originators, including central banks, code issuers and banks making it easy for issuers and originators to maintain data regularly and thoroughly. SWIFTRef constantly validates and cross-checks data across the different data sets.[12]SWIFTNet Mail[SWIFT offers a secure person-to-person messaging service,SWIFTNet Mail, which went live on 16 May 2007.[13]SWIFT clients can configure their existing email infrastructure to pass email messages through the highly secure and reliable SWIFTNet network instead of the open Internet. SWIFTNet Mail is intended for the secure transfer of sensitive business documents, such as invoices, contracts and signatories, and is designed to replace existing telex and courier services, as well as the transmission of security-sensitive data over the open Internet. Seven financial institutions, includingHSBC,FirstRand Bank,Clear stream,DnB NOR,Nedbank,and Standard Bank of South Africa, as well as SWIFT piloted the service.[14]United States of America government involvement in SWIFT mattersTerrorist Finance Tracking Program

A series of articles published on 23 June 2006, byThe New York Times,The Wall Street JournalandThe Los Angeles Timesrevealed that theUS Treasury Departmentand the USACentral Intelligence Agency (CIA)and otherUnited States of America governmentagencies had a program to access the SWIFT transaction database after the11 September attackscalled theTerrorist Finance Tracking Program.[15]After these articles, SWIFT quickly came under pressure for compromising the data privacy of its customers by letting foreign government (United States government) agencies access sensitive personal data. In September 2006, the Belgian government declared that the SWIFT dealings with USA government authorities were a breach of Belgian andEuropeanprivacy laws.In response, SWIFT is in the process of improving its architecture to satisfy member privacy concerns by implementing the new distributed architecture with a two-zone model for storing messages (seeOperations centers).Concurrent to this process, theEuropean Unionnegotiated an agreement with theUnited States Governmentto permit the transfer of intra-EU SWIFT transaction information to the United States under certain circumstances. Due to concerns about its potential contents, theEuropean Parliamentadopted a position statement in September 2009, demanding to see the full text of the agreement, and requesting that it be fully compliant with EU privacy legislation, with appropriate oversight mechanisms in place to ensure that all data requests were handled appropriately.[16]An interim agreement was signed without European Parliamentary approval by theEuropean Councilon 30 November 2009,[17]the day before theLisbon Treatywhich would have prohibited such an agreement from being signed under the terms of theCodecision procedureformally came into effect. While the interim agreement was scheduled to come into effect on 1 January 2010, the text of the agreement was classified as "EU Restricted" until translations could be provided in all EU languages and published on 25 January 2010.On 11 February 2010, the European Parliament decided to reject the interim agreement between the EU and the USA with 378 to 196 votes.[18][19]One week earlier, the parliament's civil liberties committee already rejected the deal, citing legal reservations.In March 2011, it was reported that two mechanisms of data protection had failed:EUROPOLreleased a report complaining that the USA's requests for information had been too vague (making it impossible to make judgments on validity)and that the guaranteed right for European citizens to know whether their information had been accessed by USA authorities had not been put into practice.Iran sanctionsIn January 2012, the advocacy groupUnited Against Nuclear Iran(UANI) implemented a campaign calling on SWIFT to end all relations with Iran's banking system, including theCentral Bank of Iran. UANI asserted that Iran's membership in SWIFT violated U.S. and EU financial sanctions against Iran as well as SWIFT's own corporate rules.[22]Consequently, in February 2012, theU.S. Senate Banking Committeeunanimously approved sanctions against SWIFT aimed at pressuring the Belgian financial telecommunications network to terminate its ties with blacklisted Iranian banks. Expelling Iranian banks from SWIFT would potentially deny Iran access to billions of dollars in revenue and spending using SWIFT but not from usingIVTS.Mark Wallace, president of UANI, praised the Senate Banking Committee.[23]Initially SWIFT denied it was acting illegally,[23]but now says "it is working with U.S. and European governments to address their concerns that its financial services are being used by Iran to avoid sanctions and conduct illicit business."[24]Targeted banks would be amongst others Saderat Bank of Iran,Bank Mellat,Post Bank of IranandSepah Bank.[25]On 17 March 2012, following agreement two days earlier between all 27 member states of theCouncil of the European Unionand the Council's subsequent ruling, SWIFT disconnected all Iranian banks from its international network that had been identified as institutions in breach of current EU sanctions and warned that even more Iranian financial institutions could be disconnected from the network.US control over transactions within the European Union[edit]On 26 February 2012 theDanishnewspaperBerlingskereported that US authorities evidently have sufficient control over SWIFT to seize money being transferred between two EU countries (Denmark and Germany), since they have seized around US$26,000 which were being transferred from a Danish businessman to aGermanbank. The money was a payment for a batch ofCuban cigarspreviously imported to Germany by a German supplier. As justification for the seizure, theU.S. Treasuryhas stated that the Danish businessman had violated theUnited States embargo against Cuba.[26]Monitoring of SWIFT transactions by the National Security Agency (NSA)[edit]Der Spiegelreported in September 2013 that theNSAwidely monitors banking transactions via SWIFT, as well as credit card transactions.[27]The NSA intercepted and retained data from the SWIFT network used by thousands of banks to securely send transaction information. SWIFT was named as a "target," according to documents leaked byEdward Snowden. The documents reveal that the NSA spied on SWIFT using a variety of methods, including reading "SWIFT printer traffic from numerous banks."[27]Use in SanctionsAs mentioned above SWIFT has disconnected all Iranian banks from its international network as a sanction against Iran. Similarly, in August 2014 the U.K. planned to press the EU to block Russian use of SWIFT as a sanction due to allegedRussia's involvement in the conflict in Ukraine

Interbank lending marketTheinterbank lending marketis a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at theinterbank rate(also called theovernight rateif the term of the loan is overnight). Low transaction volume in this market was a major contributing factor to thefinancial crisis of 2007.Banks are required to hold an adequate amount ofliquid assets, such ascash, to manage any potentialbank runsby clients. If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such asreserve requirements. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. There is a wide range of published interbank rates, including thefederal funds rate(USA), theLIBOR(UK) and theEuribor(Eurozone).

Interbank segment of the money marketThe interbank lending market refers to the subset of bank-to-bank transactions that take place in the money market.Themoney marketis a subsection of the financial market in which funds are lent and borrowed for periods of one year or less. Funds are transferred through the purchase and sale ofmoney market instrumentshighly liquid short-term debt securities. These instruments are considered cash equivalents since they can be sold in the market easily and at low cost. They are commonly issued in units of at least one million and tend to have maturities of three months or less. Since activesecondary marketsexist for almost all money market instruments, investors can sell their holdings prior to maturity. The money market is anover-the-counter(OTC) market.Banksare key players in several segments of the money market. To meet reserve requirements and manage day-to-day liquidity needs, banks buy and sell short-term uncollateralized loans in thefederal funds market. For longer maturity loans, banks can tap theEurodollarmarket. Eurodollars are dollar-denominated deposit liabilities of banks located outside the United States (or ofInternational Banking Facilitiesin the United States). US banks can raise funds in the Eurodollar market through their overseas branches and subsidiaries. A second option is to issue large negotiablecertificates of deposit(CDs). These are certificates issued by banks which state that a specified amount of money has been deposited for a period of time and will be redeemed with interest at maturity.Repurchase agreements(repos) are yet another source of funding. Repos and reverse repos are transactions in which a borrower agrees to sell securities to a lender and then to repurchase the same or similar securities after a specified time, at a given price, and including interest at an agreed-upon rate. Repos are collateralized orsecured loansin contrast to federal funds loans which are unsecured.

Role of interbank lending in the financial systemTo support the fractional reserve banking modelThe creation of credit and transfer of the created funds to another bank, creates the need for the 'net-lender' bank to borrow to cover short term withdrawal (by depositors) requirements. This results from the fact that the initially created funds have been transferred to another bank. If there was (conceptually) only one commercial bank then all the new credit (money) created would be redeposited in that bank (or held as physical cash outside it) and the requirement for interbank lending for this purpose would reduce. (In afractional reserve bankingmodel it would still be required to address the issue of a 'run' on the bank concerned).A source of funds for banksInterbank loans are important for a well-functioning and efficient banking system. Since banks are subject to regulations such as reserve requirements, they may face liquidity shortages at the end of the day. The interbank market allows banks to smooth through such temporary liquidity shortages and reduce 'funding liquidity risk'.Funding liquidity riskFunding liquidity risk captures the inability of a financial intermediary to service its liabilities as they fall due. This type of risk is particularly relevant for banks since their business model involves funding long-term loans through short-term deposits and other liabilities. The healthy functioning of interbank lending markets can help reduce funding liquidity risk because banks can obtain loans in this market quickly and at little cost. When interbank markets are dysfunctional or strained, banks face a greater funding liquidity risk which in extreme cases can result in insolvency.Longer-term trends in banks' sources of fundsIn the past,checkable depositswere US banks most important source of funds; in 1960, checkable deposits comprised more than 60 percent of banks total liabilities. Over time, however, the composition of banks balance sheets has changed significantly. In lieu of customer deposits, banks have increasingly turned to short-term liabilities such ascommercial paper(CP),certificates of deposit(CDs),repurchase agreements(repos), swapped foreign exchange liabilities, and brokered deposits.Benchmarks for short-term lending ratesInterest rates in the unsecured interbank lending market serve as reference rates in the pricing of numerous financial instruments such asfloating rate notes(FRNs),adjustable-rate mortgages(ARMs), andsyndicated loans. These benchmark rates are also commonly used in corporate cashflow analysis as discount rates. Thus, conditions in the unsecured interbank market can have wide-reaching effects in the financial system and the real economy by influencing the investment decisions of firms and households.Efficient functioning of the markets for such instruments relies on well-established and stable reference rates. The benchmark rate used to price many US financial securities is the three-month US dollar Libor rate. Up until the mid-1980s, the Treasury bill rate was the leading reference rate. However, it eventually lost its benchmark status to Libor due to pricing volatility caused by periodic, large swings in the supply of bills. In general, offshore reference rates such as the US dollar Libor rate are preferred to onshore benchmarks since the former are less likely to be distorted by government regulations such ascapital controlsanddeposit insurance.Monetary policy transmissionCentral banks in many economies implementmonetary policyby manipulating instruments to achieve a specified value of an operating target. Instruments refer to the variables that central banks directly control; examples includereserve requirements, the interest rate paid on funds borrowed from the central bank, and balance sheet composition. Operating targets are typically measures ofbank reservesor short-term interest rates such as the overnight interbank rate. These targets are set to achieve specified policy goals which differ across central banks depending on their specific mandates.1US federal funds marketUS monetary policyimplementation involves intervening in the unsecured interbank lending market known as the fed funds market.Federal funds(fed funds) are uncollateralized loans of reserve balances atFederal Reserve banks. The majority of lending in the fed funds market is overnight, but some transactions have longer maturities. The market is anover-the-counter(OTC) market where parties negotiate loan terms either directly with each other or through a fed funds broker. Most of these overnight loans are booked without a contract and consist of a verbal agreement between parties. Participants in the fed funds market include:commercial banks,savings and loan associations, branches of foreign banks in the US, federal agencies, andprimary dealers.Depository institutionsin the US are subject toreserve requirements, regulations set by theBoard of Governors of the Federal Reservewhich oblige banks to keep a specified amount of funds (reserves) in their accounts at the Fed as insurance against deposit outflows and other balance sheet fluctuations. It is common for banks to end up with too many or too few reserves in their accounts at the Fed. Up until October 2008, banks had the incentive to lend out idle funds since the Fed did not payinterest on excess reservesInterest rate channel of monetary policyTheinterest rate channelof monetary policy refers to the effect of monetary policy actions on interest rates that influence the investment and consumption decisions of households and businesses. Along this channel, the transmission of monetary policy to the real economy relies on linkages between central bank instruments, operating targets, and policy goals. For example, when the Federal Reserve conductsopen market operationsin the federal funds market, the instrument it is manipulating is itsholdings of government securities. The Fed's operating target is the overnight federal funds rate and its policy goals are maximum employment, stable prices, and moderate long-term interest rates. For the interest rate channel of monetary policy to work, open market operations must affect the overnight federal funds rate which must influence the interest rates on loans extended to households and businesses.As explained in the previous section, many US financial instruments are actually based on the US dollar Libor rate, not the effective federal funds rate. Successful monetary policy transmission thus requires a linkage between the Fed's operating targets and interbank lending reference rates such as Libor. During the 2007 financial crisis, a weakening of this linkage posed major challenges for central banks and was one factor that motivated the creation of liquidity and credit facilities. Thus, conditions in interbank lending markets can have important effects on the implementation and transmission of monetary policy.Strains in interbank lending markets during the 2007 financial crisisBy mid-2007, cracks started to appear in markets forasset-backed securities. For example, in June 2007,ratings agenciesdowngraded over 100 bonds backed by second-liensubprime mortgages. Soon after, the investment bankBear Stearnsliquidated twohedge fundsthat had invested heavily inmortgage-backed securities(MBS) and a few large mortgage lenders filed for Chapter 11 bankruptcy protection. Strains in interbank lending markets became apparent on August 9, 2007, afterBNP Paribasannounced that it was halting redemptions on three of its investment funds. That morning the US dollar Libor rate climbed over 10 basis points (bps) and remained elevated thereafter. The US Libor-OIS spread ballooned to over 90bps in September whereas it had averaged 10bps in prior months.At the following FOMC meeting (September 18, 2007), the Fed started to ease monetary policy aggressively in response to the turmoil in financial markets. In the minutes from the September FOMC meeting, Fed officials characterize the interbank lending market as significantly impaired:Banks took measures to conserve their liquidity and were cautious about counterparties exposures to asset-backed commercial paper. Term interbank funding markets were significantly impaired, with rates rising well above expected future overnight rates and traders reporting a substantial drop in the availability of term funding.By the end of 2007, the Federal Reserve had cut the fed funds target rate by 100bps and initiated severalliquidity-providing programsand yet the Libor-OIS spread remained elevated. Meanwhile, for most of 2008, term funding conditions remained stressed. In September 2008, when the US government decided not to bail out the investment bankLehman Brothers, credit markets went from being strained to completely broken and the Libor-OIS spread blew out to over 350bps.Possible explanations[edit]Increase in counterparty risk[edit]An increase incounterparty riskreduces lending banks expected payoffs from providing unsecured funds to other banks and thus lowers their incentive to transact with one another. This is a result from Stiglitz and Weiss (1981): the expected return on a loan to a bank is a decreasing function of the riskiness of the loan. Stiglitz and Weiss also show that increases in funding costs can lead safe borrowers to drop out of the market, making the remaining pool of borrowers more risky. Thus, adverse selection may have exacerbated strains in interbank lending markets once Libor rates were on the rise.The market environment at the time was not inconsistent with an increase in counterparty risk and a higher degree ofinformation asymmetry. In the second half of 2007, market participants and regulators started to become aware of the risks in securitized products and derivatives. Many banks were in the process of writing down the values of their mortgage-related portfolios. House prices were falling all over the country and the ratings agencies had just started to downgrade subprime mortgages. Concerns aboutstructured investment vehicles(SIVs) andmortgage and bond insurerswere growing. Moreover, there was very high uncertainty about how to value complex securitized instruments and where in the financial system these securities were concentrated.Liquidity hoardingAnother possible explanation for the seizing up of interbank lending is that banks were hoarding liquidity in anticipation of future shortages. Two modern features of the financial industry suggest this hypothesis is not implausible. First, banks have come to rely much less on deposits as a source of funds and more on short-term wholesale funding (brokered CDs,asset-backed commercial paper (ABCP), interbankrepurchase agreements, etc.). Many of these markets came under stress during the early phase of the crisis, particularly the ABCP market. This meant banks had fewer sources of funds to turn to, although an increase in retail deposits over this period provided some offset.Second, it has become common for corporations to turn to markets rather than banks for short-term funding. In particular, before the crisis firms were regularly tapping commercial paper markets for funds. These corporations still had lines of credit set up with banks, but they used them more as a source of insurance. After the near collapse of the commercial paper market, however, firms took advantage of this insurance and banks had no choice but to provide the liquidity. Thus, firms use of credit lines during the crisis increased illiquidity risks for banks. Lastly, banks off-balance sheet programs (SIVs for example) relied on short-term ABCP to operate; when this market dried up, banks in some cases had to take the assets from these vehicles onto their balance sheets. All of these factors made liquidity risk management especially challenging during this time.

INTERBANK MOBILE PAYMENT SERVICE1. What is IMPS?Interbank Mobile Payment Service (IMPS) is an instant interbank electronic fund transfer service through mobile phones. IMPS facilitate customers to use mobile instruments as a channel for accessing their banks accounts and remitting funds therefrom.Inter Mobile Payment System (IMPS)Immediate Payment Service (IMPS) is an initiative ofNational Payments Corporation of India (NPCI). It is a service through which money can be transferred immediately from one account to the other account, within the same bank or accounts across other banks. Upon registration, both the individuals are issued an MMID(Mobile Money Identifier) Code from their respective banks. This is a 7 digit numeric code. To initiate the transaction, the sender in his mobile banking application need to enter the registered mobile number of the receiver, MMID of the receiver and amount to be transferred. Upon successful transaction, the money gets credited in the account of the receiver instantly. This facility is available 24X7 and can be used through mobile banking application. Some banks have also started providing this service through internet banking profile of their customers. Though most banks offer this facility free of cost to encourage paperless payment system, ICICI bank and Axis bank charge for it as per their respectiveNEFTcharges.Nowadays, money through this service can be transferred directly also by using the receiver's bank account number andIFS code. In such case, neither the receiver of the money need to be registered for mobile banking service of his bank, nor does he need MMID code. IMPS facility differs fromNEFTandRTGSas there is no time limit to carry out the transaction. This facility can be availed 24X7 and on all public and bank holidays including RBI holiday

Currently majority of interbank mobile fund transfer transactions are channelised through NEFT mechanism. Under NEFT, the transactions are processed and settled in batches, hence are not real time. Also, the transactions can be done only during the working hours of the RTGS system.

To overcome the above constraint, National Payments Corporation of India (NPCI) has introduced Interbank Mobile Payment Service (IMPS) from 22nd November 2010 after carrying out a pilot study involving some select banks. IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones.

IMPS facilitate customers to use mobile instruments as a channel for accessing their bank accounts and put high interbank fund transfers in a secured manner with immediate confirmation features. This facility is provided by NPCI through its existing NFS switch.

The eligible criteria for the Banks who can participate in IMPS is as follows Bank should be member of National Financial Switch (NFS) driven by NPCI Bank should have approval from RBI for Mobile Banking Service

Objectives of this method: To enable bank customers to use mobile instruments as a channel for accessing their banks accounts and remit funds Making payment simpler just with the mobile number of the beneficiary To sub-serve the goal of electronification of retail payments To facilitate mobile payment systems to be inter-operable across banks and mobile operators in a safe and secured manner To build the foundation for a full range of mobile based Banking services.

Participants in the transaction will be:

Remitter (Sender) Beneficiary (Receiver) Banks National Financial Switch - NPCI

Procedure:Remitter:Remitter is required to register for mobile banking service with his bank and obtain Mobile Money Identifier (MMID) and MPIN from the bank Download Software (Application) for mobile banking (ensuring compatibility of mobile with the application) or using the SMS facility in the mobile if bank provides IMPS on SMS

Beneficiary: Beneficiary has to link his/her mobile number to the account in the respective bank and obtain Mobile Money Identifier (MMID) from the bank. There is no need to register for mobile banking service.

To send money: Remitter to login to the application and select the IMPS menu from the IMPS or use the SMS facility in his/her mobile if bank provides IMPS on SMS Get Beneficiary Mobile number and MMID Enter Beneficiary Mobile number, beneficiary MMID, Amount and his/her MPIN to send Await confirmation SMS for the debit in his/her account and credit in beneficiary account Note the transaction reference number for any future query

To receive money: Beneficiary is required to share his/her Mobile number and MMID with the remitter Ask the remitter to send money using your Mobile number and MMID Check the confirmation SMS for credit to his/her account from the remitter Note the transaction reference number for any future query

2. Presently, how are interbank fund transfers made using mobile phone?Various banks are providing remittance facility through their mobile banking platforms. The interbank remittance request initiated from a mobile is processed by the beneficiary bank as a National Electronic Fund Transfer (NEFT) transaction. The status of such payment request is therefore not known instantly because NEFT payments are processed in batches from 9 am to 7 pm. The NEFT transactions are charged by banks and charges vary from bank to bank3. Does the customer need to have a bank account for availing IMPS?Yes, the customer needs to have a bank account with the bank which has enabled this facility.4. Does the customer need to register to remit the funds through IMPS?Yes. Customer should enroll for Mobile Banking Service with the bank where customer has an account. The registration process shall be as per their banks laid down procedures.5. Is the beneficiary customer also required to register for IMPS?The beneficiary customer should have their mobile numbers registered with the bank where he/she maintain the account and where he intends to receive thecreditand should have a valid MMID provided by the bank. No need to specifically enroll for Mobile Banking Service of the bank.6. What beneficiary details does the customer need to affect an IMPS remittance?The beneficiary details required are:a. Beneficiarys mobile numberb. MMID of the beneficiary customer7. What is MMID?MobileMoneyIdentifier (MMID)is a seven digit random number issued by the bank upon registration. Remitter (customer who wants tosend money) and Beneficiary (customer who wants to receive the money) should have this MMID for doing this interbank funds transfer.8. Can a customer linkmorethan one account to the same mobile number?Yes. The customer can link the same mobile number to more than one account subject to bank offering that feasibility.9. Incase if the customer has more than one account linked to his / her mobile number how does he select the account from which he / she intends to pay?The bank will allocate a Mobile Money Identifier (MMID) for each account of the mobile banking customers. The customer can select the account using this MMID allocated to him / her.The combination of mobile number and MMID helps as a mistake proofing step for the remitter and tries to mitigate the risk of wrong credit incase the remitter enters erroneous mobile number.10. What is the Process flow of IMPS?Step 1:Remitter sends instruction from his/her mobile through his/her bank provided application or SMS.Step 2:Remitting bank validates the details of the remitter and debits his/ her account. This transaction is sent by the remitting bank to NPCI.Step 3:Transaction is passed by NPCI to the beneficiary bank. Beneficiary Bank validates the details of the beneficiary customer, credits the account, sends confirmation NPCI about transaction status and sends a SMS to the beneficiary customer informing him of the credit.Step 4:NPCI sends the transaction status to remitting bank which in turn informs the status of the transaction to the Remitter.Step 5:Remitting bank send a SMS confirmation of the transaction to the remitting customer.11. Is there any limit on the value of transactions in IMPS?The limit is defined by RBI in the Mobile Payment Guidelines issued to banks. The customer can transact on IMPS subject to a daily cap of ` 50,000/- per customer overall for transactions through mobile for the funds transfer. Transactions up to `5000/- (RBI Circular No. RBI/2010-11/511 DPSS.CO.No.2502 /02.23.02/ 2010-11) can be facilitated by banks without end-to-end encryption.

12. Does the customer require a mobile handset of a particular model or make or features to enable this service?It depends on the banks mobile banking interface requirements. This varies from bank to bank. The details can be obtained by the respective banks.13. What can a customer does in case he / she is not able to install the mobile banking application on his mobile handset?In case the customer is not able to install the mobile banking application on the mobile handset or the application is not functioning as desired, the customer may need to update the software on the mobile handset and re-install the mobile banking application on the same. If the problem is not resolved, the customer should then contact the helpdesk of the bank whose mobile banking facility the customer intends to use.14. Can we withdraw and / or deposit money using IMPS?Presently, the customers cannot withdraw and / or deposit money using IMPS.15. What if IMPS registered mobile is lost or misplaced? Will anyone who comes into possession of mobile be able to make a remittance from customers account?At the time of mobile banking registration, bank would provide the customer with a User id and MPIN (Mobile Personal Identification Number) for accessing the mobile banking facility. An IMPS remittance will not be possible without these two inputs.16. What happens in case the remitter enters a wrong beneficiary mobile number for remittance?The beneficiary details required for making a remittance are mobile number and MMID. The transaction will get declined in case anyone of these two numbers is erroneous and transaction gets reversed instantly.17. What are the timings for initiating and receiving IMPS remittances?IMPS transactions can be sent and received at any time and any day. There are no timing or holiday restrictions on IMPS remittances.18. If the transaction is not completed will the customer get his / her money back? When?Yes. In case for any reason, technical or business, the IMPS transaction is not completed the reversal of the remitters funds will happen immediately. In case if such a transaction becomes a subject to reconciliation wherein the status of transaction is not determined immediately, the reversal of funds will happen on the next working day.19. What are the charges for the customer for sending and receiving remittances using IMPS?The charges for remittance through IMPS are decided by the individual banks. Please contact your bank for the details.20. Are there any subscription charges for the customers to avail this facility?The charges for remittance through IMPS are decided by the individual banks.

21. How long does it take for the remittance to get credited into the beneficiary account number?The funds should be credited into the beneficiary account within 30 seconds after initiated the transaction.22. Can the remitter transfer funds from his / her to the beneficiary account in other bank?Yes, the remitting customer can transfer funds to the beneficiary account in other IMPS member banks. The list of banks offering IMPS is available on websitehttp://www.npci.org.in/bankmember.aspx23. Is it necessary to have sufficient account balance to initiate a remittance?Yes, the customer should have sufficient account balance to initiate a fund transfer.24. Is it necessary to have a minimum balance to receive funds through IMPS?This will be decided by the beneficiary bank.25. How does the remitter come to know that his account is debited and funds have been credited in the beneficiarys account?The remitting bank sends a confirmation SMS to the remitting customer about the transaction initiated by him / her.26. How does a beneficiary come to know of funds being credited to his / her banks account?The beneficiary bank sends a confirmation SMS to the beneficiary customer informing him / her of the credit in the account.27. Can a customer remit and / or receive remittance using the mobile number other than the one registered with the bank?The customer can remit and / or receive funds using the registered mobile number only. In case he / she need to remit / receive funds using the other mobile number, he / she will have to approach the bank and complete the process of changing the registered mobile number for mobile banking.28. When can the beneficiary use the funds received through IMPS?The beneficiary can use the funds immediately on receipt of credit in the account. The funds received through IMPS are good funds and can be used immediately upon credit.

According to an April 2007 report by the Bank for International Settlements, theforeign exchange markethas an average daily volume of close to $3 trillion, making it the largest market in the world. Unlike most other exchanges such as the New York Stock Exchange or the Chicago Board of Trade, the FX market is not a centralized market. In a centralized market, each transaction is recorded by price dealt and volume traded. There is usually one central place back to which all trades can be traced and there is often onespecialistormarket maker. The currency market, however, is a decentralized market. There isn't one "exchange" where every trade is recorded. Instead, each market maker records his or her own transactions and keeps it as proprietary information. The primary market makers who make bid and ask spreads in the currency market are the largest banks in the world. They deal with each other constantly either on behalf of themselves or their customers. This is why the market on which banks conduct transactions is called theinterbank market.The competition between banks ensures tight spreads and fair pricing. For individual investors, this is the source of pricequotesand is where forex brokers offset their positions. Most individuals are unable to access the pricing available on the interbank market because the customers at the interbank desks tend to include the largest mutual and hedge funds in the world as well as large multinational corporations who have millions (if not billions) of dollars. Despite this, it is important for individual investors to understand how the interbank market works because it is one the best ways to understand how retail spreads are priced, and to decide whether you are getting fair pricing from your broker. Read on to find out how this market works and how its inner workings can affect yourinvestments.Who makes the prices?Trading in a decentralized market has its advantages and disadvantages. In a centralized market, you have the benefit of seeingvolumein the market as a whole but at the same time, prices can easily be skewed to accommodate the interests of the specialist and not the trader. The international nature of the interbank market can make it difficult to regulate, however, with such important players in the market, self-regulation is sometimes even more effective than government regulations. For the individual investor, a forex broker must be registered with theCommodity Futures Trading Commissionas a futures commission merchant and be a member of theNational Futures Association(NFA). The CFTC regulates the broker and ensures that he or she meets strict financial standards. (For more insight on determining whether you're getting a fair price from your broker, readIs Your Forex Broker A Scam?andPrice Shading In The Forex Markets.)Most of the total forex volume is transacted through about 10 banks. These banks are the brand names that we all know well, including Deutsche Bank (NYSE:DB), UBS (NYSE:UBS), Citigroup (NYSE:C) and HSBC (NYSE:HBC). Each bank is structured differently but most banks will have a separate group known as the Foreign Exchange Sales and Trading Department. This group is responsible for making prices for the bank's clients and for offsetting that risk with other banks. Within the foreign exchange group, there is a sales and a trading desk. The sales desk is generally responsible for taking the orders from the client, getting a quote from thespot traderand relaying the quote to the client to see if they want to deal on it. This three-step process is quite common because even though online foreign exchangetradingis available, many of the large clients who deal anywhere from $10 million to $100 million at a time (cash on cash), believe that they can get better pricing dealing over the phone than over the trading platform. This is because most platforms offered by banks will have a trading size limit because the dealer wants to make sure that it is able to offset the risk.On a foreign exchange spot trading desk, there are generally one or two market makers responsible for eachcurrency pair. That is, for theEUR/USD, there is only one primary dealer that will give quotes on the currency. He or she may have a secondary dealer that gives quotes on a smaller transaction size. This setup is mostly true for the four majors where the dealers see a lot of activity. For the commodity currencies, there may be one dealer responsible for all three commodity currencies or, depending upon how much volume the bank sees, there may be two dealers.This is important because the bank wants to make sure that each dealer knows its currency well and understands the behavior of the other players in the market. Usually, the Australian dollar dealer is also responsible for the New Zealand dollar and there is often a separate dealer making quotes for the Canadian dollar. There usually isn't a "crosses" dealer - the primary dealer responsible for the more liquid currency will make the quote. For example, the Japanese yen trader will make quotes on all yen crosses. Finally, there is one additional dealer that is responsible for the exotic currencies such as the Mexican peso and the South African rand. This setup is usually mimicked across three trading centers - London, New York and Tokyo. Each center passes the client orders and positions to another trading center at the end of the day to ensure that client orders are watched 24 hours a day. (To continue reading about currency crosses, seeMake The Currency Cross Your BossandIdentifying Trending & Range-Bound Currencies.)How do banks determine the price?Bank dealers will determine their prices based upon a variety of factors including, the current market rate, how much volume is available at the current price level, their views on where the currency pair is headed and their inventory positions. If they think that the euro is headed higher, they may be willing to offer a more competitive rate for clients who want to sell euros because they believe that once they are given the euros, they can hold onto them for a fewpipsand offset at a better price. On the flip side, if they think that the euro is headed lower and the client is giving them euros, they may offer a lower price because they are not sure if they can sell the euro back to the market at the same level at which it was given to them. This is something that is unique to market makers that do not offer a fixed spread.How does a bank offset risk?Similar to the way we see prices on an electronicforex broker's platform, there are two primary platforms that interbank traders use: one is offered by Reuters Dealing and the other is offered by the Electronic Brokerage Service (EBS).The interbank market is a credit-approved system in which banks trade based solely on the credit relationships they have established with one another. All of the banks can see the best market rates currently available; however, each bank must have a specific credit relationship with another bank in order to trade at the rates being offered. The bigger the banks, the more credit relationships they can have and the better pricing they will be able access. The same is true for clients such as retail forex brokers. The larger the retail forex broker in terms of capital available, the more favorable pricing it can get from the interbank market. If a client or even a bank is small, it is restricted to dealing with only a select number of larger banks and tends to get less favorable pricing.

Both the EBS and Reuters Dealing systems offer trading in the major currency pairs, but certain currency pairs are more liquid and are traded more frequently over either EBS or Reuters Dealing. These two companies are continually trying to capture each other's market shares, but as a guide, the following is the breakdown where each currency pair is primarily traded:EBSReuters

EUR/USDGBP/USD

USD/JPYEUR/GBP

EUR/JPYUSD/CAD

EU

studies on interbanking transactions

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bank transfer rtgs

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reserve bank of india