RTGS Payment System Glitch – Operational Risk Vulnerabilities in India

A snarl in the real-time gross settlement (RTGS) system this past Monday, saw a few banks face a near default-like situation. This has yet again raised questions on the value and the soundness of the infrastructure supporting the Indian financial system.

RTGS, for the uninitiated is an almost instantaneous funds-transfer and settlement system. In the Indian RTGS system, it’s possible to transfer money to another bank account within a maximum of two hours. RTGS is mainly used for high-value clearing.

When contacted, a Reserve Bank of India (RBI) spokesperson said, “There was a glitch (in the system) on Monday, after we upgraded the RTGS software over the weekend.” She clarified that RBI had rectified the problem on the same day.

Bankers familiar with the RTGS system said that while clustering of payments is an often-enough occurrence (four to five times a year) this is the first instance of such large-scale malfunction. One large state-owned bank, in particular, faced an acute payment crisis that forced it to request assistance from other banks, to meet its obligations. After a considerable delay, funds were arranged.

“Many of the counterparties did not receive payment till as late as 1.00 am the next morning. And by virtue of one critical fund or counterparty not paying up, it would have had a cascading effect on other banks,” said the head of treasury at one foreign bank.

Customer payments can be processed through the RTGS facility only up to 4.30 pm on weekdays while inter-bank transactions are possible up to 6.00 pm.

People familiar with the matter maintain that central bank officials and computer staff worked towards moving the entire RTGS load to the back-up site of the system vendor. It was only after this switch that RTGS operations could be brought back on an even keel.

While some say, the incident highlights the inadequacy of the RTGS infrastructure, others were too quick to commend RBI for the promptness with which it acted to restore order. “Any system is open to the occasional risk. However, there should always be a fallback arrangement to cater to such eventualities,” said an irate banker who had to soothe quite a number of ruffled clients.

However, a section of the industry terms it as just a blip on account of the fact that RTGS users have grown many-fold. “RBI and several banks are still in the process of enhancing their servers to cater to the excess load. This has occurred, because banks have crossed normal threshold limits, hence, the bunching up of payments. However, in such times, the National Electronic Fund Transfer (NEFT) system can provide an alternate. The only difference is that the window would be slightly larger than 4-6 hours,” said a senior staff member of a leading public sector bank.

Under NEFT, the transfer takes place either on the same day or on the next day, depending on the time of instructions given. Yet, senior private sector bankers disagree. “NEFT can’t be an alibi for RTGS. The bottom-line is that any robust infrastructure should have a fall back. If this had occurred during the month end, we would have had a virtual stampede,” a senior private sector banker said.