Understanding the Benefits of Real-Time Gross Settlement(RTGS)
Real-time gross settlement (RTGS) is a system that allows financial institutions to settle transactions with each other in real-time. This system has numerous benefits, which is why it has become increasingly popular in recent years.
In this article, we will discuss the benefits of RTGS and explain why it is such an important system for the modern economy.
So, what exactly is RTGS?
In order to understand the benefits of RTGS, it is first necessary to understand what the system is and how it works. As mentioned earlier, it is a payment system that facilitates the transfer of funds between financial institutions in real time. This means that the funds are settled immediately, without any delays.
One of the most important features of RTGS is that it is a gross system. This means that each transaction is settled independently of all other transactions. This is in contrast to netting, which involves consolidating multiple transactions into a single settlement.
The advantage of gross settlement is that it minimises counterparty risk. This is because each transaction is settled individually, so there is no risk that one party will not be able to meet its obligations. This is a particularly important consideration in the current economic climate, where counterparty risk has become a major concern.
Why is RTGS important?
RTGS is an important system because it provides a number of benefits, which we will discuss in more detail below.
1. Improved efficiency – One of the most significant benefits of RTGS is that it improves efficiency. This is because the system eliminates the need for manual processing and settlement of transactions. This truly saves time and reduces the likelihood of errors. In addition, RTGS allows for the automation of many back-office processes, which further increases efficiency.
2. Reduced costs – Another benefit of RTGS is that it can help to reduce costs. This is because the system eliminates the need for paper-based transactions and the associated costs, such as postage and printing. RTGS can also help to reduce the costs of compliance with financial regulations.
3. Improved liquidity – RTGS improves liquidity by providing real-time settlement of transactions. This means that funds are available immediately, which can help to avoid delays in the payment of salaries or invoices. Additionally, improved liquidity can help to reduce borrowing costs.
4. Improved risk management – RTGS also provides improved risk management by reducing counterparty risk. As we mentioned above, this is because each transaction is settled individually, so there is no risk that one party will not be able to meet its obligations. This is a particularly important consideration in the current economic climate, where counterparty risk has become a major concern.
Summary
In conclusion, RTGS is a system that allows financial institutions to settle transactions with each other in real time. This system has numerous benefits, which is why it has become increasingly popular in recent years. In this article, we have discussed the benefits of RTGS and explained why it is such an important system for the modern economy.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
