Manual clearance of high-volume cheques poses a greater systemic risk to the financial system, according to the central bank.
The central bank review report of National Payment System revealed that the current arrangement on high-volume cheque payment poses a systemic risk as it may cause problems for other banks, and potentially across the whole financial system, if a bank has an insufficient fund in its settlement account to cover its obligations.
Currently, cheques worth more than Rs 100 million are cleared by a special daily manual clearing session at the central bank. The central bank clears around eight cheques worth more than Rs 100 million every day on an average.
The study supported by International Financial Corporation (IFC) also concluded that measures currently in place do not actually address the problem, calling for immediate action to resolve the position rather than penalising the offending institution latter.
The manual system was considered less risky as the country has no foolproof technology to check the infringement. But if the payments are not cleared on time, which could happen due to manual system, the reputation of traders could be at risk.
The central bank is planning National Payment System Development Starategy to upgrade large-volume payment to Real Time Gross Settlement System. The strategy has proposed introduction of payment amount limits, requiring banks to maintain minimum balances, or introducing a collateral pool.
The establishment of settlement assurance procedures like cost sharing arrangements or a guarantee fund, and its associated costs, will be studied in terms of the level of systemic importance of the automated clearing house are other recommendations.
The proposed strategy has also suggested connecting Smart Choice Technologies’ (SCT) systems to Real Time Gross Settlement System to mitigate the current systemic risk. Currently, settlement is done a day after transactions through SCT that is the country’s largest card services provider, with 84 members and some 1.7 million cardholders, out of an approximately 2.5 million total cardholders in Nepal.
Regular power outage has also been identified as one of the critical problem for the IT-based payment system.
As Nepal Clearing House is also planning to come up with an idea of direct credit and direct debit facility, the proposed strategy has called for an efficient, sound and interoperable retail payment system.
However, some of the banks have already started utility payment system like telephone bill and insurance premium payment directly from the individual’s account currently.
Besides Nepal Payment System Development Strategy, the central bank is also working on Nepal Rastra Bank Payment System Oversight and Implementation of Payment System Functions: Roadmap.