Payment and Settlement Systems

Overview

A payment system has three steps: payment instruction, clearing (exchanging and netting instructions between banks) and settlement (final transfer of funds, usually across accounts at the central bank). Developing a secure, healthy and efficient payment system is a statutory objective of Nepal Rastra Bank (NRB). Under the Payment and Settlement Act, 2075, NRB's Payment Systems Department licenses payment system operators (PSOs) and payment service providers (PSPs) and oversees them.

Cheques and clearing

A cheque drawn on one bank and deposited in another is cleared electronically through NCHL-ECC (Electronic Cheque Clearing).

• MICR: Magnetic Ink Character Recognition, the line printed at the bottom of a cheque and read by machine.
• Cheque truncation: the cheque is scanned and its image and data travel to the paying bank; the paper does not move.
• Presenting member: the bank where the cheque is deposited. Paying member: the bank on which it is drawn.
• Net Clearing Position (NCP): each member's net debit or credit at the close of a session, worked out on a multilateral basis and settled at NRB.
• Stale cheque: one presented more than six months after its date; the system rejects it. A post-dated cheque carries a future date.
• Sessions include regular, express and high-value clearing.

Nepal Clearing House Limited (NCHL)

NCHL is a public limited company established on 23 December 2008 (8 Poush 2065) under the leadership of NRB. Its shares are held by NRB, commercial banks, development banks and finance companies.

Real Time Gross Settlement (RTGS)

RTGS was launched by NRB on 15 September 2019. NRB owns, hosts and operates the central system.

• Real time: no waiting period; a payment settles as soon as it is entered, if funds are available.
• Gross: each transaction settles one by one, without netting.
• Payments are final and irrevocable once processed.
• It is meant for high-value and urgent payments and also settles the net positions of other systems such as ECC.
• Because every payment settles in central bank accounts before it reaches the receiving bank, RTGS removes the systemic settlement risk of end-of-day net settlement.
• There is no upper limit on an RTGS transaction; the paying bank only needs enough funds in its settlement account.

Cards and electronic channels

• Debit card: spends the holder's own deposit; the account is debited directly.
• Credit card: spends a credit limit given by the issuer, repaid later.
• Prepaid card: loaded with value in advance.
• Mobile and internet banking: the customer's own bank channel for transfers, bill payment and statements.
• Wallets: run by licensed PSPs.
• QR payment: the payer scans the merchant's code; interoperability comes from the NepalQR standard.

SWIFT

SWIFT is a member-owned cooperative that provides secure financial messaging between institutions worldwide. It carries instructions; it does not hold or move the funds itself. Institutions are identified by a BIC (ISO 9362) of 8 or 11 characters: four for the business party, two for the country, two for the suffix and an optional three for the branch.

Exam pointers

• Clearing is exchange and netting; settlement is final transfer.
• ECC is deferred net settlement; RTGS is gross and immediate.
• NCHL: 23 December 2008; RTGS: 15 September 2019, run by NRB.
• NCHL-IPS means direct credit and direct debit; connectIPS is the retail platform.
• Stale cheque: over six months old.
• SWIFT sends messages, not money; a BIC has 8 or 11 characters.