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The NPS Seminar

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The NPS Seminar Workshop on the PNG National Payments System 30 November 2009 BANK OF PAPUA NEW GUINEA What is the National Payments System? BANK OF PAPUA NEW GUINEA The National Payments System (NPS) of a country encompasses everything to do with the movement of money from payer to payee. It covers all phases of payment from initial offer of a payment instrument to final settlement. It is the essential lubrication mechanism for the engine of the economy. BANK OF PAPUA NEW GUINEA The NPS is the infrastructure for moving money safely, efficiently and swiftly “Real” Economy (Buying & Selling) Banking System (Payment Systems) Interbank Transfer (Clearing) Systems Final Settlement BANK OF PAPUA NEW GUINEA Requirements • Speed of payment • Certainty of payment • Reliability • Safety and soundness • Reduction of risk • Convenience •Cost • Equality of access and competition • International standards BANK OF PAPUA NEW GUINEA Typical Modernisation Objectives • Provide the foundation for improved banking products and services, and geographical coverage • Ensure greater efficiency • Make maximum use of the liquidity in the banking system • Reduce risk and establish a sound risk management process • Optimise the costs of funds transfer transactions • Provide support for international funds transfers • Support a more efficient operation of the commercial and public sectors • Support the development of securities markets • Foundation for future technical developments BANK OF PAPUA NEW GUINEA Outcomes (Benefits) 1. Reduction of Risk 2. Efficiency • Speed, cost-effectiveness 3. Convenience • For business, government and citizens 4. Safety • Reduced use of cash 5. Trust • Leading to increased use of the financial system BANK OF PAPUA NEW GUINEA Components of a National Payments System • Payment Instruments • Systems • Legal and regulatory arrangements BANK OF PAPUA NEW GUINEA Payment Instruments •Cash • Paper – Cheques – Warrants • Electronic – EFTPOS – Electronic credits – Direct debits – Mobile payments BANK OF PAPUA NEW GUINEA Systems Payments Securities Markets Real Time Gross Central Securities Interbank money Settlement (RTGS) Depository (CSD) market Low Value Clearing Primary Market Forex market (LVCS) (auction) Stock Exchange Card clearing Secondary Market (trading) Central Bank Government Financial General Ledger Treasury Systems Institutions Core banking systems Cash management Customers’ accounting systems BANK OF PAPUA NEW GUINEA Linkages • A National Payments System comprises a number of individual payment systems (see previous slide) • In the past, systems were introduced piecemeal by different players • Little or no integration of systems • NPS functions more efficiently – and with less risk –if systems are linked appropriately • The modern approach is to acquire and install systems in a co-ordinated fashion, to ensure that they can interwork and exchange information as needed BANK OF PAPUA NEW 11 GUINEA General Cash Mgmt Ledger System NBFIs Treasury System BPNG (Govt.) Commercial Banks’ Systems Primary Market Auction Message handling CSD RTGS LVCS Secondary Market Stock Exchange Trading Card Clearing Centre(s) Foreign Exchange Interbank Market Money Market BANK OF PAPUA NEW GUINEA Real Time Gross Settlement (RTGS) • At the heart of a modern NPS • Mainly used for high-value, high-priority interbank payments • To ensure regularity, RTGS systems are usually operated by central banks (one per country) • Primary objective is to eliminate systemic risk by ensuring that each payment is settled: –In Real Time (as soon as it is sent) –Gross (one by one, no batching or netting) –With finality (once settled, the payment is irrevocable) BANK OF PAPUA NEW GUINEA Systemic Risk • High-value payments are a source of systemic risk – if a bank cannot pay, this can cause system-wide problems (domino effect) • With an RTGS system, each bank has a settlement account maintained by the central bank • Payments are sent to the system for immediate settlement – if there are sufficient funds • Settlement is final and irrevocable • Unsuccessful payments (insufficient funds) can be either rejected or queued until funds are available BANK OF PAPUA NEW GUINEA What Sorts of Payments? • All RTGS payments are bank-to-bank • Settlement of securities purchases • Payments of interest and maturity on Government /BPNG securities • Settlement of interbank obligations (loans and repayments) • Large payments by banks on behalf of customers • Settlement of netted low-value clearing operations (e.g. cards) – see below • Settlement of trading operations in equities and securities BANK OF PAPUA NEW GUINEA Central Securities Depository • Holds information about all Government and BPNG securities: – Details of each issue (date of issue, maturity, interest, etc.) – Details of holders (identity, amounts held, etc.) • Updated each time: – an issue is completed – A trade is settled on the secondary market – An issue reaches maturity • Calculates and pays interest, maturity payments BANK OF PAPUA NEW GUINEA Coupling of RTGS and CSD Best modern practice is to have the RTGS and CSD systems very closely coupled. Why? Two main reasons: 1.Delivery versus Payment (DvP) 2.Intraday Liquidity Management in the RTGS system BANK OF PAPUA NEW GUINEA Delivery versus Payment • Avoidance of Settlement Risk: – I don’t want to pay for your securities until you let me have them – You don’t want to let me have your securities until I pay you • Solution is to carry out the transaction simultaneously: – in the RTGS for the ‘payment leg’ of the transaction – in the CSD for the transfer of ownership BANK OF PAPUA NEW GUINEA Intraday Liquidity • RTGS systems are very safe but can require a lot of liquidity to support high-value payments continuously throughout the day • If a bank has insufficient funds in its Settlement Account, it can’t make payments – this can lead to system-wide problems • One solution is for the BPNG to lend money to banks to support the payments flow (to “oil the wheels”) • This naturally requires collateral – a good source of collateral is the securities held by the borrowing bank • The borrowing bank offers suitable securities, which the BPNG would typically take via a repurchase agreement (‘repo’) BANK OF PAPUA NEW GUINEA Low Value Payment Systems • The great majority of payments are low-value, high- volume. For example: – (cheques) – Credit orders – Salary and pension payments – ATM, EFTPOS and credit card transactions – Collection of Government revenue – Payment of utility bills (phone, gas, water, electricity, etc.) – Regular customer payments (loan repayments, insurance premiums, etc.) • It is inefficient and costly to handle these on a real time, gross basis – and each payment by itself poses no systemic risk • Low value payments usually go through a bulk clearing processBANK OF PAPUA NEW GUINEA Automated Transfer System (ATS) • In many countries low value clearing of interbank credit payments, direct debits, etc., is done in special centres called Automated Clearing Houses (ACH) • There is no ACH at present in PNG: all low value payments are cleared between banks on a bilateral basis • The modern approach is to have one system which combines RTGS and ACH and can handle both low- volume/high-value and high-volume/low value payments – an Automated Transfer System (ATS) BANK OF PAPUA NEW GUINEA Payments System Development in PNG BANK OF PAPUA NEW GUINEA Role of the Bank of PNG 1. Responsibility – “…. to promote an efficient national and international payments system” (Central Banking Act 2000) 2. Goal “.... improve payment, clearing and settlement systems to: – promote efficiency – reduce risk and – encourage electronic payments” (2005-2008 Strategic Plan) BANK OF PAPUA NEW GUINEA NPS Development Programme • 2008 Review – Analysis – Vision and Strategy – Action Plan • 2009 ->>> Implementation – Consultative framework (NPC) – Legal and regulatory development – New payment and settlement system BANK OF PAPUA NEW GUINEA Institutional and market structure 1. Bank of PNG (the central bank): – Formulates & implements monetary policy – Regulates & supervises financial institutions – Promotes an efficient payments system – Promotes macro-economic stability 2. “Formal” banking sector 3. Non-bank financial sector BANK OF PAPUA NEW GUINEA “Formal” Banking Sector • Small number of banks • Number of accounts approximates to 7% of population (…but a high percentage of the ‘formal’ economy) – Large organisations and their employees • Serve the main centres only (~100 outlets) • Offer modern products and instruments •BUT… – >90% of population don’t have bank accounts • Stringent ID requirements – Geographical penetration is shallow – No electronic interbank payment instruments BANK OF PAPUA NEW GUINEA Non-Bank Financial Sector 1. Savings and Loans Societies – Occupational (e.g. Police, Teachers, BPNG) – Rural (generally geographically-based) • Membership growing rapidly • Many rural areas are prosperous (coffee, copra, palm oil etc.) – Greater geographical reach than banks 2. Microfinance companies – Customer base growing rapidly – Greater geographical reach than banks 3. Finance companies 4. Superannuation funds 5. Life insurance companies & brokers BANK OF PAPUA NEW GUINEA Payment instruments and circuits 1. Cash – the predominant means of payment – Inefficient and risky – Money is locked up in “bamboo banks” ……..but is the only practical instrument in most of the country 2. Cheques – Prone to fraud – Long clearing times 3. Warrants – Preferred for larger payments (safer than cheques) – But still
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