Payment and Settlement System in Bangladesh - An Overview Bangladesh Bank has undertaken efforts to upgrade existing payment systems with focus on the capacity building necessary to define a long-term strategy for payments in Bangladesh. This is important for the healthy growth of the financial settlements through a safe and efficient payment and settlement systems ensuring fast and secured transfer of money and financial instruments using modern technological innovation. Bangladesh is currently processing cheques in both manual and semiautomated fashion entailing lengthy settlement times. Cash is still the major payment mode in Bangladesh. Cheques form the second most important payment instrument. In other words, cheques, banker's demand drafts, pay orders and other negotiable instruments are commonly used for settlement of claims. The level of computerizations in the payment and settlement system is also very low. Only a few banks have their branches in the capital city brought under computer network. Payment & settlement through electronic media in the domestic market is uncommon. Bangladesh Bank operates a regional clearing system in Dhaka and similar systems exist at the 7 other centers where Bangladesh Bank has a branch enabling the banks in that area to settle their mutual claims arising out from customer and interbank transactions. Each clearing house operates as a local clearing center with all non local clearing items being treated in a collection basis. All the scheduled banks are eligible for membership of the clearing house provided they agree to comply with the rules of the clearing house. Members bear the maintenance charges of a clearing house on proportional basis. A member ceases to be a member if it stops or suspends payment of its debts generally or ceases to carry on business voluntarily or compulsorily. In the district level where Bangladesh Bank has no branch, Sonali Bank, the largest state owned commercial bank in the country operates the clearing house on 1
behalf of Bangladesh Bank for that locality. At present 37 branches of Sonali Bank are performing clearing and settlement operation. Operating procedure of the clearing house has been outlined by Bangladesh Bank in terms of which all the clearing houses operate their day to day business. In areas where there is no clearing house, instruments presented/deposited to a bank account are settled through collection from the original drawer banks and accounted for through an inter-bank reconciliation system among them. However, this involves a longer collection time. In the central bank, all transactions in the current accounts of the scheduled banks are settled either by cash or transfer instruments. No electronic settlement system is operative. Similarly, transactions in the government accounts maintained with the central bank are also settled through cash and transfer instruments. 2.1 The clearing activities of the banks: Currently Bangladesh Bank is receiving the information of cheques/instruments on diskettes from all member banks of clearing house and processes the same using a software 'NIKASH' developed in-house. Branches of each bank dealing with the clearing house use the above software provided by Bangladesh Bank to capture the data of cheque into floppy disks. Where branches do not have suitable hardware for data input the "Local" (Service Branch) office of that bank will perform the data capture job on behalf of those branches. Cheques are physically sorted by bank/branch. A clearing schedule is printed for each bank. This outward clearing schedule, sorted cheques and data disks are then taken to the clearing house. 2.2 First Clearing (Morning) Each bank attends the clearing house physically and hands its outward cheques to each of the other respective banks. Each bank carries out a check to ensure that the listing of inward cheques received matches the physical cheques received. 2
Diskettes containing the data are passed to the Bangladesh Bank supervisor who feeds each disk into a PC based system. This system consolidates all the data on the disks and calculates a 'settlement' figure for each bank (the difference between the value of cheques submitted to a bank and the value received from that bank). Schedules of cheques now being cleared to each bank are printed out of the computer system and passed to each bank representative. Each bank then checks the schedules against the cheques received to confirm accuracy. Each bank receives a diskette of all cheques that have been 'cleared ' (inward) to that bank. Debit/credit vouchers are prepared in the computer for updating the member bank's account. Bangladesh Bank effects settlement by manually posting the debit/credit to each individual clearing bank account at BB. 2.3 Second Clearing (Return) A return clearing exists also for returned/dishonored instruments. Cheques to be returned unpaid are brought to the clearing house each evening and the same process as above is followed. The diskette based automation exists in all the 8 branches of Bangladesh Bank except one branch. 2.4 Same-Day Clearing: To improve and facilitate quick processing of cheques and prompt settlement 'Same-Day' clearing of high-value cheques (Tk. 500000 or above) has been introduced. Clearing operation of high-value cheques at BB starts at 11.00am and closes at 2.00pm and is participated by members close to Motijheel area. The settlement is done on the same day. 3
2.5 Clearing Houses at Sonali Bank Branches: In regions where BB does not have branches, Sonali Bank carries out a clearing house service on behalf of BB. The clearing activities are done manually by Sonali Bank as those have not been computerized using the 'NIKASH' software. 2.6 Volumes There is an estimated average of 40,000 to 50,000 cheques and demand drafts in Dhaka, 25,000 in Chittagong per day being cleared. The peak number of cheques in Dhaka clearing house region is around 70,000. 3.0 Proposed Clearing System: There has been a significant increase in number of cheques during the last few years and with the rapid expansion of banking institutions, clearing of cheques has become one of the most critical and sensitive areas in banking services where reduction of clearing time will contribute towards better customer services and minimisation of float. The rapid growth of cheque/instrument volume has made the task of manual sorting and listing very difficult. To improve the quality and facilitate quick processing of cheques and prompt settlement and to comply with the Core Principles for Systemically Important Payment Systems (CPSS) as provided by the BIS Bangladesh Bank has taken initiatives for mechanised cheque processing systems using Magnetic Ink Character Recognition (MICR) technology. A draft document has been prepared by Bangladesh Bank which lays down the procedural guidelines for mechanised cheque processing based on MICR technology to be used by the member banks of clearing house. This document has been developed by Bangladesh Bank in cooperation with representatives of the Commercial Banks in Bangladesh and other interested stakeholders from both the private and public sectors (cheque printers, Central Banks and other Government officials). It defines the design, specifications, physical security and other conventions for the purpose of initiating the designing and printing of cheques by participants for use in the automated cheque processing. 4
The primary features of the design specifications are Magnetic Ink Character Recognition (MICR) and an "Image Friendly" cheque design that will allow Bangladesh to have a single standard specification for cheques and will not require additional modification as new technologies for processing cheques are introduced in the future such as Optical Character Recognition (OCR), Intelligent Character Recognition (ICR) and Imaging. The specifications are based on the composite experience of Central Banks and Clearing House organizations from around the world. Bangladesh Bank has incorporated international standards and proven designs based on the experience of Singapore, the United States, Canada, the United Kingdom, India and Malaysia. The committees and working groups have reviewed the practices in the aforementioned countries and adopted designs and standards customized for use in Bangladesh. The design standards are applicable to personal, business and government cheques and include designs for both the front and back. Physical security has been addressed through the adoption of a set of minimum standards that will be required for use in all cheques. The primary user of these standards will be the designers and printers of cheques. The standards are applicable to financial institutions, individuals, companies, government departments and any other organizations which use negotiable instruments. Cheque printers and organizations who wish to perform personalization will be required to demonstrate the ability to conform to the standards and will be expected to go through a periodic review process to ensure maintenance of the standards. Printers of cheques for financial institutions in Bangladesh will need to be accredited by Bangladesh Bank to ensure optimum processing of cheques and high image quality. The term 'cheque' includes all types of clearing instruments including cheques, drafts, pay orders 'at par' instruments, etc. A single automated cheque processing system, based on international standards is to be made operative in place of the present paper based manual system under which processing of cheques will take place in each of the existing Bangladesh Bank offices linked to Dhaka via satellite. In this system intra-regional clearing will take place on the same day with inter-regional clearing taking place on the next day. 5
The system envisages introduction of MICR (Magnetic Ink Character Recognition) cheques encoded with information regarding the amount, transaction type, account number, bank information and cheque numbers etc. to be processed mechanically. In addition, the information on both the front and the back of the cheques will be recorded through the use of digital imaging method. The instruments should be printed on MICR grade quality paper specified by Bangladesh Bank. Settlement accounts will be maintained for each of the participant institutions for the purpose of end of day settlement. It is important that there must be a significant level of new cheques in circulation (approximately 95% of all cheques) for implementation of the automated processing as the system will not be capable of processing the current paper based cheques. For this reason, Banks will be given approximately eighteen months to come into compliance with the new designs. The design standards are applicable to personal, business and government cheques and include designs for both the front and back of the proposed cheque. Physical security has been adequately ensured through the adoption of a set of standards which will be mandatory for use in all such cheques. These standards will be applicable to financial institutions, individuals, companies and government departments. Cheque printers and organizations will have option to perform cheque personalization and will be required to demonstrate the ability to conform to the standards and will be expected to go through a periodic review process to ensure maintenance of the standards outlined by a proposed committee to be headed by Bangladesh Bank. The MICR settlement system is part of the initiative under the Remittance and Payments Partnership (RPP) project which is being funded through a grant from the Department for International Development (DFID), UK. The primary focus of the initiative is to increase the speed of remittance flows from workers abroad to individuals and families living in Bangladesh. As such, a large portion of the funding will be used for capacity building within Bangladesh Bank. A part of the funding will go to the acquisition of equipment for the automated cheque processing system. The project also has a scheme to develop a National Payments Council whose members will be drawn from the financial community and chaired by Bangladesh 6
Bank. The primary responsibility of the council will be to develop and define a National Payment Strategy for Bangladesh. This will include all forms of payments from cheque processing to retail payments including card payments and ATMs to inter bank payments that will eventually flow through a Real Time Gross Settlement (RTGS) system operated by Bangladesh Bank. Provision will also be made for the settlement of securities and foreign exchange payments. This is a significant undertaking and one that is vitally important to the growth of the financial markets in Bangladesh. In addition to the development of the strategy, other initiatives include review of the legal and regulatory infrastructure for payment systems in Bangladesh. Once assessed, recommendations will be made regarding the definition of the roles and responsibilities of Bangladesh Bank as regards its regulatory and oversight obligations. These will likely take the form of legislation or amendments to the Bangladesh Bank Order and the Bank Company Act further defining the Central bank's role in payment systems. The payment system initiatives discussed above will have a significant impact on the financial sector in Bangladesh. These projects are already underway with the results to be implemented over the next three to four years. At the end of that time, Bangladesh will be well on its way to establishing payment standards consistent with the international standards. - x 7
Source: Department of Currency Management and Payment System 8