Studies On Interbanking Transactions

Studies On Interbanking transactions
Sr.n
o
Topic
Interbank transfer
RTGS
NEFT
Interbank market
5
6
7
8
SWIFT
Role of interbank lending in financial system
IMPS
conclusion
K.C.COLLEGE
Summary
Inter Bank Transfer enables electronic transfer of funds

from the account of the remitter in one Bank to the
account of the beneficiary maintained with any other Bank
branch. There are two systems of Inter Bank Transfer RTGS and NEFT. Both these systems are maintained by
Reserve Bank of India...
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Inter bank transfer

1. What is Inter Bank Transfer?
Inter Bank Transfer enables electronic transfer of funds from the account of the
remitter in one Bank to the account of the beneficiary maintained with any other
Bank branch. There are two systems of Inter Bank Transfer - RTGS and NEFT.
Both these systems are maintained by Reserve Bank of India.
RTGS- Real Time Gross Settlement- This is a system where the processing of
funds transfer instructions takes place at the time they are received (real time).
Also the settlement of funds transfer instructions occurs individually on an
instruction by instruction basis (gross settlement). RTGS is the fastest possible
interbank money transfer facility available through secure banking channels in
India.
NEFT- National Electronic Fund Transfer- This system of fund transfer
operates on a Deferred Net Settlement basis. Fund transfer transactions are
settled in batches as opposed to the continuous, individual settlement in RTGS.
Presently, NEFT operates in hourly batches from 9 am to 7 pm on week days and
9 am to 1 pm on Saturdays.
What is the minimum/maximum amount for RTGS/NEFT transactions under
Retail Internet Banking?
Type
Minimum
Maximum
RTGS
Rs.2 Lakhs
Rs.5 Lakhs
NEFT
No Minimum
Rs.5 Lakhs
2. What is the minimum/maximum amount for RTGS/NEFT

transactions under Corporate Internet Banking?
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Type
Minimum
Maximum
RTGS
Rs.2 Lakhs
Rs.50 lakhs for Vyapaar and

Rs.500 crores for Vistaar
NEFT
No Minimum
Rs.50 lakhs for Vyapaar and

Rs.500 crores for Vistaar
3. When does the beneficiary get the credit for a RTGS payment?
Under normal circumstances the beneficiary Bank branch receives the funds in
real time as soon as funds are transferred by the remitting Bank. The beneficiary
Bank has to credit the beneficiary's account within two hours of receiving the
funds transfer message.
4. When does the beneficiary get the credit for a NEFT payment?
As stated above, NEFT operates in hourly batches. Currently there are eleven
settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1
pm on Saturdays. Therefore, the beneficiary can expect to get the credit for the
transactions put through between 9 am to 5 pm on weekdays (between 9 am to
12 noon on Saturdays) on the same day. For transactions settled in the 6 and 7
pm batches on week days and at 1 pm on Saturday, the credit will be afforded
either on the same day or on the next working day.
5. If an RTGS transaction is not credited to the beneficiary account,
does the remitter get back the money?

Yes. If the beneficiary's bank is unable to credit the beneficiary's account for any
reason, the former will return the money to the remitting bank within 2 hours.
Once the amount is received by the remitting bank, it is credited to the remitter's
account by the branch concerned.
6. If an NEFT transaction is not credited to a beneficiary account,
does the Remitter get back the money?

Yes. If the beneficiary's bank is unable to credit the beneficiary's account for any
reason, the former will return the money to the remitting bank within 2 hours of
completion of the batch in which the transaction was processed. Once the
amount is received by the remitting bank, it is credited to the remitter's account
by the branch concerned.
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7. At what time during the day/week the RTGS & NEFT services are
available?
RTGS transactions are sent to RBI as per the following schedule:
Day
Start Time
End Time
Monday to Friday
9:00 hrs
16:30 hrs
Saturday
9:00 hrs
13:30 hrs
NEFT transactions will be sent to RBI based on the following schedule:

Day
Start Time
End Time
Monday to Friday
8:00 hrs
18:30 hrs
Saturday
8:00 hrs
12:30 hrs
8.
RBI NEFT transactions are settled in batches based on the following timings:
1. 11 settlements on weekdays - at 09:00, 10:00, 11:00, 12:00, 13:00, 14:00,
15:00, 16:00, 17:00, 18:00 and 19:00 hrs.
2. 5 settlements on Saturdays - at 09:00, 10:00, 11:00, 12:00 and 13:00 hrs.
9. What is the mandatory information required to make an RTGS &

NEFT payment?
For effecting an RTGS/NEFT remittance the remitter has to furnish the following
information:
o Amount to be remitted.
o Remitting customer's account number which is to be debited
o Name of the beneficiary bank.
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o Name of the beneficiary.

o Account number of the beneficiary.
o Sender to receiver information, if any
o IFSC code of the destination bank branch
2 How to find the IFSC code of the beneficiary branch?
In Onlinesbi, the remitter has the option of selecting the location of the
destination Bank Branch in case the IFSC code is not known. If the correct
values are selected for Bank, State and Branch, the IFSC code is automatically
updated.
1
2
3
4 What are the service charges applicable for RTGS/NEFT transactions?
Charges for RTGS/NEFT are as listed in the following table:
RTGS Time of settlement
at the Reserve
Bank of India
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From
To
09:00
Hours
12:00
Hours
After
12:00
Hours
15:30
( 13:00 hrs
on
Saturday
hours)
Charges per
Transaction for
Outward
Transactions.
Rs.2 lakhs
toRs.5 lakhs
Rs.25/-
Above Rs.5
lakhs
Rs.50/-
Rs.2 lakhs
toRs.5 lakhs
Rs.26/-
Above Rs.5
lakhs
Rs.51/-
NEFT
After
15:30
Hours
16:30 hrs
( On week
days)
Rs.2 lakhs
toRs.5 lakhs
Rs.30/-
Above Rs.5
lakhs
Rs.55/-
Amount
Service Charge
Upto Rs.1 lakh
Rs.5/-
Above Rs.1 lakh

to Rs.2 lakhs
Rs.15/-
Above Rs.2 lakhs
Rs.25/-
Real time gross settlement

The acronym 'RTGS' stands for real time gross settlement. The Reserve Bank of
India (India's Central Bank) maintains this payment network. RTGS system is a funds
transfer mechanism where transfer of money takes place from one bank to another on a
'real time' and on 'gross' basis. This is the fastest possible money transfer system
through the banking channel. Settlement in 'real time' means payment transaction is not
subjected to any waiting period. The transactions are settled as soon as they are
processed. 'Gross settlement' means the transaction is settled on one to one basis
without bunching with any other transaction. Considering that money transfer takes
place in the books of the Reserve Bank of India, the payment is taken as final and
irrevocable.
Fees for RTGS vary from bank to bank. RBI has prescribed upper limit for the fees
which can be charged by all banks both for NEFT and RTGS. Both the remitting and
receiving must have core banking in place to enter into RTGS transactions. Core
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Banking enabled banks and branches are assigned an Indian Financial System
Code (IFSC) for RTGS and NEFT purposes. This is an eleven digit alphanumeric code
and unique to each branch of bank. The first four letters indicate the identity of the bank
and remaining seven numerals indicate a single branch. This code is provided on the
cheque books, which are required for transactions along with recipient's account
number.
RTGS is a large value (minimum value of transaction should be 2,00,000) funds
transfer system whereby financial intermediaries can settle interbank transfers for their
own account as well as for their customers. The system effects final settlement of
interbank funds transfers on a continuous, transaction-by-transaction basis throughout
the processing day. Customers can access the RTGS facility between 9 am to 4:30 pm
(Interbank up to 6:30 pm) on weekdays and 9 am to 2:00 pm (Interbank up to 3:00 pm)
on Saturdays. However, the timings that the banks follow may vary depending on the
bank branch. Time Varying Charges has been introduced w.e.f. 1 October 2011 by RBI.
The basic purpose of RTGS is to facilitate the transactions which need immediate
access for the completion of the transaction.
Banks could use balances maintained under the cash reserve ratio (CRR) and the intraday liquidity (IDL) to be supplied by the central bank, for meeting any eventuality arising
out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to
three times their net owned fund (NOF).
The IDL will be charged at 25 per transaction entered into by the bank on the RTGS
platform. The marketable securities and treasury bills will have to be placed as collateral
with a margin of five per cent. However, the apex bank will also impose severe penalties
if the IDL is not paid back at the end of the day.
The RTGS service window for customer's transactions is available from 9:00 hours to
16:30 hours on week days and from 9:00 hours to 14:00 hours on Saturdays.
No Transaction on weekly holidays and public holidays.
RTGS systems are specialist funds transfer systems where transfer
of money or securities[1] takes place from one bank to another on a "real time" and on
"gross" basis. Settlement in "real time" means payment transaction is not subjected to
any waiting period. The transactions are settled as soon as they are processed. "Gross
settlement" means the transaction is settled on one to one basis without bundling or
netting with any other transaction. Once processed, payments are final and irrevocable.
RTGS systems are typically used for high-value transactions that require immediate
clearing, in some countries the RTGS systems may be the only way to get same day
cleared funds and so may be used when payments need to be settled urgently such as
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when purchasing a house. However most regular payments would not use a RTGS
system, but instead would use a national payment system or network that allows
participants to batch and net payments.
RTGS systems are usually operated by a country's Central bank as it is seen as a
critical infrastructure for a country's economy. Economists view that an efficient national
payment system reduces the cost of exchanging goods and services, and is
indispensable to the functioning of the interbank, money, and capital markets. A weak
payment system may severely drag on the stability and developmental capacity of a
national economy; its failures can result in inefficient use of financial resources,
inequitable risk-sharing among agents, actual losses for participants, and loss of
confidence in the financial system and in the very use of money.
Central banks and RTGS

This "electronic" payment system is normally maintained or controlled by the central
bank of a country. There is no physical exchange of money; the central bank makes
adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in
Bank A's account by $100,000 and increasing the amount of Bank B's account by the
same. The RTGS system is suited for low-volume, high-value transactions. It lowers
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settlement risk, besides giving an accurate picture of an institution's account at any

point of time. Such systems are an alternative to systems of settling transactions at the
end of the day, also known as the net settlement system such as the
UKs, BACS system. In the net settlement system, all the inter-institution transactions
during the day are accumulated. At the end of the day, the accounts of the institutions
are adjusted. The implementation of RTGS systems by central banks throughout the
world is driven by the goal to minimize risk in high-value electronic payment settlement
systems. In an RTGS system, transactions are settled across accounts held at a central
bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit
risks due to settlement lags are eliminated. The best RTGS national payment system
cover up to 95% of high-value transactions within the national monetary market.
The World Bank has been paying increasing attention to payment system development
as a key component of the financial infrastructure of a country, and has provided various
forms of assistance to over 100 countries. Most of the RTGS systems in place are
secure and have been designed around international standards and best practices.
[3]
Several reasons exist for central banks for RTGS adoption decisions to include
counterparts in the system. First, a decision to adopt is influenced by competitive
pressure from the global financial markets. Second, it is more beneficial to adopt an
RTGS system for central bank when this allows access to a broad system of other
countries' RTGS systems. Third, it is very likely that the knowledge acquired through
experiences with RTGS systems spills over to other central banks and helps them make
their adoption decision. Fourth, central banks do not necessarily have to install and
develop RTGS themselves. The possibility of sharing development with providers that
have built RTGS systems in more than one country (Logica CMG of UK, CMA Small
System of Sweden, JV Perago of South Africa and SIA SpA of Italy, Montran of USA)
has presumably lowered the cost and hence made it feasible for many countries to
adopt.[4] By 1985, three central banks had implemented RTGS systems. At the end of
2005, the use of RTGS systems had spread to 90 central banks.
Payments are an indispensable part of our daily transactions, be it a consumer to a

business, a business to a consumer or a business to a business. Payments raise
the GDP of a country thus it is mandatory that the payment systems of the country are
safe, secure, sound, efficient, accessible and authorize, as states the mission
statement of the Reserve Bank of Indias publication on Payment Systems in India
(200912). The Reserve Bank of India continually strives towards ensuring the smooth
progress of the payments system. In India it is the BPSS (Board for Regulation of
Payment and Settlement Systems) which is in charge of regulating these systems.
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India has multiple payments and settlement systems. RBI Still continues to evolve new
payment methods and slowly revamping the payments and settlement capability in
India.
India supports a variety of electronic payments and settlement system, both Gross as
well as Net settlement systems.
The Gross systems is
Real Time Gross Settlement (RTGS)
The Net settlement systems are;
ECS - Credit
ECS - debit
Credit cards and Debit cards
National Electronic Funds Transfer (NEFT)
Indo-Nepal Remittance Facility Scheme
Immediate Payment Service
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Traditional methods of making payments

Traditional methods dominating the Indian payments market have been cheques and
cash.
Cash
Cash is the most popular modes of payment especially when it comes to retail
transactions because it gives the customer a sense of completion once the amount is
paid in cash. There are still quite a few small business transactions that happen in cash.
Cheques
India has an evolved cheques clearing system. There are multiple flavours of paper
instruments including customer cheques, Bankers Cheque [or Pay order] and are still in
use.
Payments in India going the e-way

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The Reserve Bank of India is doing its best to encourage alternative methods of
payments which will bring security and efficiency to the payments system and make the
whole process easier for banks. The Indian banking sector has been growing
successfully, innovating and trying to adopt and implement electronic payments to
enhance the banking system. Though the Indian payment systems have always been
dominated by paper-based transactions, e-payments are not far behind. Ever since the
introduction of e-payments in India, the banking sector has witnessed growth like never
before.
According to a survey by Celent, the ratio of e-payments to paper based transactions
has considerably increased between 2004 and 2008. This has happened as a result of
advances in technology and increasing consumer awareness of the ease and efficiency
of internet and mobile transactions.[1]
In the case of India, the RBI has played a pivotal role in facilitating e-payments by
making it compulsory for banks to route high value transactions through Real Time
Gross Settlement (RTGS) and also by introducing NEFT (National Electronic Funds
Transfer) and NECS (National Electronic Clearing Services) which has encouraged
individuals and businesses to switch to electronic methods of payment. With the
changing times and technology so have changed the methods of payments in India. Epayments in India have been growing at a fast rate of 60% over the last 3 years.
In India plastics have been fast over-taking papers. With 130 million cards in
circulation currently, both credit and debit, and an increasing consumer base with
disposable income, India is clearly one of the fastest growing countries for payment
cards in the Asis-Pacific region. Behaviourial patterns of Indian customers are also likely
to be influenced by their internet accessibility and usage, which currently is about 32
million PC users, 68% of whom have access to the net. However these statistical
indications are far from the reality where customers still prefer to pay in line rather than
online, with 63% payments still being made in cash. E-payments have to be
continuously promoted showing consumers the various routes through which they can
make these payments like ATMs, the internet, mobile phones and drop boxes.
Electronic Payment and Settlement Systems in India

Due to the efforts of the RBI and the BPSS now over 75% of all transaction volume are
in the electronic mode, including both large-value and retail payments. Out of this 75%,
98% come from the RTGS (large-value payments) whereas a meagre 2% come from
retail payments. This means consumers have not yet accepted this as a regular means
of paying their bills and still prefer conventional methods. Retail payments if made via
electronic modes are done by ECS (debit and credit), EFT and card payments. [1]
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Electronic Clearing Service (ECS Credit)

Known as Credit-push facility or one-to-many facility this method is used mainly for
large-value or bulk payments where the receivers account is credited with the payment
from the institution making the payment. Such payments are made on a timely-basis like
a year, half a year, etc. and used to pay salaries, dividends or commissions. Over time it
has become one of the most convenient methods of making large payments.
Electronic Clearing Services (ECS Debit)

Known as many-to-one or debit-pull facility this method is used mainly for small value
payments from consumers/ individuals to big organizations or companies. It eliminates
the need for paper and instead makes the payment through banks/corporates or
government departments. It facilitates individual payments like telephone bills, electricity
bills, online and card payments and insurance payments. Though easy this method
lacks popularity because of lack of consumer awareness.
National Electronic Funds Transfer (NEFT)

NEFT is a facility provided to bank customers to enable them to transfer funds easily
and securely on a one-to-one basis. It is done via electronic messages. In order to
speed up the transactions there are up to 6 transactions in one day. Even though it is
not on real time basis like RTGS (Real Time Gross Settlement), NEFT facilities are
available in 30.000 bank branches all over the country and work on a batch mode.
NEFT has gained popularity due to it saving on time and the ease with which the
transactions can be concluded. This reflects from the fact that 42% of all electronic
transactions in the 2008 financial year were NEFT transactions.
Credit cards and Debit cards

As mentioned above India is one of the fastest growing countries in the plastic money
segment. Already there are 130 million cards in circulation, which is likely to increase at
a very fast pace due to rampant consumerism. Indias card market has been recording a
growth rate of 30% in the last 5 years. Card payments form an integral part of epayments in India because customers make many payments on their card-paying their
bills, transferring funds and shopping.
Ever since Debit cards entered India, in 1998 they have been growing in number and
today they consist of nearly 3/4th of the total number of cards in circulation.
Credit cards have shown a relatively slower growth even though they entered the
market one decade before debit cards. Only in the last 5 years has there been an
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impressive growth in the number of credit cards- by 74.3% between 2004 and 2008. It is
expected to grow at a rate of about 60% considering levels of employment and
disposable income. Majority of credit card purchases come from expenses on jewellery,
dining and shopping.
Another recent innovation in the field of plastic money is co branded credit cards, which
combine many services into one card-where banks and other retail stores, airlines,
telecom companies enter into business partnerships. This increases the utility of these
cards and hence they are used not only in ATMs but also at Point of sale (POS)
terminals and while making payments on the net. [1]
Service Charge for RTGS
a) Inward transactions 1%, no charge to be levied.
b) Outward transactions
- For transactions of 2 lakhs to 5 lakhs -up to 25 per transaction plus applicable Time
Varying Charges ( 1/- to 5/-); total not exceeding 30 per transaction, (+ Service Tax).
- Above 5 lakhs - 50 per transaction plus applicable Time Varying Charges ( 1/- to
5/-); total charges not exceeding 55 per transaction, (+ Service Tax).
No time varying charges are applicable for RTGS transactions settled up to 12:30 hrs.
From Starting Jan 2014
National electronic fund transfer

The national electronic fund transfer (NEFT) system is a nation-wide system that
facilitates individuals, firms and corporates to electronically transfer funds from any bank
branch to any individual, firm or corporate having an account with any other bank
branch in the country. For being part of the NEFT funds transfer network, a bank branch
has to be NEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101
banks in the country (out of around 82,400 bank branches) are NEFT-enabled. Steps
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are being taken to further widen the coverage both in terms of banks and branches
offices.
Service Charges for NEFT
The structure of charges that can be
a) Inward transactions at destination bank branches (for credit to beneficiary accounts):
Free, no charges to be collected from beneficiaries
b) Outward transactions at originating bank branches (charges for the remitter):
For transactions up to 10,000: not exceeding 2.50 (+ Service Tax)
For transactions above 10,000 up to 1 lakh: not exceeding 5 (+ Service Tax)
For transactions above 1 lakh and up to 2 lakhs: not exceeding 15 (+ Service

Tax)
For transactions above 2 lakhs: not exceeding 25 (+ Service Tax)
Settlement Timings
Currently, NEFT operates in hourly batches - there are twelve settlements from 8:00 AM
to 6:30 PM on week days and six settlements from 8 AM to 1 PM on Saturdays.
Any transaction initiated after a designated settlement time would have to wait till the
next designated settlement time. As of 2013, all transactions initiated before 5 PM will
be settled on same day.
No transactions will be settled on weekly holidays and public holidays.
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Indo-Nepal Remittance Facility Scheme

Indo-Nepal Remittance Facility is a cross-border remittance scheme to transfer funds
from India to Nepal, enabled under the NEFT Scheme. The scheme was launched to
provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit
money back to their families in Nepal. A remitter can transfer funds up to 50,000
(maximum permissible amount) from any of the NEFT-enabled branches in India.The
beneficiary would receive funds in Nepalese Rupees.
Comparison
The key difference between RTGS and NEFT is that while RTGS is on gross settlement
basis, NEFT is on net settlement basis. Besides, RTGS facilitates real-time ("push")
transfer, while NEFT involves twelve settlements from 8 am to 7 pm on week days and
six settlements from 8 am to 1 pm on Saturdays. Customers can access the RTGS
facility between 9 am to 4:30 pm on weekdays and 9 am to 1:30 pm on Saturday. Thus
if a customer has given instruction to its bank to transfer money through NEFT to
another bank in the morning hours, money would be transferred the same day, but if the
instruction is given much later during the day, money may be transferred next day.
RTGS facility is available in over 1,13,000 branches across India, while NEFT is
available in little over 1,15,000 branches of a 100 banks.
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Channels of e-payments
In their effort to enable customers to make payments the electronic way banks have
developed many channels of payments viz. the internet, mobiles, ATMs (Automated
Teller Machines) and drop boxes.
The internet as a channel of payment is one of the most popular especially among the
youth. Debit and credit payments are made by customers on various banks websites
for small purchases,(retail payments) and retail transfers( ATM transfers).
ATMs serve many other purposes, apart from functioning as terminals for withdrawals
and balance inquiries, such as payment of bills through ATMs, applications for cheques
books and loans can also be made via ATMs.
Banks also provide telephone and mobile banking facilities. Through call agents
payments can be made and as the number of telephone and mobile subscribers are
expected to rise, so is this channel of payment expected to gain popularity.
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Drop boxes provide a solution to those who have no access to the internet or to a
telephone or mobile. These drop-boxes are kept in the premises of banks and the
customers can drop their bills along with the bill payment slips in these boxes to be
collected by third party agents.
Role of the RBI in encouraging e-payments

As the apex financial and regulatory institution in the country it is compulsory for the RBI
to ensure that the payments system in the country is as technologically advanced as
possible and in view of this aim, the RBI has taken several initiatives to strengthen the
e-payments system in India and encourage people to adopt it.
The Payment and Settlement Systems Act, 2007 was a major step in this
direction. It enables the RBI to regulate, supervise and lay down policies involving
payment and settlement space in India. Apart from some basic instructions to banks
as to the personal and confidential nature of customer payments, supervising the
timely payment and settlement of all transactions, the RBI has actively encouraged
all banks and consumers to embrace e-payments.
In pursuit of the above-mentioned goal the RBI has granted NBFCs (NonBanking Financial Companies) the permission to issue co branded credit cards
forming partnerships with commercial banks.
The Kisan Credit Card Scheme was launched by NABARD in order to meet the
credit needs of farmers, so that they can be free of paper money hassles and use
only plastic money.
A domestic card scheme known as RuPay has recently been started by the
National Payments Corporation of India (NPCI),promoted by RBI and Indian Banks
Association (IBA), inspired by Unionpay in China, which will be promoting the use of
cards ie. plastic money. Initially functioning as an NPO, Rupay will focus on
potential customers from rural and semi-urban areas of India. Rupay will have a
much wider coverage than Visa, MasterCard or American Express cards which have
always been used for card-based settlements.
The NREGA (National Rural Employment Guarantee Scheme) introduced by the

Government will ensure rural employment in turn ensuring that the employees get
wages. Each employee will have a smart card functioning as his personal
identification card, drivers license, credit card which will also function as an
electronic pass book, thus familiarising the rural populations with e-payments. [1]
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However, the Indian banking system suffers from some defects due to certain sociocultural factors which hampers the spread of the e-payments culture even though there
are many effective electronic payment channels and systems in place. Despite the
infrastructure being there nearly 63% of all payments are still made in cash. A relatively
small percentage of the population pays their bills electronically and most of that
population is from urban India-the metropolitans. Also in some cases the transaction is
done partially online and partially offline. The main reason for this apathy to switch to
e-payments comes from lack of awareness of the customer despite various efforts by
the Government
INTERBANK MARKET
When seeking funds for borrowing, consumers, financial speculators, and corporations
contact a bank representative to discuss the terms of the proposed credit agreement.
These discussions and transactions between clients and banks take place at the retail
level, where banks charge a premium over the cost of the funds acquired in the
wholesale market in order to make a profit. The interbank market is the name of the
wholesale market where banks trade between themselves in order to remain liquid and
meet customer demands for deposits, withdrawals, and borrowing for many different
purposes.
The main difference between the interbank market and the retail market (that is, the
bank counter) is the interest rate charged on borrowed funds. Since commercial banks
have access to the central bank of the nation, they are able to acquire funding at a
much lower cost than what it available to the end-user. By passing the low-cost money
acquired through the terms and conditions set and maintained by the central bank to the
consumer at a higher price, banks can make a profit, and stay in business.
The interbank market is also the medium where the vast majority of forex transactions
take place.
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Participants
As its name suggests, the main participants in the interbank market are mostly the
major banks such as Deutsche Bank, UBS, Citibank, but other banks, large international
corporations, hedge funds also create smaller portions of the activity in this medium.
The activities of hedge funds and investment banks, while significant, are much smaller
in comparison to the volume generated by the major international banks. However,
since these firms are able to utilize much higher levels of leverage in comparison to
commercial banks, they can play greater roles in the market from time to time. The
trade-related foreign exchange volumes generated by the activities of international
corporations are not very significant in comparison to the speculative activity created by
major banks and financial institutions.
The activities of retail forex brokers and their clients is estimated to constitute about two
percent of the overall activity in the interba0nk market, and it is increasing.
Forex Brokers and the Interbank Market

Forex brokers are the intermediaries between clients and the interbank market. As
market makers themselves, brokers pool the orders of their customers together, match
buy and sell orders internally with each other, and pass the remaining balance to the
interbank market in order to meet orders. Thus the amount of orders communicated by
brokers to the banks is smaller than the total amount of orders received by them.
Apart from the internal matching of orders, forex brokers charge a usually small fee over
the prices quoted by the various banks in the interbank market before passing it to
customers. This small fee is called the spread and is the main source of income for
brokers.
How to understand the interbank market?

Understanding the interbank market can be beneficial because of its role as the
circulatory system of a nations economy. Tensions in the interbank market are reflected
in the various other financial markets as widening spreads, lack of liquidity, increased
volatility, and currency shortages. If banks themselves are unable to obtain the funds
necessary to maintain their own businesses, they will be unable to extend credit to
consumers, firms, mortgage borrowers, students, and many other types of borrowers.
As such, tensions and turmoil in the interbank market have important implications for
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general economic stability, and market trends, and they are carefully monitored by the
relevant authorities. Difficulties in the interbank market are often mirrored by severe
reactions in the forex market, where banks try to obtain funding for their cross-border
operations.
The interbank market is decentralized, meaning that there is no central exchange

quoting prices and collecting statistics. However, both national central banks, and
international institutions such as the Bank of International Settlements collect data from
the various participants in the interbank market on a voluntary basis in order evaluate
economic developments better. The data and interpretations generated by them are
widely used by traders, economists, analysts, and politicians.
Overnight rates
The maximum maturity term of most transactions in the interbank market is one month,
and a majority of interbank activity is conducted through overnight unsecured lending
over the real time gross settlement system (RTGS) where there is no requirement of
collateral. In performing overnight transactions, banks use the main interest rates
declared by the central bank of the nation. This rate is called the federal funds rate in
the US, in the Eurozone it is the main refinancing rate, in Japan it is named the
overnight call rate, and Bank Rate in the United Kingdom. In india this is called Call
Money Rate.
When funding is not readily available, the first option considered by banks is overnight
borrowing, since this is the safest option for the lender, and still solves the problems of
the illiquid institution. Consequently, any problem in the interbank market manifests itself
first at the overnight rates which are very sensitive to illiquid conditions. In emerging
markets and the third world, lending in the interbank market can evaporate completely,
which leads illiquid banks to seek funding in the repo market for their immediate liquidity
needs. If the quality or quantity of the required collateral is too high, bank failures can
result. It is rare to see the overnight market completely shut down, and in such cases
the central bank of the nation will intervene in a heavy handed manner to maintain its
rate target.
Banking crises, as described simplistically, and briefly above, can cause massive
volatiliy in the forex market, and create great dangers as well as opportunities for
traders. A trader who is able to detect a deteriorating liquidity conditions can sell the
currency of the suffering nation and make great profits in the ensuing turmoil. The main
tool for examining and evaluating liquidity conditions in the interbank market is the
overnight libor rate.
K.C.COLLEGE
Overnight Libor
The overnight libor rate is the actual rate at which transactions in the interbank market
take place, in contrast to the target rate which is the level at which transactions ought to
take place, as desired by the central bank. Discrepancies between the overnight libor
rate and the target rate signal conditions of laxity (abundant liquidity), or tension
(liquidity shortage) in the interbank market. All else being constant, a libor rate lower
than the target rate will result in a depreciating currency since there is more supply than
there is demand in the interbank market, and vice versa. The relationship is in fact a lot
more complex with a number of other variables influencing currency prices in the short
term, however, if the gaps are too large, they can override every other concern as banks
scramble to raise capital.
There is no general overnight libor rate, but an average is calculated based on the data
communicated by banks and later passed on to news providers. This rate is termed
EONIA in the Eurozone, SONIA in the United Kingdom. These rates are calculated on
the basis of locality, and not nationality. For example, a British bank operating in the
U.S. will also communicate
quotes
which will be included in the calculation of the days dollar libor. Only the currency of
the overnight transaction matters.
Central banks explicitly aim to keep the overnight rate in line with the target rate
declared, and they will never allow a large divergence to exist for long. To bring the
actual rates in the interbank market in line with the target rate, central banks conduct
open market operations.
Open market operations

Open market operations involve repurchase agreements (repos) and reverse repos
where the central bank buys or sells government bonds in return for cash for a specified
maturity. By using this tool, the central bank can control the amount of liquidity in the
system, as well as the overnight rate, since it is very sensitive to liquidity conditions in
the market. Central banks regularly intervene in the interbank market in order to
manage routine, and insignificant reserve imbalances that arise, but they can also
conduct special, unscheduled operations in response to tensions.
Libor over longer maturities

Although the central banks can influence conditions in the interbank market at shorter
maturities by direct interventions and enforcing the target rate through open market
operations, they have less influence over rates on longer maturities. Although libor
values exist for maturities up to a year, these are mostly used for benchmarking
purposes, and do not represent actual lending between banks. Nonetheless, the threeK.C.COLLEGE
month dollar libor, and its equivalent in other currencies is a common indicator of
difficulties and insecurity in the interbank market because of its role as a benchmark for
many different kinds of contracts and agreements
SWIFT:
The Society for Worldwide Interbank Financial Telecommunication (SWIFT)
provides a network that enables financial institutionsworldwide to send and receive
information about financial transactions in a secure, standardized and reliable
environment. Swift also sells software and services to financial institutions, much of it for
use on the SWIFTNet Network, and ISO 9362. Business Identifier Codes (BICs) are
popularly known as "SWIFT codes".
The chairman of SWIFT is Yawar Shah,[1] originally from Pakistan,[2] and
its CEO is Gottfried Leibbrandt, originally from theNetherlands.
The majority of international interbank messages use the SWIFT network. As of
September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries
and territories, who were exchanging an average of over 15 million messages per day
(compared to an average of 2.4 million daily messages in 1995). [4] SWIFT transports
financial messages in a highly secure way but does not hold accounts for its members
and does not perform any form of clearing or settlement.
SWIFT does not facilitate funds transfer; rather, it sends payment orders, which must be
settled by correspondent accounts that the institutions have with each other. Each
financial institution, to exchange banking transactions, must have a banking relationship
by either being a bank or affiliating itself with one (or more) so as to enjoy those
particular business features.
SWIFT hosts an annual conference every year called SIBOS which is specifically aimed
at the financial services industry.
K.C.COLLEGE
SWIFT is a cooperative society under Belgian law and it is owned by its member
financial institutions. It has offices around the world. SWIFT headquarters, designed
by Ricardo Bofill Taller de Arquitectura are in La Hulpe, Belgium, near Brussels.
History
SWIFT was founded in Brussels in 1973 under the leadership of its inaugural CEO Carl
Reuterskild (19731983) and was supported by 239 banks in 15 countries. It started to
establish common standards for financial transactions and a shared data processing
system and worldwide communications network designed by Logica.
[5]
Fundamental operating procedures, rules for liability, etc., were established in 1975
and the first message was sent in 1977. SWIFT's first United States operating center
was inaugurated by Governor John N. Dalton of Virginia in 1979.[6]
Standards
K.C.COLLEGE
SWIFT has become the industry standard for syntax in financial messages. Messages
formatted to SWIFT standards can be read by, and processed by, many well-known
financial processing systems, whether or not the message traveled over the SWIFT
network. SWIFT cooperates with international organizations for defining standards for
message format and content. SWIFT is also Registration authority (RA) for the
following ISO standards:
ISO 9362: 1994 BankingBanking telecommunication messagesBank

identifier codes
ISO 10383: 2003 Securities and related financial instrumentsCodes for

exchanges and market identification (MIC)
ISO 13616: 2003 IBAN Registry
ISO 15022: 1999 SecuritiesScheme for messages (Data Field Dictionary)

(replaces ISO 7775)
ISO 20022-1: 2004 and ISO 20022-2:2007 Financial servicesUNIversal

Financial Industry message scheme
In RFC 3615 urn:swift: was defined as Uniform Resource Names (URNs) for SWIFT
FIN.
Operations centers
The SWIFT secure messaging network is run from two redundant data centers, one in
the United States and one in the Netherlands. These centers share information in near
real-time. In case of a failure in one of the data centers, the other is able to handle the
traffic of the complete network.
SWIFT opened a third data center in Switzerland, which started operating in
2009. Since then, data from European SWIFT members are no longer mirrored to the
U.S. data center. The distributed architecture partitions messaging into two messaging
zones: European and Trans-Atlantic. European zone messages are stored in the
Netherlands and in a part of the Switzerland operating center; Trans-Atlantic zone
messages are stored in the United States and in a part of the Switzerland operating
center that is segregated from the European zone messages. Countries outside of
K.C.COLLEGE
Europe were by default allocated to the Trans-Atlantic zone but could choose to have
their messages stored in the European zone.
SWIFTNet network
SWIFT moved to its current IP network infrastructure, known as SWIFTNet, from 2001
to 2005, providing a total replacement of the previous X.25 infrastructure. The process
involved the development of new protocols that facilitate efficient messaging, using
existing and new message standards. The adopted technology chosen to develop the
protocols was XML, where it now provides a wrapper around all messages legacy or
contemporary. The communication protocols can be broken down into:
InterAct
FileAct
SWIFTNet InterAct Realtime
SWIFTNet FileAct Realtime
SWIFTNet InterAct Store and Forward
SWIFTNet FileAct Store and Forward
Architecture
SWIFT provides a centralized store-and-forward mechanism, with some transaction
management. For bank A to send a message to bank B with a copy or authorization with
institution C, it formats the message according to standard and securely sends it to
SWIFT. SWIFT guarantees its secure and reliable delivery to B after the appropriate
action by C. SWIFT guarantees are based primarily on high redundancy of hardware,
software, and people.
SWIFTNet Phase 2
During 2007 and 2008, the entire SWIFT Network migrated its infrastructure to a new
protocol called SWIFTNet Phase 2. The main difference between Phase 2 and the
former arrangement is that Phase 2 requires banks connecting to the network to use
a Relationship Management Application (RMA) instead of the former Bilateral key
exchange (BKE) system. According to SWIFT's public information database on the
subject, RMA software should eventually prove more secure and easier to keep up-todate; however, converting to the RMA system meant that thousands of banks around
K.C.COLLEGE
the world had to update their international payments systems to comply with the new
standards. RMA completely replaced BKE on 1 January 2009.
Products and interfaces

SWIFT means several things in the financial world:
1. a secure network for transmitting messages between financial institutions;
2. a set of syntax standards for financial messages (for transmission over
SWIFTNet or any other network)
3. a set of connection software and services allowing financial institutions to
transmit messages over SWIFT network.
Under 3 above, SWIFT provides turn-key solutions for members, consisting of linkage
clients to facilitate connectivity to the SWIFT network and CBTs or 'computer based
terminals'which members use to manage the delivery and receipt of their messages.
Some of the more well-known interfaces and CBTs provided to their members are:
SWIFTNet Link (SNL) software which is installed on the SWIFT customer's site
and opens a connection to SWIFTNet. Other applications can only communicate
with SWIFTNet through the SNL.
Alliance Gateway (SAG) software with interfaces (e.g., RAHA = Remote Access
Host Adapter), allowing other software products to use the SNL to connect to
SWIFTNet
Alliance WebStation (SAB) desktop interface for SWIFT Alliance Gateway with
several usage options:
1. administrative access to the SAG
2. direct connection SWIFTNet by the SAG, to administrate SWIFT Certificates
3. so-called Browse connection to SWIFTNet (also by SAG) to use additional
services, for example Target2
Alliance Access (SAA) is the main messaging software by SWIFT, which allows
message creation only for FIN messages, but routing and monitoring for FIN
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and MX messages. The main interfaces are FTA (files transfer automated, not FTP)
and MQSA, a WebSphere MQ interface.
The Alliance Workstation (SAW) is the desktop software for administration,

monitoring and FIN message creation. Since Alliance Access is not yet capable of
creating MX messages, Alliance Messenger (SAM) has to be used for this purpose.
Alliance Web Platform (SWP) as new thin-client desktop interface provided as an

alternative to existing Alliance WebStation, Alliance Workstation (soon) and Alliance
Messenger.
Alliance Integrator built on Oracle's Java Caps which enables customer's back
office applications to connect to Alliance Access or Alliance Entry.
Alliance Lite2 is a secure and reliable, cloud-based way to connect to the SWIFT
network which is a Lite version of Alliance Access specifically targeting customers
with low volume of traffic.
Services
There are four key areas that SWIFT services fall under in the financial
marketplace: Securities, Treasury & Derivatives, Trade Services and Payments & Cash
Management.
Securities
Treasury & Derivatives
Cash Management
SWIFTNet FIX (obsolete)
SWIFTNet Accord for Treasury
SWIFTNet Bulk
SWIFTNet Data Distribution
SWIFTNet Affirmations
SWIFTNet Cash
SWIFTNet Funds
SWIFTNet CLS Third Party

Service
SWIFTNet Exce
Investigations
SWIFTNet Accord for Securities
SWIFTREF
SWIFTRef, the global payments reference data utility, is SWIFTs unique reference data service.
SWIFTRef sources data direct from data originators, including central banks, code issuers and
banks making it easy for issuers and originators to maintain data regularly and thoroughly.
SWIFTRef constantly validates and cross-checks data across the different data sets. [12]
K.C.COLLEGE
SWIFTNet Mail[
SWIFT offers a secure person-to-person messaging service, SWIFTNet Mail, which went live on 16
May 2007.[13] SWIFT clients can configure their existing email infrastructure to pass email messages
through the highly secure and reliable SWIFTNet network instead of the open Internet. SWIFTNet
Mail is intended for the secure transfer of sensitive business documents, such as invoices, contracts
and signatories, and is designed to replace existing telex and courier services, as well as the
transmission of security-sensitive data over the open Internet. Seven financial institutions,
including HSBC, FirstRand Bank, Clear stream, DnB NOR, Nedbank, and Standard Bank of South
Africa, as well as SWIFT piloted the service.[14]
United States of America government involvement in SWIFT matters
Terrorist Finance Tracking Program
A series of articles published on 23 June 2006, by The New York Times, The Wall
Street Journal and The Los Angeles Times revealed that the US Treasury
Department and the USA Central Intelligence Agency (CIA) and other United States of
America government agencies had a program to access the SWIFT transaction
database after the 11 September attacks called the Terrorist Finance Tracking Program.
[15]
After these articles, SWIFT quickly came under pressure for compromising the data
privacy of its customers by letting foreign government (United States government)
agencies access sensitive personal data. In September 2006, the Belgian government
declared that the SWIFT dealings with USA government authorities were a breach of
Belgian andEuropean privacy laws.
In response, SWIFT is in the process of improving its architecture to satisfy member
privacy concerns by implementing the new distributed architecture with a two-zone
model for storing messages (see Operations centers).
Concurrent to this process, the European Union negotiated an agreement with
the United States Government to permit the transfer of intra-EU SWIFT transaction
information to the United States under certain circumstances. Due to concerns about its
potential contents, the European Parliament adopted a position statement in September
2009, demanding to see the full text of the agreement, and requesting that it be fully
compliant with EU privacy legislation, with appropriate oversight mechanisms in place to
K.C.COLLEGE
ensure that all data requests were handled appropriately.[16] An interim agreement was
signed without European Parliamentary approval by the European Council on 30
November 2009,[17] the day before theLisbon Treatywhich would have prohibited such
an agreement from being signed under the terms of the Codecision procedureformally
came into effect. While the interim agreement was scheduled to come into effect on 1
January 2010, the text of the agreement was classified as "EU Restricted" until
translations could be provided in all EU languages and published on 25 January 2010.
On 11 February 2010, the European Parliament decided to reject the interim agreement
between the EU and the USA with 378 to 196 votes. [18][19] One week earlier, the
parliament's civil liberties committee already rejected the deal, citing legal reservations.
In March 2011, it was reported that two mechanisms of data protection had
failed: EUROPOL released a report complaining that the USA's requests for information
had been too vague (making it impossible to make judgments on validity) and that the
guaranteed right for European citizens to know whether their information had been
accessed by USA authorities had not been put into practice.
Iran sanctions
In January 2012, the advocacy group United Against Nuclear Iran (UANI) implemented a campaign
calling on SWIFT to end all relations with Iran's banking system, including theCentral Bank of Iran.
UANI asserted that Iran's membership in SWIFT violated U.S. and EU financial sanctions against
Iran as well as SWIFT's own corporate rules.[22]
Consequently, in February 2012, the U.S. Senate Banking Committee unanimously approved
sanctions against SWIFT aimed at pressuring the Belgian financial telecommunications network to
terminate its ties with blacklisted Iranian banks. Expelling Iranian banks from SWIFT would
potentially deny Iran access to billions of dollars in revenue and spending using SWIFT but not from
using IVTS. Mark Wallace, president of UANI, praised the Senate Banking Committee. [23]
Initially SWIFT denied it was acting illegally,[23] but now says "it is working with U.S. and European
governments to address their concerns that its financial services are being used by Iran to avoid
sanctions and conduct illicit business."[24] Targeted banks would be amongst others Saderat
Bank of Iran, Bank Mellat, Post Bank of Iran and Sepah Bank.[25]On 17 March 2012, following
agreement two days earlier between all 27 member states of the Council of the European Union and
the Council's subsequent ruling, SWIFT disconnected all Iranian banks from its international network
that had been identified as institutions in breach of current EU sanctions and warned that even more
Iranian financial institutions could be disconnected from the network.
K.C.COLLEGE
US control over transactions within the European Union [edit]

On 26 February 2012 the Danish newspaper Berlingske reported that US authorities
evidently have sufficient control over SWIFT to seize money being transferred between
two EU countries (Denmark and Germany), since they have seized around US$26,000
which were being transferred from a Danish businessman to a German bank. The
money was a payment for a batch of Cuban cigars previously imported to Germany by a
German supplier. As justification for the seizure, the U.S. Treasury has stated that the
Danish businessman had violated the United States embargo against Cuba.[26]
Monitoring of SWIFT transactions by the National Security Agency

(NSA)[edit]
Der Spiegel reported in September 2013 that the NSA widely monitors banking
transactions via SWIFT, as well as credit card transactions. [27] The NSA intercepted and
retained data from the SWIFT network used by thousands of banks to securely send
transaction information. SWIFT was named as a "target," according to documents
leaked by Edward Snowden. The documents reveal that the NSA spied on SWIFT using
a variety of methods, including reading "SWIFT printer traffic from numerous banks." [27]
Use in Sanctions
As mentioned above SWIFT has disconnected all Iranian banks from its international network as a
sanction against Iran. Similarly, in August 2014 the U.K. planned to press the EU to block Russian
use of SWIFT as a sanction due to alleged Russia's involvement in the conflict in Ukraine
Interbank lending market

The interbank lending market is a market in which banks extend loans to one another for a
specified term. Most interbank loans are for maturities of one week or less, the majority being
K.C.COLLEGE
overnight. Such loans are made at the interbank rate (also called the overnight rate if the term of
the loan is overnight). Low transaction volume in this market was a major contributing factor to
the financial crisis of 2007.
Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any
potential bank runs by clients. If a bank cannot meet these liquidity requirements, it will need to
borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have
excess liquid assets above and beyond the liquidity requirements. These banks will lend money in
the interbank market, receiving interest on the assets.
The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow
and lend money in the interbank lending market in order to manage liquidity and satisfy regulations
such as reserve requirements. The interest rate charged depends on the availability of money in the
market, on prevailing rates and on the specific terms of the contract, such as term length. There is a
wide range of published interbank rates, including the federal funds rate (USA), the LIBOR (UK) and
the Euribor (Eurozone).
Interbank segment of the money market
The interbank lending market refers to the subset of bank-to-bank transactions that take
place in the money market.
The money market is a subsection of the financial market in which funds are lent and
borrowed for periods of one year or less. Funds are transferred through the purchase
and sale of money market instrumentshighly liquid short-term debt securities. These
instruments are considered cash equivalents since they can be sold in the market easily
and at low cost. They are commonly issued in units of at least one million and tend to
have maturities of three months or less. Since active secondary markets exist for almost
all money market instruments, investors can sell their holdings prior to maturity. The
money market is an over-the-counter (OTC) market.
Banks are key players in several segments of the money market. To meet reserve
requirements and manage day-to-day liquidity needs, banks buy and sell short-term
uncollateralized loans in the federal funds market. For longer maturity loans, banks can
tap the Eurodollar market. Eurodollars are dollar-denominated deposit liabilities of
banks located outside the United States (or of International Banking Facilities in the
United States). US banks can raise funds in the Eurodollar market through their
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overseas branches and subsidiaries. A second option is to issue large

negotiable certificates of deposit (CDs). These are certificates issued by banks which
state that a specified amount of money has been deposited for a period of time and will
be redeemed with interest at maturity. Repurchase agreements (repos) are yet another
source of funding. Repos and reverse repos are transactions in which a borrower
agrees to sell securities to a lender and then to repurchase the same or similar
securities after a specified time, at a given price, and including interest at an agreedupon rate. Repos are collateralized or secured loans in contrast to federal funds loans
which are unsecured.
Role of interbank lending in the financial system
To support the fractional reserve banking model

The creation of credit and transfer of the created funds to another bank, creates the
need for the 'net-lender' bank to borrow to cover short term withdrawal (by depositors)
requirements. This results from the fact that the initially created funds have been
transferred to another bank. If there was (conceptually) only one commercial bank then
all the new credit (money) created would be redeposited in that bank (or held as
physical cash outside it) and the requirement for interbank lending for this purpose
would reduce. (In a fractional reserve banking model it would still be required to address
the issue of a 'run' on the bank concerned).
A source of funds for banks

Interbank loans are important for a well-functioning and efficient banking system. Since
banks are subject to regulations such as reserve requirements, they may face liquidity
shortages at the end of the day. The interbank market allows banks to smooth through
such temporary liquidity shortages and reduce 'funding liquidity risk'.
Funding liquidity risk

Funding liquidity risk captures the inability of a financial intermediary to service its
liabilities as they fall due. This type of risk is particularly relevant for banks since their
business model involves funding long-term loans through short-term deposits and other
liabilities. The healthy functioning of interbank lending markets can help reduce funding
liquidity risk because banks can obtain loans in this market quickly and at little cost.
K.C.COLLEGE
When interbank markets are dysfunctional or strained, banks face a greater funding
liquidity risk which in extreme cases can result in insolvency.
Longer-term trends in banks' sources of funds

In the past, checkable deposits were US banks most important source of funds; in
1960, checkable deposits comprised more than 60 percent of banks total liabilities.
Over time, however, the composition of banks balance sheets has changed
significantly. In lieu of customer deposits, banks have increasingly turned to short-term
liabilities such as commercial paper (CP), certificates of deposit (CDs), repurchase
agreements (repos), swapped foreign exchange liabilities, and brokered deposits.
Benchmarks for short-term lending rates

Interest rates in the unsecured interbank lending market serve as reference rates in the
pricing of numerous financial instruments such as floating rate
notes (FRNs), adjustable-rate mortgages (ARMs), and syndicated loans. These
benchmark rates are also commonly used in corporate cashflow analysis as discount
rates. Thus, conditions in the unsecured interbank market can have wide-reaching
effects in the financial system and the real economy by influencing the investment
decisions of firms and households.
Efficient functioning of the markets for such instruments relies on well-established and
stable reference rates. The benchmark rate used to price many US financial securities
is the three-month US dollar Libor rate. Up until the mid-1980s, the Treasury bill rate
was the leading reference rate. However, it eventually lost its benchmark status to Libor
due to pricing volatility caused by periodic, large swings in the supply of bills. In general,
offshore reference rates such as the US dollar Libor rate are preferred to onshore
benchmarks since the former are less likely to be distorted by government regulations
such as capital controls and deposit insurance.
Monetary policy transmission

Central banks in many economies implement monetary policy by manipulating
instruments to achieve a specified value of an operating target. Instruments refer to the
variables that central banks directly control; examples include reserve requirements, the
interest rate paid on funds borrowed from the central bank, and balance sheet
composition. Operating targets are typically measures of bank reserves or short-term
interest rates such as the overnight interbank rate. These targets are set to achieve
K.C.COLLEGE
specified policy goals which differ across central banks depending on their specific
mandates.1
US federal funds market

US monetary policy implementation involves intervening in the unsecured interbank
lending market known as the fed funds market. Federal funds (fed funds) are
uncollateralized loans of reserve balances at Federal Reserve banks. The majority of
lending in the fed funds market is overnight, but some transactions have longer
maturities. The market is anover-the-counter (OTC) market where parties negotiate loan
terms either directly with each other or through a fed funds broker. Most of these
overnight loans are booked without a contract and consist of a verbal agreement
between parties. Participants in the fed funds market include: commercial
banks, savings and loan associations, branches of foreign banks in the US, federal
agencies, and primary dealers.
Depository institutions in the US are subject to reserve requirements, regulations set by
the Board of Governors of the Federal Reserve which oblige banks to keep a specified
amount of funds (reserves) in their accounts at the Fed as insurance against deposit
outflows and other balance sheet fluctuations. It is common for banks to end up with too
many or too few reserves in their accounts at the Fed. Up until October 2008, banks
had the incentive to lend out idle funds since the Fed did not pay interest on excess
reserves
Interest rate channel of monetary policy

The interest rate channel of monetary policy refers to the effect of monetary policy
actions on interest rates that influence the investment and consumption decisions of
households and businesses. Along this channel, the transmission of monetary policy to
the real economy relies on linkages between central bank instruments, operating
targets, and policy goals. For example, when the Federal Reserve conducts open market
operations in the federal funds market, the instrument it is manipulating is its holdings of
government securities. The Fed's operating target is the overnight federal funds rate
and its policy goals are maximum employment, stable prices, and moderate long-term
interest rates. For the interest rate channel of monetary policy to work, open market
operations must affect the overnight federal funds rate which must influence the interest
rates on loans extended to households and businesses.
K.C.COLLEGE
As explained in the previous section, many US financial instruments are actually based
on the US dollar Libor rate, not the effective federal funds rate. Successful monetary
policy transmission thus requires a linkage between the Fed's operating targets and
interbank lending reference rates such as Libor. During the 2007 financial crisis, a
weakening of this linkage posed major challenges for central banks and was one factor
that motivated the creation of liquidity and credit facilities. Thus, conditions in interbank
lending markets can have important effects on the implementation and transmission of
monetary policy.
Strains in interbank lending markets during the 2007 financial crisis
By mid-2007, cracks started to appear in markets for asset-backed securities. For

example, in June 2007, ratings agencies downgraded over 100 bonds backed by
second-liensubprime mortgages. Soon after, the investment bank Bear
Stearns liquidated two hedge funds that had invested heavily in mortgage-backed
securities (MBS) and a few large mortgage lenders filed for Chapter 11 bankruptcy
protection. Strains in interbank lending markets became apparent on August 9, 2007,
after BNP Paribas announced that it was halting redemptions on three of its investment
funds. That morning the US dollar Libor rate climbed over 10 basis points (bps) and
remained elevated thereafter. The US Libor-OIS spread ballooned to over 90bps in
September whereas it had averaged 10bps in prior months.
At the following FOMC meeting (September 18, 2007), the Fed started to ease
monetary policy aggressively in response to the turmoil in financial markets. In the
minutes from the September FOMC meeting, Fed officials characterize the interbank
lending market as significantly impaired:
Banks took measures to conserve their liquidity and were cautious about
counterparties exposures to asset-backed commercial paper. Term interbank funding
markets were significantly impaired, with rates rising well above expected future
overnight rates and traders reporting a substantial drop in the availability of term
funding.
By the end of 2007, the Federal Reserve had cut the fed funds target rate by 100bps
and initiated several liquidity-providing programs and yet the Libor-OIS spread remained
elevated. Meanwhile, for most of 2008, term funding conditions remained stressed. In
September 2008, when the US government decided not to bail out the investment
bankLehman Brothers, credit markets went from being strained to completely broken
and the Libor-OIS spread blew out to over 350bps.
K.C.COLLEGE
Possible explanations[edit]
Increase in counterparty risk[edit]
An increase in counterparty risk reduces lending banks expected payoffs from providing
unsecured funds to other banks and thus lowers their incentive to transact with one
another. This is a result from Stiglitz and Weiss (1981): the expected return on a loan to
a bank is a decreasing function of the riskiness of the loan. Stiglitz and Weiss also show
that increases in funding costs can lead safe borrowers to drop out of the market,
making the remaining pool of borrowers more risky. Thus, adverse selection may have
exacerbated strains in interbank lending markets once Libor rates were on the rise.
The market environment at the time was not inconsistent with an increase in
counterparty risk and a higher degree of information asymmetry. In the second half of
2007, market participants and regulators started to become aware of the risks in
securitized products and derivatives. Many banks were in the process of writing down
the values of their mortgage-related portfolios. House prices were falling all over the
country and the ratings agencies had just started to downgrade subprime mortgages.
Concerns about structured investment vehicles (SIVs) and mortgage and bond
insurers were growing. Moreover, there was very high uncertainty about how to value
complex securitized instruments and where in the financial system these securities were
concentrated.
Liquidity hoarding
Another possible explanation for the seizing up of interbank lending is that banks were
hoarding liquidity in anticipation of future shortages. Two modern features of the
financial industry suggest this hypothesis is not implausible. First, banks have come to
rely much less on deposits as a source of funds and more on short-term wholesale
funding (brokered CDs, asset-backed commercial paper (ABCP), interbank repurchase
agreements, etc.). Many of these markets came under stress during the early phase of
the crisis, particularly the ABCP market. This meant banks had fewer sources of funds
to turn to, although an increase in retail deposits over this period provided some offset.
Second, it has become common for corporations to turn to markets rather than banks
for short-term funding. In particular, before the crisis firms were regularly tapping
commercial paper markets for funds. These corporations still had lines of credit set up
with banks, but they used them more as a source of insurance. After the near collapse
of the commercial paper market, however, firms took advantage of this insurance and
banks had no choice but to provide the liquidity. Thus, firms use of credit lines during
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the crisis increased illiquidity risks for banks. Lastly, banks off-balance sheet programs
(SIVs for example) relied on short-term ABCP to operate; when this market dried up,
banks in some cases had to take the assets from these vehicles onto their balance
sheets. All of these factors made liquidity risk management especially challenging
during this time.
INTERBANK MOBILE PAYMENT SERVICE

1. What is IMPS?
Interbank Mobile Payment Service (IMPS) is an instant interbank electronic fund
transfer service through mobile phones. IMPS facilitate customers to use mobile
instruments as a channel for accessing their banks accounts and remitting funds
therefrom.
Inter Mobile Payment System (IMPS)
Immediate Payment Service (IMPS) is an initiative of National Payments Corporation of
India (NPCI). It is a service through which money can be transferred immediately from
one account to the other account, within the same bank or accounts across other banks.
Upon registration, both the individuals are issued an MMID(Mobile Money Identifier)
Code from their respective banks. This is a 7 digit numeric code. To initiate the
transaction, the sender in his mobile banking application need to enter the registered
mobile number of the receiver, MMID of the receiver and amount to be transferred.
Upon successful transaction, the money gets credited in the account of the receiver
instantly. This facility is available 24X7 and can be used through mobile banking
application. Some banks have also started providing this service through internet
banking profile of their customers. Though most banks offer this facility free of cost to
encourage paperless payment system, ICICI bank and Axis bank charge for it as per
their respective NEFT charges.
Nowadays, money through this service can be transferred directly also by using the
receiver's bank account number and IFS code. In such case, neither the receiver of the
money need to be registered for mobile banking service of his bank, nor does he need
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MMID code. IMPS facility differs from NEFT and RTGS as there is no time limit to carry
out the transaction. This facility can be availed 24X7 and on all public and bank holidays
including RBI holiday
Currently majority of interbank mobile fund transfer transactions are channelised
through NEFT mechanism. Under NEFT, the transactions are processed and settled in
batches, hence are not real time. Also, the transactions can be done only during the
working hours of the RTGS system.
To overcome the above constraint, National Payments Corporation of India (NPCI) has
introduced Interbank Mobile Payment Service (IMPS) from 22nd November 2010 after
carrying out a pilot study involving some select banks. IMPS offers an instant, 24X7,
interbank electronic fund transfer service through mobile phones.
IMPS facilitate customers to use mobile instruments as a channel for accessing their
bank accounts and put high interbank fund transfers in a secured manner with
immediate confirmation features. This facility is provided by NPCI through its existing
NFS switch.
The eligible criteria for the Banks who can participate in IMPS is as follows
Bank should be member of National Financial Switch (NFS) driven by NPCI
Bank should have approval from RBI for Mobile Banking Service
Objectives of this method:
To enable bank customers to use mobile instruments as a channel for accessing

their banks accounts and remit funds
Making payment simpler just with the mobile number of the beneficiary
To sub-serve the goal of electronification of retail payments
To facilitate mobile payment systems to be inter-operable across banks and
mobile operators in a safe and secured manner
To build the foundation for a full range of mobile based Banking services.
Participants in the transaction will be:
Remitter (Sender)
Beneficiary (Receiver)
Banks
National Financial Switch - NPCI
Procedure:
Remitter:
Remitter is required to register for mobile banking service with his bank and obtain
Mobile Money Identifier (MMID) and MPIN from the bank
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Download Software (Application) for mobile banking (ensuring compatibility of mobile

with the application) or using the SMS facility in the mobile if bank provides IMPS on
SMS
Beneficiary:
Beneficiary has to link his/her mobile number to the account in the
respective bank and obtain Mobile Money Identifier (MMID) from the bank.
There is no need to register for mobile banking service .
To send money:
Remitter to login to the application and select the IMPS menu from
the IMPS or use the SMS facility in his/her mobile if bank provides
IMPS on SMS
Get Beneficiary Mobile number and MMID
Enter Beneficiary Mobile number, beneficiary MMID, Amount and
his/her MPIN to send
Await confirmation SMS for the debit in his/her account and credit in
beneficiary account
Note the transaction reference number for any future query
To receive money:
Beneficiary is required to share his/her Mobile number and MMID
with the remitter
Ask the remitter to send money using your Mobile number and MMID
Check the confirmation SMS for credit to his/her account from the
remitter
Note the transaction reference number for any future query
2. Presently, how are interbank fund transfers made using mobile

phone?
Various banks are providing remittance facility through their mobile banking platforms. The
interbank remittance request initiated from a mobile is processed by the beneficiary bank as
a National Electronic Fund Transfer (NEFT) transaction. The status of such payment
request is therefore not known instantly because NEFT payments are processed in batches
K.C.COLLEGE
from 9 am to 7 pm. The NEFT transactions are charged by banks and charges vary from
bank to bank
3. Does the customer need to have a bank account for availing IMPS?
Yes, the customer needs to have a bank account with the bank which has enabled this
facility.
4. Does the customer need to register to remit the funds through

IMPS?
Yes. Customer should enroll for Mobile Banking Service with the bank where customer
has an account. The registration process shall be as per their banks laid down
procedures.
5. Is the beneficiary customer also required to register for IMPS?

The beneficiary customer should have their mobile numbers registered with the bank
where he/she maintain the account and where he intends to receive the credit and
should have a valid MMID provided by the bank. No need to specifically enroll for
Mobile Banking Service of the bank.
6. What beneficiary details does the customer need to affect an IMPS

remittance?
The beneficiary details required are:
a. Beneficiarys mobile number
b. MMID of the beneficiary customer
7. What is MMID?
Mobile Money Identifier (MMID) is a seven digit random number issued
by the bank upon registration. Remitter (customer who wants to send money) and
Beneficiary (customer who wants to receive the money) should have this MMID for
doing this interbank funds transfer.
8. Can a customer link more than one account to the same mobile number?
Yes. The customer can link the same mobile number to more than one account subject
to bank offering that feasibility.
9. Incase if the customer has more than one account linked to his /
her mobile number how does he select the account from which he /
she intends to pay?
The bank will allocate a Mobile Money Identifier (MMID) for each account of the mobile
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banking customers. The customer can select the account using this MMID allocated to
him / her.
The combination of mobile number and MMID helps as a mistake proofing step for the
remitter and tries to mitigate the risk of wrong credit incase the remitter enters
erroneous mobile number.
10. What is the Process flow of IMPS?

Step 1: Remitter sends instruction from his/her mobile through his/her bank
provided application or SMS.
Step 2: Remitting bank validates the details of the remitter and debits his/ her account.
This transaction is sent by the remitting bank to NPCI.
Step 3: Transaction is passed by NPCI to the beneficiary bank. Beneficiary Bank
validates the details of the beneficiary customer, credits the account, sends confirmation
NPCI about transaction status and sends a SMS to the beneficiary customer informing
him of the credit.
Step 4: NPCI sends the transaction status to remitting bank which in turn informs the
status of the transaction to the Remitter.
Step 5: Remitting bank send a SMS confirmation of the transaction to the remitting
customer.
11. Is there any limit on the value of transactions in IMPS?

The limit is defined by RBI in the Mobile Payment Guidelines issued to banks. The
customer can transact on IMPS subject to a daily cap of ` 50,000/- per customer overall
for transactions through mobile for the funds transfer. Transactions up to `5000/- (RBI
Circular No. RBI/2010-11/511 DPSS.CO.No.2502 /02.23.02/ 2010-11) can be facilitated
by banks without end-to-end encryption.
12. Does the customer require a mobile handset of a particular model

or make or features to enable this service?
It depends on the banks mobile banking interface requirements. This varies from bank
to bank. The details can be obtained by the respective banks.
13. What can a customer does in case he / she is not able to install the
mobile banking application on his mobile handset?
In case the customer is not able to install the mobile banking application on the mobile
handset or the application is not functioning as desired, the customer may need to
update the software on the mobile handset and re-install the mobile banking application
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on the same. If the problem is not resolved, the customer should then contact the
helpdesk of the bank whose mobile banking facility the customer intends to use.
14. Can we withdraw and / or deposit money using IMPS?

Presently, the customers cannot withdraw and / or deposit money using IMPS.
15. What if IMPS registered mobile is lost or misplaced? Will anyone

who comes into possession of mobile be able to make a remittance
from customers account?
At the time of mobile banking registration, bank would provide the customer with a User
id and MPIN (Mobile Personal Identification Number) for accessing the mobile banking
facility. An IMPS remittance will not be possible without these two inputs.
16. What happens in case the remitter enters a wrong beneficiary

mobile number for remittance?
The beneficiary details required for making a remittance are mobile number and MMID.
The transaction will get declined in case anyone of these two numbers is erroneous and
transaction gets reversed instantly.
17. What are the timings for initiating and receiving IMPS
remittances?
IMPS transactions can be sent and received at any time and any day. There are no
timing or holiday restrictions on IMPS remittances.
18. If the transaction is not completed will the customer get his / her
money back? When?
Yes. In case for any reason, technical or business, the IMPS transaction is not
completed the reversal of the remitters funds will happen immediately. In case if such a
transaction becomes a subject to reconciliation wherein the status of transaction is not
determined immediately, the reversal of funds will happen on the next working day.
19. What are the charges for the customer for sending and receiving
remittances using IMPS?
The charges for remittance through IMPS are decided by the individual banks. Please
contact your bank for the details.
20. Are there any subscription charges for the customers to avail this
facility?
The charges for remittance through IMPS are decided by the individual banks.
K.C.COLLEGE
21. How long does it take for the remittance to get credited into the
beneficiary account number?
The funds should be credited into the beneficiary account within 30 seconds after
initiated the transaction.
22. Can the remitter transfer funds from his / her to the beneficiary
account in other bank?
Yes, the remitting customer can transfer funds to the beneficiary account in other IMPS
member banks. The list of banks offering IMPS is available on
website http://www.npci.org.in/bankmember.aspx
23. Is it necessary to have sufficient account balance to initiate a

remittance?
Yes, the customer should have sufficient account balance to initiate a fund transfer.
24. Is it necessary to have a minimum balance to receive funds

through IMPS?
This will be decided by the beneficiary bank.
25. How does the remitter come to know that his account is debited
and funds have been credited in the beneficiarys account?
The remitting bank sends a confirmation SMS to the remitting customer about the
transaction initiated by him / her.
26. How does a beneficiary come to know of funds being credited to

his / her banks account?
The beneficiary bank sends a confirmation SMS to the beneficiary customer informing
him / her of the credit in the account.
27. Can a customer remit and / or receive remittance using the mobile
number other than the one registered with the bank?
The customer can remit and / or receive funds using the registered mobile number only.
In case he / she need to remit / receive funds using the other mobile number, he / she
will have to approach the bank and complete the process of changing the registered
mobile number for mobile banking.
K.C.COLLEGE
28. When can the beneficiary use the funds received through IMPS?
The beneficiary can use the funds immediately on receipt of credit in the account. The
funds received through IMPS are good funds and can be used immediately upon credit.
K.C.COLLEGE
According to an April 2007 report by the Bank for International Settlements,

theforeign exchange market has an average daily volume of close to $3 trillion,
making it the largest market in the world. Unlike most other exchanges such as
the New York Stock Exchange or the Chicago Board of Trade, the FX market is
not a centralized market. In a centralized market, each transaction is recorded by
price dealt and volume traded. There is usually one central place back to which
all trades can be traced and there is often one specialist or market maker. The
currency market, however, is a decentralized market. There isn't one "exchange"
where every trade is recorded. Instead, each market maker records his or her
own transactions and keeps it as proprietary information. The primary market
makers who make bid and ask spreads in the currency market are the largest
banks in the world. They deal with each other constantly either on behalf of
K.C.COLLEGE
themselves or their customers. This is why the market on which banks conduct
transactions is called the interbank market.
The competition between banks ensures tight spreads and fair pricing. For
individual investors, this is the source of price
quotes
and is where forex brokers offset their positions. Most individuals are unable to
access the pricing available on the interbank market because the customers at
the interbank desks tend to include the largest mutual and hedge funds in the
world as well as large multinational corporations who have millions (if not billions)
of dollars. Despite this, it is important for individual investors to understand how
the interbank market works because it is one the best ways to understand how
retail spreads are priced, and to decide whether you are getting fair pricing from
your broker. Read on to find out how this market works and how its inner
workings can affect your investments.
Who makes the prices?
Trading in a decentralized market has its advantages and disadvantages. In a
centralized market, you have the benefit of seeing volume in the market as a
whole but at the same time, prices can easily be skewed to accommodate the
interests of the specialist and not the trader. The international nature of the
interbank market can make it difficult to regulate, however, with such important
players in the market, self-regulation is sometimes even more effective than
government regulations. For the individual investor, a forex broker must be
registered with the Commodity Futures Trading Commission as a futures
commission merchant and be a member of the National Futures
Association(NFA). The CFTC regulates the broker and ensures that he or she
meets strict financial standards. (For more insight on determining whether you're
getting a fair price from your broker, read Is Your Forex Broker A
Scam? and Price Shading In The Forex Markets.)
Most of the total forex volume is transacted through about 10 banks. These
banks are the brand names that we all know well, including Deutsche Bank
(NYSE:DB), UBS (NYSE:UBS), Citigroup (NYSE:C) and HSBC (NYSE:HBC).
Each bank is structured differently but most banks will have a separate group
K.C.COLLEGE
known as the Foreign Exchange Sales and Trading Department. This group is
responsible for making prices for the bank's clients and for offsetting that risk with
other banks. Within the foreign exchange group, there is a sales and a trading
desk. The sales desk is generally responsible for taking the orders from the
client, getting a quote from the spot trader and relaying the quote to the client to
see if they want to deal on it. This three-step process is quite common because
even though online foreign exchange trading is available, many of the large
clients who deal anywhere from $10 million to $100 million at a time (cash on
cash), believe that they can get better pricing dealing over the phone than over
the trading platform. This is because most platforms offered by banks will have a
trading size limit because the dealer wants to make sure that it is able to offset
the risk.
On a foreign exchange spot trading desk, there are generally one or two market
makers responsible for each currency pair. That is, for the EUR/USD, there is
only one primary dealer that will give quotes on the currency. He or she may
have a secondary dealer that gives quotes on a smaller transaction size. This
setup is mostly true for the four majors where the dealers see a lot of activity. For
the commodity currencies, there may be one dealer responsible for all three
commodity currencies or, depending upon how much volume the bank sees,
there may be two dealers.
This is important because the bank wants to make sure that each dealer knows
its currency well and understands the behavior of the other players in the market.
Usually, the Australian dollar dealer is also responsible for the New Zealand
dollar and there is often a separate dealer making quotes for the Canadian dollar.
There usually isn't a "crosses" dealer - the primary dealer responsible for the
more liquid currency will make the quote. For example, the Japanese yen trader
will make quotes on all yen crosses. Finally, there is one additional dealer that is
responsible for the exotic currencies such as the Mexican peso and the South
African rand. This setup is usually mimicked across three trading centers London, New York and Tokyo. Each center passes the client orders and positions
to another trading center at the end of the day to ensure that client orders are
watched 24 hours a day. (To continue reading about currency crosses, see Make
The Currency Cross Your Boss andIdentifying Trending & Range-Bound
Currencies.)
K.C.COLLEGE
How do banks determine the price?

Bank dealers will determine their prices based upon a variety of factors including,
the current market rate, how much volume is available at the current price level,
their views on where the currency pair is headed and their inventory positions. If
they think that the euro is headed higher, they may be willing to offer a more
competitive rate for clients who want to sell euros because they believe that once
they are given the euros, they can hold onto them for a few pips and offset at a
better price. On the flip side, if they think that the euro is headed lower and the
client is giving them euros, they may offer a lower price because they are not
sure if they can sell the euro back to the market at the same level at which it was
given to them. This is something that is unique to market makers that do not offer
a fixed spread.
How does a bank offset risk?
Similar to the way we see prices on an electronic forex broker's platform, there
are two primary platforms that interbank traders use: one is offered by Reuters
Dealing and the other is offered by the Electronic Brokerage Service (EBS). The
interbank market is a credit-approved system in which banks trade based solely
on the credit relationships they have established with one another. All of the
banks can see the best market rates currently available; however, each bank
must have a specific credit relationship with another bank in order to trade at the
rates being offered. The bigger the banks, the more credit relationships they can
have and the better pricing they will be able access. The same is true for clients
such as retail forex brokers. The larger the retail forex broker in terms of capital
available, the more favorable pricing it can get from the interbank market. If a
client or even a bank is small, it is restricted to dealing with only a select number
of larger banks and tends to get less favorable pricing.
K.C.COLLEGE
Both the EBS and Reuters Dealing systems offer trading in the major currency
pairs, but certain currency pairs are more liquid and are traded more frequently
over either EBS or Reuters Dealing. These two companies are continually trying
to capture each other's market shares, but as a guide, the following is the
breakdown where each currency pair is primarily traded:
EBS
Reuters
EUR/USD
GBP/USD
USD/JPY
EUR/GBP
EUR/JPY
USD/CAD
EUR/CHF
AUD/USD
USD/CHF
NZD/USD
Cross currency pairs are generally not quoted on either platform, but are
calculated based on the rates of the major currency pairs and then offset through
the legs. For example, if an interbank trader had a client who wanted to go long
EUR/CAD, the trader would most likely buy EUR/USD over the EBS system and
buy USD/CAD over the Reuters platform. The trader then would multiply these
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rates and provide the client with the respective EUR/CAD rate. The two-currencypair transaction is the reason why the spread for currency crosses, such as the
EUR/CAD, tends to be wider than the spread for the EUR/USD.
The minimum transaction size of each unit that can be dealt on either platform
tends to one million of the base currency. The average one-ticket transaction size
tends to five million of the base currency. This is why individual investors can't
access the interbank market - what would be an extremely large trading amount
(remember this is unleveraged) is the bare minimum quote that banks are willing
to give - and this is only for clients that trade between $10 million and $100
million and just need to clear up some loose change on their books
CONCLUSION
Inter banking transactions perform and important role in the financial market by
providing easy and fast exchanges and transfer. It also strengthens the financial
framework of the country by easy flow of money in the market.
K.C.COLLEGE

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