Settlement Risk Management

NPCI as a national retail payments system operator along with member participants is exposed to exigencies of settlement risk. The settlement risk is the risk that a counterparty, whether a participant or other entity, will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so at a future date. This risk could further lead to principal risk. (Principal Risk is the risk of losing the transaction value due to bankruptcy or default). Thus, both parties to the financial transaction are potentially exposed to settlement risk on the settlement date. Settlement related issues have the potential to create systemic risks, particularly in the cases of insolvency, failure of the financial market infrastructure or moratoriums issued by the central bank. NPCI has obligation of "Settlements" under the following Payment System statutes in India -

  • Chapter V of The PSS Act, 2007 u/s 23 - The Rights & Duties of Payment System Provider with respect to Settlement and Netting
  • Chapter VI of The PSS Act, 2007 u/s 24 - The Settlement of Disputes

NPCI adheres to the legal basis and specific statutes as applicable. As an on-going process and under relevant laws NPCI demonstrates adequate affirmative position pertaining to the settlement process, perform risk-based approach thereby safeguarding the enterprise against the exigencies of settlement risk and report/communicate of any default situation to the RBI and member banks.

NPCI is cognizant of the potential risks associated with payment systems such as NFS/ATM, IMPS, UPI, AEPS, Bharat BillPay, NETC, NACH (credit returns) and RuPay. To mitigate these risks, the Settlement Guarantee Fund (SGF) has been established, which consists of two components:

1. Line of Credit (LoC):

90% of the Settlement Guarantee Fund is arranged by NPCI through a Line of Credit obtained from various banks.

2. Member Contribution:

10% of the Settlement Guarantee Fund is contributed by member banks as cash collateral. When member banks join the system, they are required to contribute a minimum of Rs. 5 lakh per product as a joining fee, which is considered part of the cash collateral. Any contribution made by member banks towards the Settlement Guarantee Fund is a non-interest-bearing refundable deposit with NPCI.

Additionally, NPCI has implemented effective tools and techniques to proactively monitor and manage potential stress scenarios that could lead to systemic risks and potential downsides.

If the Real-Time Gross Settlement (RTGS) account does not maintain a sufficient balance at the time of settlement, it can result in a delay in the settlement process. Furthermore, such instances of insufficient funds in an RTGS account may attract penal charges or even lead to the cancellation of NPCI direct membership, or possibly both.

“Managing Director and Chief Executive Officer or Chief Risk Officer or Chief Financial Officer are hereby authorized to take necessary decisions with respect to Settlement Risk and towards maintenance of Settlement Guarantee Fund (SGF) and related processes surrounding the same.”

General loss sharing mechanism for payment systems:

Loss arises when an institution fails in its commitment to meet its payment obligations. In such an event the commitment not honoured by the failed member bank is guaranteed by NPCI. The failure of a member would not hinder the process of settlement as the Settlement Guarantee Fund [SGF] would instantly operate to fund the immediate liquidity requirement. In the event of a temporary failure, the amount is replenished by the defaulting member bank(s) itself. In the event of permanent failure of a member bank(s), the net obligation of the default member bank(s) shall be borne by the surviving member banks of the respective payment system who have participated on that day in that cycle. The recovered amount from the surviving member banks would be used to replenish the funds utilized from Settlement Guarantee Fund [SGF] to meet the settlement.

Acceptance of Government Securities (G-Sec) as Collateral for Settlement Guarantee Fund (SGF):

National Payments Corporation of (NPCI) had introduced Standardized Settlement Guarantee Mechanism (SSGM) Policy (vide circular no. NPCI/2021-2022/RMD/001 dated June 18, 2021) across all online products to put in place an appropriate risk management system to meet the exigencies of settlement risk for all the services offered by NPCI.

As per SSGM Policy, NPCI is now accepting Government Securities (G-Sec) as a part of Settlement Guarantee Fund (SGF) / Collateral contribution, which has been approved by the Reserve Bank of India (RBI).

The eligible member banks of NPCI can now contribute collateral maximum up-to 50% of total collateral requirement by way of G-Sec. For accepting G-Sec in the form of collateral NPCI has opened a Constituents Subsidiary General Ledger (CSGL) account no. 52181900003 with the RBI, wherein the eligible member banks of NPCI can contribute the G-Sec. This has been communicated vide circular no. NPCI/2022-23/ACCT/001 dated July 01, 2022.

In case of any query / assistance required for the same, you may get in touch with us at treasury.desk@npci.org.in or contact@npci.org.in

NPCI Risk Management PDF

G-Sec SGF Notification