The proposed outfit will be the apex bank's first subsidiary in the field of information technology (IT).

The proposal, recommended by the payment system group, will be placed at the RBI board for its ratification. The subsidiary will be set up under the proposed Electronic Funds Transfer (EFT) Act which is being worked by the central bank.

"We are setting up the subsidiary as we cannot be a regulator as well as a player in settlements system. The subsidiary will be an ISP and regulated by the RBI under the EFT Act," a source in the central bank said.

The ISP may set up a contingency fund to meet losses, if any, so that the RBI will not be required to pump in money even if the subsidiary incurs losses on the RTGS system. The other players inthe settlement system will be banks, financial institutions and authorised dealers in the forex market.

The central bank is setting up an RTGS under the guidance of a proposed national payment council.

The RBI has already instituted a payment system group (PSG) and a V-SAT user group to deal with the issues relating to the RTGS system. The PSG will visit Australia in the second half of January to study and understand the RTGS system there.

According to the RBI, the move towards an RTGS environment is the main objective of payment system reforms in most countries of the world. The RTGS will seek to phase out the risks involved in a net settlement system where the default by one bank may lead to a "knock-on" or domino effect on the system. The gross settlement system reduces the risks significantly as transactions are settled one by one on a bilateral basis in a real-time mode.

The national RTGS facility would help promote an integrated national payment covering an array of payment products andservices with a mix of paper and electronic payments, ATM, smart/credit transactions, national clearing system on deferred net settlement basis, national delivery versus payment (DVP), cross-currency clearing and settlement system, money market dealing system, debt and capital market segments, national on-line government accounts system, national currency management and accounting system.

The Reserve Bank has identified the RTGS as the centre-piece of an integrated payment system which will enable real time and on-line fund management for the financial system. The proposed RTGS will be the centralised settlement system into which all the dispersed net settlement systems will flow.

Apart from providing real time fund settlement environment, the RTGS is critical for an effective risk-control strategy as the risks inherent in the net settlement systems are well known. The introduction of the new payment system becomes more relevant as cross-country risks are more difficult to manage compared with domestictransactions.