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At the very outset I would like to express my sincere thanks and gratitude to Mrs. Shweta Bagaria Sarawagi, Senior Accounts Officer-G.M.O.-E.Z., for her Guidance, Support, Encouragement and Suggestions during my internship training in Hindustan Petroleum Corporation Limited. My special thanks to Mrs. Archana Agarwal DGM-Finance and Mr. K.R.Ramesh, DGM-Finance who could lend me their precious time during my internship. Along with it I would like to thank my college guide Prof. Dr. Atish Prosad Mondal who stood next to me time to time and gave me his helping hand in finishing my project. Last but not the least, I would like to offer my sincere gratitude to all officers & staffs of the General Managers Office, Eastern Zone situated at 6,Church Lane, Kolkata-700001, all employees of the Kolkata Retail Outlet at Camac Street, Kolkata the BudgeBudge Refinery & Lubricant Plant at BudgeBudge for their kind help . For any error that remains, I off course stand personally responsible.
-RONI RUNDLETT
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TABLE OF CONTENTS
INTRODUCTION TO REAL TIME GROSS SETTLEMENT Objective of the study Scope of the study Key factors about r.t.g.s. Interface of r.t.g.s. with other systems Indian scenario- r.t.g.s. Types of r.t.g.s. transactions Liquidity factor of r.t.g.s. Steps involved in r.t.g.s. transactions Backdrop of Hindustan petroleum corporation ltd.
Infrastructure-Hindustan petroleum corporation ltd. 24 Analysis of the method of functioning of h.p.c.l Research methodology Summary of findings Current situation of transaction systems Conclusion Bibliography 25-29 30 31 32-33 34 35
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RTGS stands for Real Time Gross Settlement. 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. The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs. 1 Lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum stipulation has been fixed for NEFT transactions. Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiarys account within two hours of receiving the funds transfer message. RTGS will eliminate settlement risk in the case of interbank and high value transactions. Banks could use balances maintained under the cash reserve ratio (CRR) instead of the intra-day liquidity (IDL) to be supplied by the central bank for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI has fixed the IDL limit for banks to three times their net owned fund (NOF).The IDL will be charged at Rs 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
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cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day. The system has also stabilised over the years and has been witnessing increased coverage in terms of bank branches and transaction volume. The volume of RTGS (Real Time Gross Settlement System) transactions is increasing rapidly. RTGS settled 1.94 million transactions in the month of March 2009 as against 0.72 million transactions in March 2008. Customer transactions settling in RTGS presently constitute 89 percent of total RTGS transactions and are growing.
The RTGS system implemented by the Reserve Bank has been in operation for more than four years. The system has also stabilised over the years and has been witnessing increased coverage in terms of bank branches and transaction volume. The volume of RTGS (Real Time Gross Settlement System) transactions is increasing rapidly. Reserve Bank of India reviewed the entire gamut of RTGS customer transactions with a view to making them more users friendly. Based on these discussions, the following decisions have been taken for implementation by RTGS member banks latest by June 01, 2009. 1. It is triturated that in a Straight Through Processing (STP) environment, standardization is very much necessary and uniformity in message format is a pre requisite for the success of STP. 2. RTGS Customers have been complaining that there is no uniformity on information provided to the customer in the pass books / account statements by different banks. Some banks merely indicate `RTGS credit without details while other banks are giving sender's bank account number or UTR number of the transactions etc. Customer is receiving multiple RTGS credits on a given date, is at a loss to understand the source of funds leading to reconciliation issues.RBI has therefore, and advised that
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a) A bank customer receiving RTGS credit shall be provided with the name of the remitter in his account statements /pass book. b) A bank customer sending a RTGS remittance shall be provided with the name of the beneficiary in his account statements / pass book. The banks are free to provide any additional information as they deem necessary / useful.
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Objective of study.....
With the advancement of technology the company is trying to switch over to RTGS for receiving payments from them. This system is advantageous for the company in many ways. They are it ensures better mobility of the funds of the company It reduces the time lag between the receipt of the instrument and the crediting of the bank account of the company. It reduces the risk factor of a default in payment by the payers as there are no chances of dishonour in this mode. RTGS is a cost-effective method of collecting payments. Thus it lowers the expenditures of the company. At present 60% of Hindustan Petroleum Corporation Limited dealers have switched over to RTGS mode. However 40% still remain to instruments and are yet to be transferred.
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sending bank according to their assessment of the urgency of the transfer. Where the priorities are assigned by the system automatically, generally a high priority is attached to transfer orders relating to central bank operations or settlement obligations stemming from other systems such as securities settlement systems (on Deliver versus Payment basis).
LIQUIDITY MANAGEMENT
Since each transaction entering the RTGS system is to be settled individually (without being set off against any incoming transaction with the same counterparty or otherwise), it demands a lot of liquidity to be made available by the system participants. If the banks have to optimize on the liquidity requirements, it calls for a very fine liquidity management on their part to ensure that transactions or payment messages do not linger in the system for long intervals of time thereby causing Gridlocks in the system. Since settlement in the RTGS system takes place in the books of the central bank, it is thus essential for the banks to have sufficient Balances in their central bank accounts throughout the processing day.
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Sources of Liquidity The participants in an RTGS system have the following sources of liquidity to meet the demands for settlement balances in the system: Balances maintained in the account/s with the central bank Incoming transfers from other banks Liquidity support from the central bank Borrowing from other banks in the money market
Balances maintained by the banks with the Central Bank may also be a part of reserve requirements. Provided these balances can be used by the bank during the day, such reserve requirements provide a useful source of funds for the banks participating in the RTGS system. While incoming transfers certainly add to the liquidity pool of the banks, the dependability on such receipts is determined by the patterns of receipts and their predictability. It also depends on the availability of information in the system about such receipts. Banks may be able to fund their positions by borrowing from other banks and institutions in the money market. Utilisation of this source, however, depends upon the market timings and the liquidity requirements along with its associated costs to the borrower. Another important source of liquidity to the banks is the credit extension given by the central bank itself. Many central banks provide intra-day credit to the RTGS participant banks, mostly free of interest, through fully collateralized intraday overdrafts or intraday repos. Central banks may also set limits to such credit extensions / liquidity support for different categories of members. A nominal fee is also charged by many central banks for such accommodation. Some central banks also extend overnight credit facility to the RTGS participants under certain conditions. Such facilities would certainly be costlier for the banks. For the individual banks, optimal liquidity
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management is a challenge it has to finely balance the cost of delaying payment and the cost of maintaining adequate liquidity (either its own resources or arranging through other sources mentioned earlier). Besides the direct cost in terms of fees / charges etc., there is also the opportunity cost of the using the assets to be given as collateral for obtaining such liquidity (especially from the central bank).
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Membership criteria.....
Membership is open to all scheduled banks and to any other institution at the discretion of RBI. The criteria for membership include: Member of INFINET Member of Negotiated Dealing System Maintain Current Account with DAD, Mumbai Scheduled bank or Primary Dealer Clearing house or clearing agency
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Membership category
Type A Membership includes RBI, all Scheduled banks including scheduled cooperative banks. These members will be required to open a separate Settlement account in DAD, Mumbai that will be distinct from their existing current account. These members will have a Participant Interface, which will enable them to communicate with the RTGS system through the IFTP. These members are eligible for availing the Intra-Day Liquidity facility extended by RBI, and can have access to all kinds of RTGS transactions. Type B membership is extended to Primary Dealers who will have similar features extended to Type A members except putting through customer transactions. Type C membership will be extended to Scheduled banks and PDs, participating in call money operations, which will avail of RTGS services through either a Type A member of the Bank. Hence these members will not require complete infrastructure facilities.
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Type D membership will be extended to clearing entities, which will submit clearing batches for settlement to the RTGS system (through Clearing Interface / Net Settlement Interface). It could include NCCs, Clearing Houses, CCIL and Stock Exchanges. Type E membership will be extended to Non-scheduled banks and other financial institutions if so decided by RBI in the future Settlement Account and Funding Account Settlement account is a dedicated Account for RTGS transactions to be opened with RBI, DAD, Mumbai by members. It will be an Intra Day Account, which will be funded (from the regular current account of the member with DAD, Mumbai) at RTGS Start of Day, and the balance will be flushed at RTGS End of Day. Accordingly, funding instructions (for transfer of funds from current account to settlement account) have to be given by the members in the form of Standing Instructions.
Liquidity in RTGS
RTGS systems entail active management of intra-day liquidity as adequate liquidity makes possible a smooth flow of payments in RTGS helping to avoid delays to individual payments and minimizing liquidity risks. Generally, sources and management of funds include: Balances maintained in the account with the central bank / settlement bank Incoming transfers from other banks including borrowing from money market Credit extensions from the central bank Separate RTGS settlement account Own Account Transfers (from current accounts of members maintained with DAD Mumbai as well as at other DADs) Queuing facilities (holding payment instructions in a separate queue till such time sufficient balance is available in the settlement account)
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Priority assignment by members along with re-prioritization facility Intra-Day Liquidity facility Gridlock Resolution Mechanism Mechanics of Intra Day Liquidity (IDL)
In our RTGS system, IDL is sought to be provided in the form of Intra Day Repos which will be fully collateralized in the form of government securities. For this purpose, the RTGS system will have an interface with the Securities Settlement System. In the SSS, members will have a separate SGL account called as IDL SGL account into which members have to deposit government securities from their SGL account which will be used as collateral (after applying suitable margin / haircut) as and when IDL is to be used by a member. The underlying principle in an intra-day credit facility is that participants must extinguish it by the close of the day by fiat money to the central bank. Thus, the stock of reserve money which expands during the course of the day returns to its initial level. The Reserve Bank would charge Rs.25 per transaction following the recommendations of the Working Group on Intra-day Credit Facility (Chairman Shri A.B.Telang). In order to minimize credit risk IDL would be provided against Central Government marketable securities (as explained above) with appropriate haircut up to a limit of three times of net owned funds (NOF) (Tier I Capital) as per the latest audited balance sheet. The system will automatically attempt to reverse outstanding IDL at frequent time intervals. At any cost, outstanding IDL has to be reversed by the member by end of the RTGS day. Accordingly, if a participant is unable to extinguish its intra-day repo position during the course of the day, the outstanding amount would attract a penal rate pegged at twice the Bank Rate or twice the corresponding days maximum call money rate, whichever is higher. If this breach (i.e., spill over to the overnight loan) occurs once, the participant would
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have to pay the penalty, besides being cautioned by the RBI. The account would also be placed under surveillance. If it happens for a second time in a six-month period, the intra-day facility would be suspended by the Bank and supervisory surveillance would be triggered. For restoration of intra-day facility, reasonable evidence has to be provided to the RBI that prudential treasury management is in place. If after restoration, it recurs for the third time during the six month period, the intra-day facility will be withdrawn permanently.
Steps involved in RTGS processing of transactions The following are the sequence of steps in a typical RTGS transactions, simplified so as to enable a better understanding of the process flow of transactions:
1. RTGS being a Credit-push mechanism (where the payers account is first debited before passing on credit to other members in the system), the paying bank / member will send the payment instruction to the IFTP (Inter-bank Funds Transfer Processor). This payment instruction could be on its own account or on account of customer requests. 2. The IFTP receives the messages, validates them for security and authentication considerations at the outset and if the message passes such validations send an acknowledgement to the sender. In case of any problem, an error message is sent and in case of any security breach, the logical connectivity with the sender is severed immediately. Thereafter, the content of the message is verified and taken up for further processing. Only that information which is relevant for settlement at RTGS will be stripped from the payment instruction and forwarded to RTGS and the rest of the information (such as transaction details, customer information etc.) is stored at the IFTP itself. 3. The instruction sent by IFTP is received by the RTGS which maintains the settlement base / accounts where the funds transfer actually takes place. The availability of necessary balance
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in the paying members account is checked. If sufficient balance is available, the paying banks settlement account (distinct from and funded from the current account at Mumbai DAD) is debited and the amount credited to the receiving banks settlement account. The message is returned to the IFTP from where an acknowledgement is sent to the sending bank / member and a credit advice is sent to the receiving bank / member. The relevant details (transaction details, customer information etc.) that were stripped earlier from the payment instruction, are added to the message by the IFTP and the forwarded to the receiving bank. In case the transaction relates to customer funds transfer, then the credit has to be passed on to the ultimate beneficiary / customer within the stipulated time. 4. In case sufficient funds are not available in the paying members settlement account, the payment instruction is put in a logical queue. The pending payments in the queue are monitored at scheduled intervals and will be processed on FIFO basis (within the priority allotted to each payment). At the end of the day, any unprocessed message will be returned to the sender. 5. Where the transaction is eligible for availing Intra-Day Liquidity (IDL) facility then the system will start the process for obtaining IDL so that necessary funds can be obtained and the payment instruction can be processed successfully. Accordingly, a message will be sent to the Securities Settlement System which is a component of the PDO-NDS / SSS application (having an interface with the RTGS system). 6. When the SSS receives the message from RTGS for IDL requirement, the first step will be to authenticate the message from security aspects. SSS is a component where all the investment details of members are available not only to RBI but also to the members themselves. 7. As stated earlier, for the purpose of obtaining IDL, members have to open a separate SGL account with PDO Mumbai. Into this account, members have to deposit sufficient amount of
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eligible securities from their own SGL account so that as and when IDL is required by the member, the securities lodged in the IDL SGL account will be used as collateral. Hence, when the IDL request is received by SSS, the availability of securities balance in the IDL SGL account is first verified (after applying the stipulated margins / hair-cut). 8. The unencumbered balance of securities in the IDL SGL account of the member will be reckoned for SLR calculation. If securities are available to cover the required amount of funding, then the securities are debited from the members IDL SGL account and a success message is sent from the SSS to RTGS. 9. If sufficient securities balance is not available, then a failure message will be sent to RTGS system. In case no IDL can be given, the payment instruction will be put back into the queue. 10. If a successful message is received from SSS, then IDL as required (within the stipulated limit) will be made available to the member so that the transaction in the payment queue can be processed. 11. Whenever IDL is used by a member, the members settlement account will be monitored / checked at stipulated time intervals by the IDL Reversal process wherein, any fresh liquidity coming into the account (from other sources) would be used to first reverse the IDL availed by the member. In such a case, a message will be sent to SSS to release the securities back into the members IDL SGL account so that the same will be available for further utilization of IDL by the member. 12. Based on availability of this liquidity, the paying members settlement account is debited and the receiving members account is credited. Message to the paying member and credit advice to receiving member is sent as explained in step 3 above.
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HPCL, a fortune 500 company, is one of the major integrated oil refining and marketing companies in India. It is a Mega Public Sector Undertaking (PSU) with Navaratna status. HPCL accounts for about 20% of the market share and about 10% of the nation's refining capacity with two coastal refineries, one at Mumbai (West Coast) having a capacity of 6.5 Million Metric Tonnes Per Annum (MMTPA) and the other in Vishakhapatnam (East Coast) with a capacity of 8.3 MMTPA. HPCL also holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited (MRPL), a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA. HPCL owns the country's largest Lube Refinery with a capacity of 335,000 Metric Tonnes which amounts to 40% of the national capacity of Lube Oil production. HPCL has given India a firm ground in this sector with its world class standard of Lube Base Oils. Presently HPCL produces over 300+ grades of Lubes, Specialities and Greases.
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HPCL's infrastructure is at par with that of the best global corporations in the hydrocarbons sector. For over a quarter century now, HPCL has been consistently breaking new grounds in production and marketing. A glimpse of the vast marketing network already developed is given below in a table:
08-09
07-08
06-07
05-06
04-05
Regional Offices Terminals/Installations/TOPs Depots LPG Bottling Plants ASFs Retail Outlets SKO/LDO Dealers LPG Distributors LPG Customers (in crores)
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THERE ARE TWO TYPES OF BANK ACCOUNTS MAINTAINED BY HINDUSTAN PETROLEUM CORPORATION LIMITED FOR ITS FINANCIAL OPERATIONS. THEY ARE: OPERATIVE ACCOUNTS NON-OPERATIVE COLLECTION ACCOUNTS
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OPERATIVE ACCOUNT
There are various modes in which the operative account of Hindustan Petroleum Corporation Limited functions. CHEQUES - Hindustan Petroleum Corporation Limited makes certain payments by way of cheques. For example the payment made for leasehold premises is made by way of cheques. ONLINE PAYMENTS - this is a process whereby Hindustan Petroleum Corporation Limited, like any other corporate organization, makes its payments through any bank, keeping a record of the transactions. Later the vouchers are prepared in the system by the accountants for book-keeping purposes. E-PAYMENTS under this system the accountants of Hindustan Petroleum Corporation Limited upload all the payment vouchers in batches from the companys server to the STANDARD CHARTERED BANK server through BATCH PROCESSING ROUTE instructing the bank to make the mentioned payments. Thus the instructions get processed and payments are made. LETTER OF AUTHORITY (L.A.) it is a system where the specified authorized signatories of Hindustan Petroleum Corporation Limited can issue a LETTER OF AUTHORITY instructing the bank to make payments on its behalf. It is to be noted that only the authorized personal can issue such letters. ELECTRONIC DATA INTERCHANGE (EDI) - Hindustan Petroleum Corporation Limited holds a special account in the State Bank of India for the payment of freight charges to the railway authorities. This account is linked to the CAG Branch, Mumbai and collects payments from it. The railways directly debit this account for the amount due through a system called ELECTRONIC DATA INTERCHANGE (EDI).
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The Regional Offices has an operative account through which they meet the expenses of the various operating locations under them. The limit of money held in the Operative Account is determined and approved by the Treasury at CAG Branch, Mumbai, depending upon the needs and requirements of the Operating Locations under the Regional Offices. The Operating Locations only have Petty Cash Deposits (PCD) with them to meet petty expenses like maintenance cost or cleaning charges, etc. However the limit defined for the Operating Locations does not include the Sales Tax to be paid by the Regional Offices. The Sales Tax payments are directly made by the Zonal Office through cheques or letter of authority from the treasury via the CAG Branch, Mumbai. The Sales Tax are not be paid by the Operative account of the Regional Offices. Besides the Operating account the Regional Offices have certain pre-funding accounts for meeting expenses like salary payment of the non-management level staff; pension payments; Medical expenditures; etc.
The Regional Offices can open up new accounts requesting the Treasury at CAG Branch, Mumbai. The Treasury approves the request and thus the required formalities are carried out to open up the account.
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The Regional Offices can change the limitations or authorized signatories by making a request to Treasury at CAG Branch, Mumbai. The Treasury approves the request and thus the required formalities are carried out to make the required changes. =======================================================================
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ONLINE PAYMENTS the payment is received in the company account through E-mode and cash receipt is prepared for book-keeping purposes.
DISCOUNTING LIMITS the company receives negotiable instruments from distinct dealers in respect of product supplied to them. In general the banker of Hindustan Petroleum Corporation Limited gets the instrument cleared by depositing it in the local clearing house. Then the instrument goes to the clearing house of the payer to get cleared. This usually takes a longer time which as a result blocks funds of the company. To solve this problem Hindustan Petroleum Corporation Limited has made discounting arrangements with its banker. The company has stated an estimated amount of outstation instruments it is to receive in a stipulated period of time. The company pays a fixed rate of discounting charges on the estimated amount irrespective of the fact whether the company receives any such instruments. The benefit of this system is that as soon as the instrument is presented to the banker the account of the company is created with such amount debiting the CAG Branch, Mumbai for discounting charges. Thus the funds of the company remains mobilized.
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Research Methodology.....
In order to study the effect of Real Time Gross Settlement (RTGS) In the company I was continuously monitoring the working of the system in respect of receiving and making payments for a period of 15 days. I also visited the Kolkata Retail Outlet situated at Camac Street, Kolkata to study the system of sales made by the company through its outlet. When sales are made a challan is issued against it. Various instruments of payments are received against sales. An Electronic-Cash Receipt (e-cash receipt) is generated in respect of the instrument received. At the end of the day Bank Deposit Slip (BDS) is prepared. Each BDS contains details of 10 instruments received which include the document number, the name of the bank branch on which the instrument is drawn, the instrument number and the amount to be credited. The respective instruments are attached with their BDS and sent to the bank for crediting. A Bank Reconciliation Statement is prepared at definite intervals to find out the number of instruments not yet debited or credited into the account of the company and finally sorting them out.
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SUMMARY OF FINDINGS.....
After a brief analysis of RTGS and making comparisons with other payment settlement systems the following points of benefit can be traced as follows: RTGS is one of the most efficient and effective inter-bank payment settlement systems of all RTGS is very much time saving as the entire processing of the transaction is done in electronic mode RTGS is very much cost effective as electronic processing of transactions involves a lesser amount of cost RTGS has a high level of accuracy as all transactions are efficiently completed. In case a transaction is incomplete it can be easily traced and rectified RTGS ensures a high level of transparency as the bankers of the payer and the payee receive prior information as per the debiting and crediting of their bank accounts RTGS also ensures adequate amount of payment security as the payers account is debited before the crediting of the receivers account RTGS systems entail active management of intra-day liquidity as adequate liquidity makes possible a smooth flow of payments in RTGS helping to avoid delays to individual payments and minimizing liquidity risks Transactions are processed in FIFO (first in first out) basis. Thus there is no back logging of pending transactions Under RTGS system priority codes are attached to the messages depicting their urgency and thus they can be processed in accordance of their urgency.
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ADOPTION OF RTGS
YEAR
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 INSTRUMENT TRANSACTIONS (USD MILLION) R.T.G.S. TRANSACTIONS (USD Million)
From the above table and bar-graph plotted above we can clearly ascertain that in the due course of time all undertakings are switching over to RTGS from the traditional methods of settlement of payments. The Table on the last page clearly indicates the increment of RTGS transactions over the years and decrement of Instrument Transactions, which is taken as an example in explaining the circumstance. However 40% of transactions still rely on instruments and are yet to be switched to electronic mode
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Conclusion.....
Finally I conclude hoping that my research and analysis was an informative one and provides adequate information and knowledge about the topic. After analyzing the various data and through the examination of the traditional payment settlement system and the new and modernised electronic payment settlement system I have observed that although HPCL is operating in both electronic an instruments it needs to completely switch over to the electronic mode to ensure mobility of funds and faster processing of transactions, thereby satisfying customers to the maximum. HPCL aims to be the leading company in the petrochemical industry and holds the potential to do so in its near future.
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Bibliography.....
DATA PROVIDED BY THE COMPANY AND OBSERVATIONS MADE WHILE ANALYSING THE WORKING OF REAL TIME GROSS SETTLEMENT IN HINDUSTAN PETROLEUM CORPORATION LIMITED
WEBSITES:
WWW.GOOGLE.COM WWW.HPCL.GOV.IN A REPORT BY THE BANK OF INTERNATIONAL SETTLEMENTS
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