Payment Systems to Facilitate South Asian Intraregional Trade

Driven by innovation and technology, central electronic clearing and settlements are at the core of modern payment systems which help to avoid multiple transactions. The South Asia region, having seen more development in wholesale as compared to retail payment systems, has huge opportunities for convergence to a regional payment system by effectively utilizing technological advancements in this area. Though smaller countries still lag behind, the South Asian Association for Regional Cooperation (SAARC) Payment Council offers a forum for regular interaction to facilitate such a convergence. In this regard, strengthening the regional payment mechanism which exists in the form of the Asian Clearing Union (ACU) would also benefit South Asia. It offers a base, and a history of interaction, that could be built upon using recent developments in payment systems. Revitalization of the ACU can also lead to real time flow through the system leading to faster settlement, reduction in transaction costs and delays, expansion of facilities offered including credit, types of flows allowed, and number of participants. Real Time Gross Settlement (RTGS), along with more convergence in macroeconomic policies and financial systems would reduce the risks of exchange rate volatilities and encourage usage of local currencies. Invoicing in local currencies reduces pass through of changes in exchange rates, and hence lowers their inflationary impact. As countries in the region move toward greater capital account convertibility, the ACU should expand the types of permitted transactions. Concerns about security, sources and types of flows are not an issue because electronic systems can discriminate between types of flows and provide detailed information without procedural delays. In modern payment systems finer restrictions can be imposed, as required, without raising transaction costs.