Context: India’s Structured Financial Messaging System (SFMS) can become a viable alternative to the SWIFT messaging system.

Key Points

• India has two parallel offerings to the world in the area of banking.

• RBI has been proactively trying to internationalise the rupee and its payment systems.

• India’s Structured Financial Messaging System (SFMS) as an alternative to SWIFT.

• While RBI efforts have gained attention, the internationalisation of India’s Structured Financial Messaging System (SFMS) went unnoticed.

• Operationalised in 2001, SFMS provides secure financial message services to domestic banks and financial institutions within India. Around 250 members use SFMS either through a thick client or cloud-based systems.

RBI Efforts

• RBI and the Central Bank of the UAE entered into two significant memorandums of understanding related to the use of local currencies for cross-border transactions, and the interlinking of respective payment systems.

• The objective is to promote the use of the rupee and the UAE dirham bilaterally and to promote fast and cost-effective cross-border fund transfers.

• The statement also includes exploring the linking of payments messaging systems.

Difference between fund transfer and messaging

• Fund transfers and messaging are two distinct processes.

• A payment transaction involves two key elements: the exchange of financial messages between the banks, and the actual transfer of funds.

• Within India, both the National Electronics Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) are fund transfer platforms, which are first validated by a secure message sent through SFMS.

How is SFMS as SWIFT alternative

• The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is widely used as the messaging system for international payments.

• SWIFT is just a messaging system like SFMS that provides secured financial messages to financial institutions.

• It neither monitors nor manages the transfer of funds; that process is separately executed by banks using different platforms.

• SFMS is at par, if not better, than SWIFT on messaging standards, messaging capabilities and cost.

• the internationalised version would cost less than half of SWIFT.

• SWIFT currently uses MT (Message Text) Standards and has initiated a shift to the International Organisation of Standardisation 20022 (ISO 20022).

• SFMS provides certain additional message types for interbank transactions such as Letters of Credit which can be used by foreign banks as well. SWIFT is only now building this capability.

• Given that it is interoperable with SWIFT, they can co-exist easily. This would enhance the resilience of global financial architecture but making it less dependent on a single messaging system.

How does the banking messaging system works?

• To enable fund transfer as a first step, the transfer request is communicated between the banks.

• SWIFT messages between remitter (sender) and beneficiary banks and will first authenticate various details.

• After confirmation, the transfer of funds between the banks gets initiated through VOSTRO and NOSTRO accounts. 

• NOSTRO (our’s) account is a domestic bank’s account maintained by a foreign bank.

• VOSTRO (their’s) account is the same foreign bank’s account maintained by the domestic bank.

• The settlement of the entire process takes 2- 3 business days as per the mutual agreements between the counterparties.