CROSS-BORDER INTERBANK PAYMENT SYSTEMS(CIPS)

Background

• In 2015, China launched a new payments system—the Cross-Border Interbank Payment System (CIPS)—that uses China’s currency, the renminbi (RMB), for international transactions.
• China's central bank launched CIPS in 2015 as part of its efforts to increase the use of yuan for global transactions, reducing the country's reliance on US dollars.
• CIPS supports cross-border payment and settlement in the yuan and the Hong Kong dollar. 
• However, the yuan's share of global payment, at 3.2 per cent in value, is still leagues behind that of the US dollar, which is at 40 per cent.

About SWIFT

• The SWIFT system stands for the Society for Worldwide Interbank Financial Telecommunication.
• The SWIFT messaging network is a component of the global payments system.
• Its principal function is to serve as the main messaging network through which international payments are initiated.
• Established in 1973, it is a secure platform for financial institutions to exchange information about global monetary transactions such as money transfers.
• SWIFT acts as a carrier of the "messages containing the payment instructions between financial institutions involved in a transaction."
• Thus, SWIFT does not move money, but it operates as a middleman to verify information of transactions by providing secure financial messaging services to more than 11,000 banks in over 200 countries.
• Based in Belgium, it is overseen by the central banks from eleven industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, besides Belgium.

CIPF vs SWIFT

• Compared to the scope of SWIFT, which has 11,000 members, CIPS is tiny.
• SWIFT says it transfers 50 million messages a day, facilitating trade of $5 trillion every day, which dwarfs the 15,000 messages handled daily by CIPS.
• Even though it has managed to attract nearly 1,205 indirect participants internationally, CIPS only has 75 direct participants (mostly overseas subsidiaries or branches of Chinese banks).

Need for an alternative for swift

• India, Russia and China are exploring an alternative to the US-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment mechanism in a bid to smoothen trade with countries facing American sanctions.
• Russia’s financial messaging system SPFS will be linked with the Chinese cross-border interbank payment system CIPS.
• While India still does not have a domestic financial messaging system, it plans to link the Central Bank of Russia’s platform with a service that is under development.
• The new system is expected to work as a “gateway” model when messages on payments are transcoded by a certain financial system.

Indian way of trading in domestic currencies

• Rupee-Ruble is a payment mechanism between India and Russia to settle trade payments in rupees and rubles, instead of dollars and euros.
• Goods imported to India will be paid for in rupees and goods imported by Russia will be paid for in rubles.
• This is being done to reduce dependence on the dollar and makes the countries less vulnerable to US sanctions.
• The rupee-ruble trade agreement was conceived decades ago in 1953.

Can the dollar be completely phased out?

• To keep the dollar out of the equation, which would need a direct domestic currency conversion rate, which is currently not available.
• Global currencies are pegged to the dollar. So to arrive at a conversion rate, we need to convert the domestic currency of both countries to dollars, to reach the domestic exchange rate between countries.
• If we are to arrive at a rupee-ruble direct exchange rate, then the governments and the central banks of both countries have to agree on the rates.

How important is domestic currency exchange

• It is important for countries such as India and China to have an alternative payment mechanism in place with Russia as the US, the EU and the UK have blocked most of the Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT). 
• SWIFT is a global secure interbank system that communicates payment instructions and enables transactions between banks from all the countries around the world.
• Since transactions with Russia cannot be carried out in international currencies such as the dollar or the euro, a domestic currency payment mechanism could play a pivotal role in deciding whether domestic exporters will get their payments and if trading can be continued with Russia.