Cheque Truncation System -- An Introduction

 

Cheque Truncation System -- An Introduction

Like them or Dislike them, Cheques in India, continue to play an important role in the Payment Systems.

Though the retail as well as corporate customers are slowing moving towards electronic payments modes (RTGS/NEFT/ECR/ATM/CARDS), there is still demand for paper Cheques.

Paper Cheques are widely preferred in the following Payment Needs: ---

01) Telephone/Electricity/Water Bills

02) Credit Card Payments.

03)  Local Government Taxes.

04)  Post dated commitments.

Etc

Hence, Reserve Bank of India, Department of Payments and Settlement Systems has launched various initiatives to make cheques: -

01) Safer 02) User-friendly 03) Faster

Toward this end, the Cheque Truncation System  was sought to be intoruced in our country.

What is Cheque Truncation System?

• Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch.

• The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of Presentation, presenting banks etc.

• Thus with the implementation of cheque truncation, the need to move the physical instruments across branches would not be required, except in exceptional circumstances.

• This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques.

Why Cheque Truncation in India?

Cheque Truncation

i.                    speeds up collection of cheques and

ii.                 therefore enhances customer service,

iii.               reduces the scope for clearing related frauds,

iv.                minimizes cost of collection of cheques,

v.                  reduces reconciliation problems,

vi.                Eliminates logistics problems etc.

With the other major product offering in the form of RTGS, the Reserve Bank created the capability to enable inter-bank payments online real time and facilitate corporate customer payments.

The other product, National Electronic Funds Transfer, is an electronic credit transfer system. However, to wish away cheques is simply not possible and that is the reason why the Reserve Bank of India,  decided to focus on improving the efficiency of the Cheque Clearing Cycle. Cheque Truncation is the alternative.

Moreover contrary to perceptions, Cheque Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one point to another, thus, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle.

How the uniqueness of the cheque would be imparted to the image?

• The images captured at the presenting bank level would be transmitted to the Clearing House and then to the drawee branches with digital signatures of the presenting bank.
• Thus each image would carry the digital signature, apart from the physical endorsement of the presenting bank, in a prescribed manner.
• In order to ensure only images of requisite quality reach the drawee branches, there will be a quality check process at the level of the Capture Systems and the Clearing House Interface. This would ensure only images of requisite quality secured with the digital signatures of the presenting banks reach the drawee branches.

Who can participate in the Cheque truncation system?

• The criteria for banks participating in the Cheque truncation system are:
• Membership of the clearing house in the NCR. ( As CTS is still live only in NCR – New Delhi.
• Membership of the Indian Financial Network (INFINET)

How the non-INFINET member banks can participate in the CTS?

• In respect of banks who are not members of the INFINET, the following alternatives are available.
• They may become the sub-members of the direct members or such banks may use the infrastructure of the other banks having INFINET membership without being the INFINET members themselves and there clearing settlement can be done either directly or through the member through whom they are participating.

Thus the benefits could be summarized as:

a) Faster clearing cycle;

b) Better reconciliation/verification process

c) Better Customer Service Enhanced Customer Window

d) T+0 for Local Clearing and T + 1 for inter-city clearing.

e) Elimination of Float Incentive to shift to Credit Push payments.

f) The jurisdiction of Clearing House can be extended to the entire country. No Geographical Dependence

g) Operational Efficiency will benefit the bottom lines of banks Local  Clearing activity is a high cost no revenue activity.

h) Minimises Transaction Costs.

i) Reduces operational risk by securing the transmission route.

Cheque Truncation System(CTS) in India, was launched as a Pilot in NCR-New Delhi, in February 2008.

After the initial hiccups associated with CTS were staiblised, MICR clearing was abolished in NCR-New Delhi w.e.f 01/07/2009, and at present only CTS is functioning in NCR-New Delhi.

The next step for Cheque Truncation System (CTS) is Chennai.

However, before CTS is introduced in Chennai, Reserve Bank of India, DPSS has laid down the Road Map for CTS – 2010 i.e Standardization (Consistency, Equality) and Enhancement (Enrichment) of Security Features in Cheque Forms.

My Blog Post on the same can be accessed @ http://prashantnepayments.blogspot.com/2010/02/standardisation-consistency-equality.html