Is it time to dump Cheque Truncation System Return Code 55 - Account blocked (situation covered in 21-25)?

       Of the myriad CTS Return Codes, two return reason codes cause the most distress.

 Return Code 55 - Account blocked (situation covered in 21-25)

Return Code 84 - Other reason- connectivity failure

Connectivity Failure – Account holders fail to understand as to where the connectivity failure is. Is it the Presenting/Collecting  Bank fault or the Drawee Bank fault?  

This explanation by Punjab and Sindh Bank underlines the meaning of Cheque Return Reason – Connectivity Failure

2. RETURN OF CHEQUES BY BANK BRANCHES CITING “LINK FAILURE” AS A REASON

Link failure is an operational disruption and such instances are mostly observed in remote locations where the cheque volumes are not significant. In situations of link / network /connectivity issues, branches are advised to proceed as under: -

Branch should explore other alternatives before returning the cheques viz. processing at the service /drawee / nearby branch as feasible.

After exhausting all avenues if it is necessary to return the cheque due to link failure, it may be returned under Reason Code 84 (Other reasons-Connectivity Failure), with no charges to be debited to the payee’s account.

No charges shall be recovered from the payee for return of the cheque in such cases. Such cheques should be re-presented in the next clearing without waiting for a request from the payee.

But the most perplexing Cheque Return Reason is :::-

Return Code 55 - Account blocked (situation covered in 21-25)

Customers scratch their head, when they see this Return Reason in their Account Statement. Customers frantically call up their bank for the exact return reason, and the Presenting/Collecting  Bank is also clueless!!

What are the situations’ covered under Return Code 21-25?

Return Code 21 -- Payment stopped by attachment order

Return Code 22 -- Payment stopped by court order

Return Code 23 -- Withdrawal stopped owing to death of account holder

Return Code 24 -- Withdrawal stopped owing to lunacy of account holder

Return Code 25 -- Withdrawal stopped owing to insolvency of account holder

          It would be great for all the stake holders and also reduce stress levels, if NPCI issues a circular stating that “Return Code 55”, is removed and instead Banks are to mention the Return Codes 21-25, as applicable.

          For a more detailed article on various Cheque Return Reasons, please refer to my earlier article “LIST OF CHEQUE RETURN REASONS – BOTH FOR INSTRUMENT AND IMAGE-BASED CHEQUE CLEARING”

          Well, not much has changed from 2013 to 2017.

          Clear return codes will encourage more businesses to migrate from cash based transactions to cheque based transactions.

          No, the cheque volumes under CTS are not on the decrease. In fact they are on the increase. The decision to demonetise old Rs. 500/1,000 notes, has led to a sharp jump in Cheque transactions.

          Also under the revised Section 44AD of the Income-Tax Act, 1961, in case of certain assessees (an individual, HUF or a partnership firm other than LLP) carrying on any business having a turnover of Rs. 2 crore or less, the profit is deemed to be 8 per cent of the total turnover for taxation.

However if digital mode of payments are used, the eligible assesses income will now be presumed to be 6 per cent of the turnover and not 8 per cent. Cheque transactions are part of the digital mode of payments.

This table reflects the growth of cheque volumes under CTS-South Grid

Illustrative but not exhaustive list of objections where customers are not at fault

(Applicable for instrument and image-based Cheque Clearing as detailed in Annexure D to Uniform Regulations and Rules for Bankers' Clearing Houses)

Code No.       Reason for Return

33       Instrument mutilated; requires bank's guarantee

35       Clearing House stamp/date required

36       Wrongly delivered/ not drawn on us

37       Present in proper zone

38       Instrument contains extraneous matter

39       Image not clear ; present again with paper

40       Present with document

41       Item listed twice

42       Paper not received

60       Crossed to two banks

61       Crossing stamp not cancelled

62       Clearing stamp not cancelled

67       Payee's endorsement irregular/ requires collecting bank's confirmation

70       Advice not received

71       Amount/ Name differs on advice

72       Drawee bank's fund with sponsor bank insufficient(applicable to sub-members)

73       Payee's separate discharge to bank required

74       Not payable till 1st proximo

75       Pay order/cheque requires counter signature

76       Required information not legible/correct

80       Bank's certificate ambiguous/ incomplete/required

81       Draft lost by issuing office; confirmation required from issuing office

82       Bank/ Branch blocked

83       Digital Certificate validation failure

84       Other reasons-connectivity failure

87       ‘Payee's a/c Credited'-Stamp required

92       Bank excluded

R I P Indian MICR Houses

            The curtains for the Indian MICR Clearing Houses came down in October 2014. The last of  our country’s 66 MICR Houses was migrated to the CTS Grid and a glorious chapter in India’s payment systems came to an end

            Any Indian with even a slender connection to Banks must have been exposed to  physical cheques along with their associated ups and downs.

            All the 66 MICR Clearing Houses spread all over Indian were merged into the 3 CTS Grids i.e Western, Northern and Southern.

The clearing and settlement are done purely on the basis of image, instead of physical instruments.

The next target would be to migrate the express cheque clearing systems (ECCS) locations to the nearest CTS Grid.

At present ECCS is present in at 1,339 smaller centres. The ECCS application package is used at centres with low volumes and also enables ‘local’ level clearing for participating banks at that centre. As the volumes are low it is not economically feasible to migrate all the 1,339 ECCS Centres to CTS. The top 25 ECCS centres can be migrated to the CTS Grids.

Brief History of MICR Clearing in india:

The need for MICR Clearing in India was felt in the early 1980’s and the first MICR machine in India was installed in Mumbai in 1986.

The solution was the introduction of Magnetic Ink Character Recognition (MICR) based mechanised cheque processing technology.

The existing cheques had to be redesigned incorporating a MICR codeline4 which could be read by document processing machines called reader-sorters.

The RBI introduced two types of reader-sorters - the Medium Speed Reader Sorters, capable of processing 300 instruments per minute for Inter-city instruments and the High Speed Reader Sorter Systems (HSRS) with speeds of 2400 documents per minute, for the clearing of local instruments.

Driven by mainframe computers the HSRS systems were the state-of-the-art systems available at that time. These were installed in Mumbai (1986) followed by Chennai, New Delhi, (1987) and Calcutta(1989).

By the middle of 1989 MICR cheque clearing operations in the four metropolitan cities had become fully operational and stabilised.

Link 1: infosys.com -Evolution-of-cheques-and-paper-based-clearing-in-India

Link 2:  CPSS RedBook

Rest in Peace – Indian MICR Clearing Houses

Grid CTS Centres

July 01, 2014 – India’s Cheque Truncation System open as usual

            As Reserve Bank of India’s accounting year is July to June, every July 1, Reserve Bank of India remains closed for public transactions.

            Under CTS the settlements take place in the respective banks account maintained with Reserve Bank of India, in its eKuber CBS.

            Till last year, the CTS Grids were closed in tandem with RBI closure on July 1. However, this year, Reserve Bank of India has decided that it will remain open even for public transactions on July 1, 2014.

            This means RTGS system will also work which in turn facilitates CTS Grids to be open.

            More than 400 lac cheques are being routed monthly in the 3 CTS Grids across India i.e 15 lacs cheques per working day.

Cheque Truncation System in India - slowly spreading its wings

The benefits of CTS are not yet visible to the general public. Once the Southern Grid is fully operationalized, the change will be clearly noticeable.

As per RBI FAQ’s on CTS, the new approach is the Grid Based approach, wherein the whole country will be divided into Grids.

As a beginning, Chennai Grid has been operationalized in March 12, with few banks of Bangalore and Coimbatore joining it. Like all good things in life, it will be a while, before all Bangalore/Coimbatore Bank branches are on the CTS Grid.

Eventually, the Chennai Grid will cover Bank Branches in Tamil Nadu, Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry.

In my view, the major benefit of CTS will be enhancement of the coverage of the Speed Clearing.

Let me explain in detail.

The below table contains list of few Co-operative with exclusive presence in Tamil Nadu or in Coimbatore/Chennai cities.

Sample List of Co-operative Banks
COIMBATORE CITY COOP.BANK LTD	Coimbatore
COIMBATORE DIST.CENTRAL COOP.BANK LTD	Coimbatore
COIMBATORE DIST.CENTRAL COOP.BANK LTD METTUPALAYAM	Coimbatore
METTUPALAYAM COOP.URBAN BANK LTD	Coimbatore
PALLAVAN GRAMA BANK LTD	Coimbatore
POLLACHI COOP.URBAN BANK LTD	Coimbatore
TAMILNADU INDUSTRIAL COOPERATIVE BANK LTD.	Coimbatore
CHENNAI CENTRAL CO-OP. BANK LTD.	Chennai
GEORGE TOWN CO-OPERATIVE BANK LTD.(GTC)	Chennai
TAMILNADU INDUSTRIAL COOPERATIVE BANK LTD.	Chennai
TAMILNADU MERCANTILE BANK LTD.	Chennai
TAMILNADU STATE APEX CO-OP. BK. LTD.	Chennai

Suppose a Bangalore based customer-(holding account with ABC Bank) receives a cheque drawn on COIMBATORE CITY COOP.BANK LTD

Sr.No	The Present	The Future
01)	Customer deposits it in ABC Bank Branch	No Change
02)	ABC Bank branch forwards it to their Bangalore Service Branch	No Change
03)	ABC Bangalore service branch, forwards cheque to their Coimbatore service branch	Change	Cheque is lodged under CTS Grid Clearing. The image is transmitted to COIMBATORE CITY COOP.BANK LTD branch
04)	ABC Coimbatore service branch presents in local clearing	Change	This step is eliminated
05)	Status - If ‘return’, the physical cheque is sent back to ABC Bangalore service branch.	Change	This step is eliminated
06)	Status - If ‘no return’, amount is credited to the customers account.	No Change

The Benefits:

1. Reduction in TAT for credit to the customer.
2. Enhancement of Scope of Speed Clearing i.e., Co-operative Banks/RRB’s/LAB’s/ Other Banks still not part of Speed Clearing
3. Increase of volumes processed under CTS.
4. Boost for financial inclusion, as citizens residing in remote/small places with access only to Co-op Banks/RRB’s can also get the benefits of faster realization of cheques.

Streamlining of few areas:

Paper to Follow – The less the ‘paper to follow’, requests, the more will the efficiency of the CTS will increase.

1. One recent Finance Ministry Notification should reduce the ‘paper to follow’, instruments to Government Departments i.e Controller General of Accounts (CGA) directed all payments above Rs 25,000 to suppliers, contractors, grantee and loan institutions to be directly credited to their bank accounts. This is with effect from 01/04/2012.
2. As the participants gain experience of the CTS environment IQA Failure cases would go down.

Bank Holidays under NI Act:

Regional Holiday and Blockage

The Grid Jurisdiction will fall under different states, and the states have different holidays calendars.

The CTS Application has a “Blockage” function in the system to handle different state holidays, for a ‘value date’. The blockage prevents other banks to present any cheques on the branch / bank put under blockage.

In addition, it gives extension to all unexpired items drawn on such branches and banks for the blockage period.

The branches / banks under blockage can not lodge any fresh presentation during the blockage period.

New Returns Reasons under Cheque Truncation System (CTS)

Reason No                  Reason Description

82                               Bank/ Branch blocked

83                               Digital Certificate Validation failure

92                               Bank Excluded

Cheque Truncation System – 2010 – (CTS 2010) Guidance Note by National Payments Corporation of India (NPCI)

Cheque Truncation System – 2010 – (CTS 2010) Guidance Note by National Payments Corporation of India (NPCI)

As the deadline for CTS-2010, is coming closer, the various stake-holders are getting their act together

As per RBI Notification No RBI/2009-10/323/DPSS.CO.CHD.No.1832/04.07.05/2009-10  dt.February 22, 2010, IBA(Indian Banks Association) and NPCI, are the coordinating agencies, for CTS - 2010.

Towards this end, NPCI has on 21^st September, 2010 issued a Guidance Note for the roll-out.

The complete Guidance Note can be accessed at

http://www.npci.org.in/CTCircular.aspx

The highlights of the Guidance Note are :

Orders placed by Banks for Cheque Forms, on or after 01/10/2010, must  comply with CTS – 2010 Security features

The Security features contain Mandatory features as well as Optional features

The Mandatory Security features are : -

A) Water Mark (to be incorporated at the paper manufacturing stage)

B) Void Pantograph ( at printing stage)

C)Ultra-violet logo of Bank(at printing stage)

D) Standardized field placements of a cheque

E) Cheque printing colours and background.

F) Microlettering.

G) New Rupee Symbol at CAR (Courtesy Amount Recognition) amount in figure field.

H) Printer Name along with CTS – 2010

Optional Features:-  These are optional features based on the Banks risk perception.

(i) Supplementary watermark containing their own logo  - - - A watermark is a recognizable image or pattern in paper that appears as various shades of lightness/darkness when viewed by transmitted light (or when viewed by reflected light, atop a dark background), caused by thickness or density variations in the paper

(ii) Embedded fluorescent fibres, - - - Invisible colored fluorescent fibres are embedded into the paper during the manufacturing process. The fibres are invisible to the naked eye, but become visible when viewed under an ultra violet lamp. This can be placed at random locations or at pre-determined locations on the Cheque forms.

(iii) fugitive ink, - - - Water fugitive ink is sensitive with most liquid solutions and will smear and stain the document.  Most official stamps uses water fugitive inks (McGraw-Hill, 2007).  This security feature makes it apparent if a document has been altered.

(iv) secondary fluorescent ink, - - - Fluorescent inks are naturally bright inks that reflect and emit light making use of UV light waves, which other inks cannot take advantage of.

(v) Toner fusing - - - Toner Fuse Technology causes Laser Toner to bond permanently to the paper surface. This covert security feature makes it impossible to "lift" words and numbers off the surface of the paper using adhesive tape, without destroying the paper surface.

(vi) check- sum.

(vii) Patterns

(vii) Floral designs

(ix) bleeding ink, - - - An option of bleeding ink could be implemented on a cheque which makes fraud impossible using any water based chemicals, if applied to the cheque a colored solvent reacts and spoils the cheque.  

(x) Structural magnetic security thread

(xii) Hot stamped holograms on multi-city cheques and demand drafts

(xiii) auto-detection tools

(xiv) Use of UV band on sensitive and  key areas of interest on a cheque such as Legal Amount Recognition (Amount in Words), Courtesy Amount Recognition (Amount in Figures), Signature, Beneficiary Name

(xv) pre-encoding of amount field on the MICR band for demand drafts / pay orders (above a self-decided cut-off) before issue to customers

(xvi) Use of check-sum on the face of demand drafts / pay orders (other than the MICR band), etc.

NPCI has advised banks that the additional security features adhere to CTS – 2010 specifications and also not Image heavy.

The deadline for implementation of the CTS 2010 standards is 31/12/2010.

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          One of the interesting aspect of this Guidance Note is that the CTS 2010 Specifications are applicable to all Cheque forms, and not only for Cheques forms for branches under the CTS (Cheque Truncation System) locations.

This might be to ensure that the Speed Clearing process does not get de-railed and also to ensure uniformity amongst the Cheque forms, in our country.

As the INR symbol has been adopted, this also is finding place on the new Cheque Forms.

I guess the next Guidance note will be on the transition period for existing Cheque Forms, already in the financial system. As it is, still Non-MICR cheques are being issued by few Government Departments.

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Another fascinating facet of this Guidance Note, is that the testing fee of Rs1000/- per Cheque Form Batch is to be remitted by Payorder/Demand Draft, and through NEFT.

Yes, I would have preferred the testing fees through NEFT rather than Pay Order/Demand Draft.

CTS – Process Flow for PDC’s (Post Dated Cheques)

CTS – Process Flow for PDC’s (Post Dated Cheques)

PDC’s are an integral part of the Indian Banking system. It is observed in spite of ECS (Debit), being popular, the rise of PDC’s is on the increase.

What is a Post Dated Cheque ?

·        A cheque with a future date entered.

·        The cheque cannot be cashed until that date is reached.

What could be the reason for the same?

The following could be some of the answers for the rise of PDC’s.

01)                      To set up a ECS Debit Mandate, the processing time is 7-14 days. This means a loan cannot be disbursed till the ECS Debit Mandate is in place. Usually the borrowers are not inclined to wait 7-14 days, to receive the Loan Proceeds.  Hence, they prefer to issue PDC’s for the Loan Tenure.

02)                     Now-a-days, majority of the Retail Loans (i.e Auto, Personal, Home) are hawked by DSA’s (Direct Sales Agents). And, DSA’s achieve their target only when the Loans are actually disbursed. Hence, they too are comfortable with PDC’s only.

03)                     Speed clearing has picked up at major Metros, at least for Private sector bank Branches. This aids in quick processing of cheques drawn on remote branch locations too.

04)                     And, for Check Bounce cases, the RETURN MEMO is of paramount importance, to pursue for recovery of the Loan dues.

Therefore cheques as a mode of settlement of Loan’s will continue to be the preferred mode of repayment.

Handling of PDC’s under the CTS scenario will : -

/ be simplified

// be accurate

///  lead to reduction of the TAT.

Present Scenario: -

·        Collect the PDC’s of all the Bank Borrower accounts – the pooling location depends on the Individual banks, whether centralized or de-centralized or hub and spoke model etc.

·        Segregate the PDC’s month-wise at the pooling location.

·        Present the PDC’s on the respective dates. The actual work commences in the background, at least 2 weeks prior to the Presentation date.

It is observed that the common date for PDC’s is the 7^th of every month. As a matter of convenience, Banks tend to present the cheques from 7^th to 10^th of the month, in order to avoid clubbing of all bank’s PDC’s on a single date.

Process the Returns, and affect the credits.

Proposed Scenario under CTS:

·        The PDC’s are scanned and converted into CTS ready images.

·        CTS Batches are created according to the Presentation date.

·        Once the CTS batches are created as per the Presentation date, no further processing is required till a couple of days before the actual presentation date.

·        On the presentation date, the CTS Batches are presented as part of the CTS cycle.

·        Process the Returns, and affect the credits.

·        The only hitch will be the removal of the CTS Images in case there is a request for non-presentation of any particular cheque. This also is not a major issue, as in the present scenario too; there are requests for non-presentation of a particular cheque, for a particular PDC cycle.

·        The most significant feature here is the menace of closed accounts. Removing cheques of closed accounts in a physical PDC cycle is tedious and time-consuming. But in case of CTS, a simple action will remove the CTS Images of the closed accounts instantly.

                     Even if the CTS images are not removed from the CTS Cycle, the automated CTS processing system will eliminate them in the first instance itself.

In the above scenario, there will be major benefits in

01)Transportation cost of the PDC’s from one location to another location.

02)                     Storage cost, as all physical PDC’s can be stored at a single pan Indian location, instead of multiple locations.

03)                     Retrieval of a physical PDC will be smoother, as all PDC’s will be at a single location only.

 

ayment and Settlement Systems - Vision 2009-12 Part 2

Payment and Settlement Systems - Vision 2009-12

Annual Policy Statement for the Year 2010-11

Part 2

I wish I had the time, to analyze the Annual Policy Statement for the Year 2010-11 in detail. But time and the vast subject the Statement encompasses does not permit me to do so.

So, I will try to highlights those points, which touch my heart.

In this Blog I will be concentrating on the Payments and Settlements part of the Reserve Bank of India’s Annual Policy Statement for the Year 2010-11

The policy statement relies on the Reserve Bank’s of India’s Payment and Settlement Systems  - Vision 2009-12

Policy Stance

Standardization of Security Features on Cheque Forms

What is there in it?

Cheque Truncation System (CTS)–2010 Standard with benchmark specifications for security features on cheque and field placements on cheque forms have been prescribed.

Why is this required?

Like it or do not like it, Cheques in India still play a dominant role in the funds movement. This phenomenon will last for another half-a-century. Therefore Reserve Bank of India, decided to Standardize the  Security features on cheque forms to aid n          faster processing of the cheques n          minimize fraudulent activities

How it will impact?

n          Please visit my earlier post on the Standardization of security features on cheque forms n          http://prashantnepayments.blogspot.com/search/label/Void%20%20Pantograph n          Increase automated processing thereby reducing the dependency on human. n          Increase automated processing means less turnover time for the ultimate credit to be effected to the customer. n          In the next couple of years, the reach of  CTS will be widened. To me the best benefit of CTS is its ability to transform the Post-Dated Cheques (PDC’s) process. PDC’s can be debit to the customers account i.e Loans or credit to the customer’s account i.e Dividend Payouts, Insurance Policy maturity amounts. The Truncated cheque images for future date can be stored for automatic processing on the due dates.

Cheque Truncation System – Infinet Membership

Cheque Truncation System – Infinet Membership.

Why is INFINET membership required for Banks to be part of CTS Grid?

• One of the important security measures in CTS is the Digital Signature of the Presenting Bank.  
• IDRBT is the certifying authority for banks & financial institutions in India, hence the Banks have to be a member of INFINET. 
• The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to payee bank will be ensured using the Public Key Infrastructure (PKI).
• The CTS is compliant to the requirement of the IT Act, 2000. It has
• been made mandatory for the presenting bank to sign the image & data from the point of  origin itself. The image and data are secured using the PKI through out the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank.

The PKI standards used are in accordance with the appropriate Indian acts and practices of IDRBT which is the certifying authority for banks & financial institutions in India.

The standards defined for the PKI are as followed:

1. hash algorithm SHA-1
2. padding algorithm pkcs#1
3. asymmetric encryption with 1024 bit key length
4. Triple DES (3DES, TDES) symmetric encryption with 168 bit key length Certificates in x.509v3 format

What are the image specifications in the CTS?

• Imaging of cheques can be based on various technology options. The cheque images
• can be black and white, Grey Scale or coloured. Black and White images do not reveal all the subtle features that are there in the cheques. Coloured Images increase storage and network bandwidth requirements.
• So it was decided that the electronic images of  truncated cheques will be in gray scale technology.
• There will be three images of the cheques i.e. front grey, front black & white and back black & white which will be made available to member banks.
•  
• The image specifications are:

Image Type Minimum DPI Format Compression

Front GrayScale 100 DPI JFIF JPEG

Front Black & White 200 DPI TIFF CCITT G4

Reverse Black & White 200 DPI TIFF CCITT G4

The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).

What is a gray-scale image?

• Scanners also function like photo-copiers by reflecting the light passed through narrow passage on to the document.
• Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called pixel.
• Images are classified as black and white, gray-scale or colors based on the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a range of gray shades between black and white. The entire image of the original document gets mapped as some shade of gray, lighter or darker, depending on the color of the source.
In the case of black and white images, such mapping is made only to two colours based on the range of values of contrasts. A black and white image is also called a binary image.

How the quality of the images will be ensured?

• As the payments will be made on the basis of the images, it is essential to ensure the quality of the images. For that purpose the solution proposes Image Quality Audit (IQA) at different level.
• RBI specifies the image standards to the member banks.
• The presenting bank is required to perform the quality audit during the capture itself. Further quality audit will be done at the gateway before onward transmission to clearing house.
• Further the drawee bank can ask for the physical instrument if it is not satisfied that the image quality is not good enough for payment processing.

What is is INFINET

The INdian  FInancial NETwork [INFINET] is the communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET. 

The INFINET is a Closed User Group [CUG] Network for the exclusive use of member banks and financial institutions.

INFINET is maintained by IDBRT-Institute for Development and Research in Banking Technology.