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

Frequently Asked Questions(FAQ's) on Speed Clearing.

Frequently Asked Questions(FAQ's) on Speed Clearing.

Reserve Bank of India, has recently released the latest Frequently Asked Questions(FAQ's) on Speed Clearing.

The  Frequently Asked Questions(FAQ's), are comprehensive and simple to understand.

Hence, I will not attempt to re-invent the Wheel.

The Frequently Asked Questions(FAQ's) on Speed Clearing, can be accessed @
http://rbi.org.in/scripts/FAQView.aspx?Id=72

However, I wish to mention a few points, for faster realization of  your Cheques.

01) Ensure that the cheques issued in your favor are in the same style as the title of your bank account.
For eg: My name in my Bank Account is Nayakanti Prashant, hence, in all the cheques I take, I ensure that the Payee Name is written as  ''Nayakanti Prashant''.

02) Ensure that your bank account number is mentioned next to your name on the cheque.

This minimizes the chances of fraudulent alteration of the Payees name on the cheque, in case it is misplaced/lost

Eg: Pay  Nayakanti Prashant a/c 556010008350

Of course, the best way to receive funds in lieu of cheques are RTGS/NEFT. However, this might not be possible, when a Post-dated cheque is part of the transaction.

Physical Clearing Process Cycle

What is Clearing Process:-

 Todays Post deals with the Physical Clearing of Cheques.

All payment instructions made through the medium of cheques are debit transactions. A debit transaction occurs when the intended recipient initiates the payment transaction by depositing the instrument in his bank. During the course of a business day a number of instruments are deposited with a bank for collection by its customers. These instruments may be drawn on different branches of various banks and a collecting bank has to physically present the instruments for collection to each drawee bank/branch. The clearing system provides a convenient and well established institutional mechanism to take care of the problem of physical delivery of instruments as well as funds transfer between different banks.

The use of Physical Instruments for funds movement in the country is coming down, but still the number is significant for us to focus in it.

ePayments was born out of Physical Cheques only!!

If the Clearing House is not present, the whole Banking System would collapse!!

Basically there are two types of Clearing

01) Local Clearing

02)                       Out-Station Clearing

A new clearing has been introduced by Reserve Bank of India, in June 2008 i.e Speed Clearing.

01) Local Clearing: Clearing of cheques situated in the jurisdiction of the respective Clearing House.

02)                       Out-Station Clearing: Clearing of Cheques not situated in the jurisdiction of the respective Clearing House.

At present,  outstation cheques are paid through two channels viz. on Collection basis or through National Clearing (Inter-city Clearing). This requires movement of cheques from the Presentation centre (city where the cheque is presented) to Drawee centre (city where the cheque is payable) which increases  the realization time for cheques.

      In India, the clearing system is local and confined to a defined Jurisdiction covering all the banks and branches situated in the area under a particular zone. The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office (and a banking department), the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks.

The complete list of Clearing Houses in India, can be accessed @

http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1056

As on 30/09/2009, 30^th September, 2009, 1139 Clearing Houses were functioning in India.

Time Frame for Collection of Cheques as laid down by Reserve Bank of India. Overall, each Bank is free to form its own Cheque Collection Policy. However, it should be in tune with the following Reserve Bank of India, guidelines.

QUOTE

For local cheques credit and debit shall be given on the same day or at the most the next day of their presentation in clearing. Ideally, in respect of local clearing, banks shall permit usage of the shadow credit afforded to the customer accounts immediately after closure of relative return clearing and in any case withdrawal shall be allowed on the same day or maximum within an hour of commencement of business on the next working day, subject to usual safeguards.

(iii) Timeframe for collection of cheques drawn on state capitals / major cities / other locations to be 7/10/14 days respectively

UNQUOTE

This is an extract from Lr.No.DPSS.CO. (CHD) No. 873 / 03.09.01/ 2008-09, dt.November 24, 2008, to The Chairman & Managing Director / Chief Executive Officer
All Scheduled Commercial Banks.
The complete letter can be accessed @
http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5008

What is NECS and why is it required?

What is NECS and why is it required?

Ans; NECS stands for National Electronic Clearing Service. It is an inititative launched by Reserve Bank of India, as an improvement over the ECS –Electronic Clearing Service, currently in vogue.

ECS was launched more than two decades back, and the growth has been extraordinary.

Both the ECS Credits and Debit Products have delivered their mandates.

The major drawback of the ECS is that the Sponsor Institution has to submit the Processing Files to each Clearing House separately and also reconcile the entries Clearing House wise.

Presently, ECS system functions in a decentralized manner requiring users to prepare separate set of ECS data centre-wise. Users are required to have tie-up with local sponsor banks for presenting ECS file to each ECS Centre. 

There is no mechanism for the Sponsor Institution to centrally submit the Processing Files or to receive the Return Files. This was hampering the growth of ECS and the transactions were at a stagnant level.

To overcome the drawbacks associated with ECS, Reserve Bank of India, decided to launch the NECS

NECS was launched on 29th September 2008 by  Shri V.Leeladhar, Deputy Governor, Reserve Bank of India. He inaugurated the National Electronic Clearing Service (NECS) at a function at the Reserve Bank's National Clearing Centre (NCC), Mumbai. 
 

The service aims to centralize the Electronic Clearing Service (ECS) operation and bring in uniformity and efficiency to the system.

NECS (Credit) would facilitate multiple credits to beneficiary accounts destination branch at participating centre against a single debit of the account of a user with the sponsor bank.

NECS (Debit) would facilitate multiple debits to destination account holders against single credit to user account. 

The system has a pan-India characteristic leveraging on Core Banking Solutions (CBS) of member banks. This would facilitate all CBS bank branches to participate in the system, irrespective of their locations. 

In the new set-up, users have to prepare one consolidated NECS file and submit it centrally to the NCC, Nariman Point, Mumbai, through their sponsor banks. The sponsor banks would make use of the web-server provided for the purpose. The web-server also has the facility to get on-line data validation so that error free data could be uploaded for processing. 

The files can be uploaded up to the cut-off time one day prior to the settlement day by sponsor banks thus bringing down further the lead time required for processing. The returns also would get processed on the settlement day itself thus on the third day the users would have the status of the transactions. 

As on date 26,000+ bank branches are participating in NECS operations and other bank branches are expected to join in course of time. 

In the first phase, the NECS (Credit) was introduced. In May 2009, more than 2 million transactions were executed through NECS (Credit). Given the benefits offered by NECS, the need for local-ECS at various locations becomes redundant.  Accordingly, local-ECS-Credit at Mumbai has been merged with NECS-Credit.  

The NECS (Debit) would be introduced subsequently, based on the experience and feedback received from member banks. 

As the process flow for NECS (Debit) is different from NECS (Credit), i.e. Validation of Mandates is required for a NECS (Debit) Transaction, the NECS (Debit), was not launched in the first phase.

As Banks have seen the benefits accruing from a NECS (Credits), they have requested Reserve Bank of India, to introduce NECS (Debit) too.

Accordingly Reserve Bank of India vide its letter RBI/2008-09/509 DPSS (CO) EPPD No.2283 / 04.01.04 / 2008-2009 dated June 25, 2009, addressed to The Chairman and Managing Director / Chief Executive Officer of all banks participating in NECS, advised Banks to prepare themselves and also the respective NECS Participants to prepare themselves for the NECS(Debit) Variant too.

The Reserve Bank of India, letter can be accessed at

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=5052&Mode=0

Consumers- Opt ECS and Save precious Time

RTGS: Customer Transactions, not to be routed in Interbank Session, warns Reserve Bank of India.

            RTGS: Customer Transactions, not to be routed in Interbank Session, warns Reserve Bank of India.

                         In RTGS, there are two types of Transactions 01) Customer and 02) Interbank Transactions.

            Customer transactions refer to those types of transactions, wherein the beneficiaries customer’s account, in the Beneficiary Bank is directly to be credited.

             Interbank Transactions refer to those types of transactions, wherein the Beneficiary is a bank, and internal accounting entries are effected, to the respective bank department.

            The Operating Session for Inter-bank, is longer than the Operating Session for Customer transactions,.

            Ideally, customer transactions, are not to be routed through inter-bank session, as the RTGS credit has to be afforded within 90 mintues, or  be returned back.

In the initial stages, when RTGS was evolving, Banks use to route customer transactions, in inter-bank session also.

             However, this practice, was being followed, even after Reserve Bank of India, extended considerably, the window for the Customer Session, vide its notification, RBI/2008-09/362, DPSS (CO) RTGS No.1288/04.04.002/2008 – 2009, dated January 28, 2009.

           The reasons could be: A) Accommodate High-Value Clients. B) Technical reasons, viz system failure of the respective Sending Bank, during Customer Session.

            Reserve Bank of India, has sought to plug the practice of routing customer transactions, in inter-bank session, through it’s Notification:- RBI/2008-09/476 DPSS (CO) RTGS No.1959/04.04.002/2008-2009, dated  11^th May, 2009.

The said notification, can be accessed at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=4982&Mode=0                                      

 Reserve Bank of India, vide its above Notification, warned banks of penal actrions, in case customer payments are routed through inter bank session.

QUOTE:-

All RTGS participants are, therefore, advised to strictly adhere to the RTGS procedural guidelines and desist from the practice of pushing customer transactions in the inter-bank mode. ''Violations, if any, brought to our notice would be viewed seriously and would attract penalty under Section 30 of the Payment and Settlement Systems Act, 2007(51 of 2007),'' the Circular said.

UNQUOTE

List of IFSC Codes of RTGS Participant Banks

            I have been receiving quite a number of queries, on IFSC Codes of different bank branches.

            IFSC Code, is like the pin code of the Beneficiary account.

The complete list of IFSC Codes, can be obtained

01) At the Reserve Bank of India website.

02) Respective Bank Website.

03) On the Cheque Leaf of the Beneficiary’s Account.

                         

IFSC expands to   Indian Financial System Code (IFSC). IFSC  is being used as the addressing code in user-to-user message transmission. The Payment System Applications such as RTGS, CFMS and NEFT developed by the Reserve Bank of India use these codes. The code consists of 11 Characters - First 4 characters (4A) represent the entity; Fifth position has been defaulted with a ‘0’ (Zero) for future use; and the Last 6 character (6X) denotes the branch identity.

 

For Eg: VYSA00005560, stands for ING Vysya Bank, Indore Branch.

BARB0MAINOF, stands for Bank of Baroda, Main Offce, Baroda

 

I have mentioned here, the IFSC’s of Controlling Units of the Banks.

This can be used as a cross-check, of the Beneficiary’s IFSC Code.

 

List of RTGS Particpants
Bank Name	IFSC Code	IFSC Code starts with
Abu Dhabi Commercial Bank	ADCB0000001	ADCB0
Abhyudaya co-op Bank Ltd.	ABHY0065001	ABHY0
ABN Amro Bank N.V.	ABNA0000001	ABNA0
Allahabad Bank	ALLA0888888	ALLA0
Andhra Bank	ANDB0TRESUY	ANDB0
Bank of America	BOFA0MM6205	BOFA0
Bank of Bahrain & Kuwait	BBKM0000001	BBKM0
Bank of Baroda	BARB0TREASU	BARB0
Bank of India	BKID000PIGW	BKID0
Bank of Maharashtra	MAHB0003007	MAHB0
Bank of Novascotia	NOSC0000MUM	NOSC0
Bank of Rajsthan	BRAJ0003350	BRAJ0
Bank of Tokyo Mitsubishi Ltd.	BOTM0003611	BOTM0
Barclays Bank PLC	BARC0INBB01	BARC0
Bharat Co-Op Bank Ltd.	BCBM0000999	BCBM0
BNP Paribas	BNPA0009066	BNPA0
Canara Bank	CNRB0RTGS01	CNRB0
Catholic Syrian Bank Ltd.	CSBK0000001	CSBK0
Caylon Bank	CRLY0000001	CRLY0
Central Bank of India	CBIN0281102	CBIN0
Chinatrust Commercial Bank Ltd.	CTCB0000001	CTCB0
Citi Bank	CITI000PIGW	CITI0
Citizencredit Co-Op Bank Ltd.	CCBL0209003	CCBL0
City Union Bank Ltd.	CIUB0000082	CIUB0
Corporation Bank	CORP0000920	CORP0
COSMOS Co-operative Bank	COSB0000025	COSB0
Dena Bank	BKDN0999999	BKDN0
Deutsche Bank Ltd.	DEUT0784BBY	DEUT0
Deutsche Securities (I) Pvt.	DSIP0INDBBY	DSIP0
DBS Bank	DBSS0IN0811	DBSS0
Development Credit Bank	DCBL0000037	DCBL0
Dhanalakshmi Bank Ltd	DLXB0000146	DLXB0
Dombivli Nagri Sahakari Bank Ltd	DNSB0000001	DNSB0
DSP Merrill Lynch	DSPM0000001	DSPM0
Federal Bank	FEDB0000379	FEDB0
HDFC Bank LTd.	HDFC0999999	HDFC0
Hongkong & Shanghai Bkg Corpn	HSBC02INDIA	HSBC0
ICICI Bank Ltd	ICIC0TREA00	ICIC0
ICICI Securities & Ltd	ISEC0000001	ISEC0
IDBI LTD.	IBKL0009998	IBKL0
IDBI Capital Market Services Limited	ICMS0000001	ICMS0
Indian Bank	IDIB000C080	IDIB0
Indian Overseas Bank	IOBA0009016	IOBA0
IndusInd Bank Ltd.	INDB0000098	INDB0
ING Vysya Bank	VYSA0000001	VYSA0
Jammu and Kashmir Bank Ltd	JAKA0DEALER	JAKA0
Jankalyan Shakari Bank Ltd.	JSBL0000001	JSBL0
JP Morgan Chase Bank, N A	CHAS0INBX01	CHAS0
Kalupur Commercial Co-op Bank	KCCB0RTGS4C	KCCB0
Karnataka Bank Ltd.	KARB0000001	KARB0
Karur Vysya Bank Limited	KVBL0001260	KVBL0
Kotak Mahindra Bank Ltd	KKBK0000632	KKBK0
Krung Thai Bank PCL	KRTH0INBB01	KRTH0
Maharashtra State Co-operative Bank Ltd.	MSCI0082002	MSCI0
Mashreq Bank	MSHQ0000001	MSHQ0
Mizuho Corporate Bank Ltd.	MHCB0000532	MHCB0
New India Co-op Bank Ltd	NICB0000001	NICB0
North Kanara G.S.B. Co-Op. Bank Ltd.	NKGS0000001	NKGS0
Nutan Nagarik Sahakari Bank Ltd	NNSB0000001	NNSB0
Oman International Bank SAOG	OIBA0000001	OIBA0
Oriental Bank of Commerce	ORBC0100000	ORBC0
PNB Gilts Limited	PNBG0000001	PNBG0
Punjab & Maharshtra Co-Op Bank	PMCB0000001	PMCB0
Punjab & Sind Bank	PSIB0000001	PSIB0
Punjab National Bank	PUNB0244200	PUNB0
Ratnakar Bank Ltd.	RATN0000070	RATN0
Reserve Bank of India	RBIN0RBIPI0	RBIN0
Saraswat Co-operative Bank Ltd.	SRCB0000092	SRCB0
SBI DFHI Ltd.	SBDF0000001	SBDF0
Securities Trading Corporation of India Ltd.	STCI0000001	STCI0
Shamrao Vithal Co-op Bank Ltd	SVCB0000001	SVCB0
Shinhan Bank	SHBK0000001	SHBK0
Societe Generale	SOGE0INBB00	SOGE0
South Indian Bank	SIBL0002002	SIBL0
Standard Chartered Bank Ltd.	SCBL0036001	SCBL0
State Bank Indore	STIN0003351	STIN0
State Bank of Hyderabad	SBHY0000600	SBHY0
State Bank of India	SBIN0004343	SBIN0
State Bank of Mauritius	STCB0000065	STCB0
State Bank of Mysore	SBMY0TREA00	SBMY0
State Bank of Travancore	SBTR0000999	SBTR0
State Bank of Bikaner & Jaipur	SBBJ0010303	SBBJ0
State Bank of Patiala	STBP0000758	STBP0
Syndicate Bank	SYNB000RTGS	SYNB0
Tamilnad Mercantile Bank Ltd	TMBL0009999	TMBL0
Thane Janta Shakari Bank	TJSB0000001	TJSB0
The Greater Bombay Co-op Bank	GBCB0000001	GBCB0
The Kapol Co-operative Bank Ltd.	KCBL0000016	KCBL0
The Laxmi Vilas Bank Ltd	LAVB0000883	LAVB0
The W. B. State Coop Bank Ltd	WBSC0000001	WBSC0
UCO Bank	UCBA0000001	UCBA0
Union Bank of India	UBIN0550451	UBIN0
United Bank of India	UTBI0HOA139	UTBI0
UTI Bank Ltd	UTIB0000001	UTIB0
Vijaya Bank	VIJB0009502	VIJB0
Yes Bank Ltd.	YESB0000001	YESB0