What is A Clearing House
A clearing house is an association of banks that facilitates payments through cheques between
different bank branches within a city / place. It acts as a central meeting place for bankers to
exchange the cheques drawn on one another and claim funds for the same. Such operations are
called as clearing operations. Generally one bank is appointed as in-charge of the clearing
operations. In the four metros and a few other major cities, the Reserve Bank of India is looking
after the operations of the clearing house. Each clearing house has uniform regulations and rules
for the conduct of its operations as prescribed by RBI. There are more than 1000 clearing houses
operating all over the country facilitating cheque payments. These are managed by the RBI, State
Bank of India and other public sector banks.
Cheques and cheque clearing
Although cheque usage has declined in recent years as businesses have started to use
automated payments and cards, it still remains a very important payment method,
particularly for small businesses.
The clearing system
Cheques are paper items which are physically transferred between banks at the same time as the
electronic data is processed. Although the paying bank receives some of the data electronically,
the physical cheques themselves must also be transferred so that they can be examined by the
paying bank for security and fraud prevention purposes.
The clearing system works within a three working day period (it does not operate on Saturdays,
Sundays or Bank Holidays).
Day 1
When a cheque is paid into an account (at the collecting bank) it is sent to the bank's clearing
centre at the end of the working day.
Day 2
All cheques received are sorted at the clearing Centre and the sort code, account number and
serial number on the bottom of the cheque, together with the amount of the cheque, are sent
electronically to the banks on which they are drawn (the paying bank) by 11am. The physical
cheque is then sent to the bank on which it is drawn.
Day 3
The paying bank debits the payer's bank account with the amount of the cheque on the morning
of day 3. At the same time, all banks calculate the amount they must pay each other on the basis
of the value of all the cheques exchanged on the previous day. The net balances are then settled
across accounts held at the Reserve Bank of India.
This is the end of the central clearing cycle.
However, if the paying bank was unable to pay the cheque, for instance if the cheque owner has
insufficient funds in their account, placed a stop on the cheque, or filled it out incorrectly, it
would return the cheque to the original collecting bank on day 3, or in certain specific
circumstances, by 12 noon on day 4. Cheques are generally returned by first class post, so the
earliest the collecting bank will know that the cheque will not be paid is day 4, or possibly day 5.
A cheque may be returned later than day 5 if it is found to be fraudulent. For instance if a
fraudster has bought goods using a stolen cheque, the genuine owner may not discover until
sometime after the goods have been exchanged that money is missing from their account. In this
case, the money that has been paid into the seller's account belongs to the genuine cheque owner
and could be withdrawn once the fraud is discovered. If you accept a cheque that subsequently
turns out to be fraudulent, you may be required to return the funds. See the section below for tips
on Avoiding Cheque Fraud.
Individual banks set their own policies on the point at which they credit funds on cheques paid
into their customers' accounts. Under The Banking Code, banks are required to provide clear
details of their policies on the issues to their customers, and whether they add extra days to the
central clearing cycle. Most high street banks allow customers to withdraw funds on the fourth or
fifth working day, but some banks allow customers to withdraw funds as early as day 1.
The Local clearing procedure.
Most of us have deposited cheques in our bank account to collect amount from somebody or
from a business. And bank collected the amount from issuer bank and credited your account.
Let’s see what are the processes involved in it. Before knowing the clearing procedure you
should know what a local cheque is? It is a cheque issued by a person or company in the same
city where receiver bank located. Since issuer bank and receiver bank is located in the same city
cheque realization is done within the city. Now let us see the clearing procedure. Consider this
scenario State bank of India gets thousands of cheques for clearing each day from its customers.
These cheques may be drawing on different banks; say Indian bank, axis bank, Indian overseas
bank etc. In this case State bank has to go each bank for collecting amounts which is a bit
difficult and time consuming process.
To simplify this process each bank will send a representative to a central place and exchange
cheques drawn on each other This centralized place is called clearing house. Reserve bank of
India is act as clearing house. SBI or some other banks acts as clearing house in cities where
RBI’s office is not exists.
Suppose SBI brings 1000 cheques for Rs 50 Lacks drawn on axis bank and axis bank brings 500
cheques for Rs 45 lacks drawn on SBI. So axis bank should give 50 lacks to SBI and SBI should
give 45 lacks to axis .instead of giving full amount consider net difference which is 5 lacks
payable by axis bank to SBI account.
The settlement bank; that is RBI passes an entry by debiting axis bank and crediting SBI in their
books. This means that Axis bank should give 5lacks to RBI for paying SBI. And RBI will settle
this amount. This kind of settlement is “net settlement”.
METHODS OF CLEARING CHEQUES
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Cheque Truncation
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.
Members participating in the Cheque truncation system
The criteria for banks participating in the Cheque truncation system are:
i. Membership of the clearing house in the NCR.
ii. Membership of the Indian Financial Network (INFINET)
The type of cheques that can be presented in the CTS
All the local cheques can be presented in the CTS. Banks may also present cheques on
banks situated outside the NCR, but such banks have branches in the NCR region. The
CTS also support the intercity clearing and specialized clearing like high value clearing
etc. The on-us instruments where both presenting and drawee banks are same are not
allowed in the CTS. Images of such instruments would be stopped at the Clearing House
Interface itself.
Some of the challenges in implementing Cheque Truncation Solution are:
1. Integration with existing large banking systems - as banks have already invested on
legacy system, it is important that the new system seamlessly integrate with the existing
system
2. Security - In any financial software, security is of prime importance. Hence, information
transmitted over electronic media should be secure enough
3. Changing the current workflow - There is often resistance to change. For any new system
to be successful, users need to support the system as it changes the traditional way of
working
4. Customer acceptance - in electronic cheque processing, merchants/customers need not
visit the bank to deposit the cheque but they can scan their cheque from their desktop and
submit for bank clearing. This calls for tremendous change in mindset among customers
to feel secure to do transactions over electronic media
The main hindrances in the clearing system by moving cheque physically are
1. Transportation of cheques
2. Cheque transmitting time
3. Reconciliation problem
4. Clearing related fraud
5. Cost involved in clearing process
Some Implementation Guidelines
1. Banks need to evaluate their existing system, as they would have already invested good
amount of money into it. So the solution they would like to implement should be able to
integrate with the existing system as well as other heterogeneous systems with ease
2. Security of the system should be of prime importance
3. The new solution should be able to scale and meet the increasing demands from the
customers and handle the load
4. Should be able to provide software as service to customers and related institutions
5. All systems are good only if people accept and ready to work with it. Hence, having a
governance model in place is important and the current team should be enthusiastic
enough to accept the new solution. Most companies forget this aspect, which leads to
failure of the system
Beneficiaries of Cheque Truncation
1. Banks - have a simplified system to collect all the information from their
merchants/branches, consolidate, process them and submit for clearance
2. Customers of banks - can electronically deposit large number of cheques without fear of
loss in transit. For example, LIC collects thousands of cheques every day can deposit the
cheque from its office rather than going and dropping cheques in multiple banks
3. Bank's Branches - teller can directly scan and deposit the cheque to its head office for
clearing rather than transporting the cheque to the HO
4. Check processing centers - streamline back office operations for the banks with greater
audit and tracking
5. Users of the system - can track the status from their desktop and plan their business or
personal goals accordingly
Thus, with the implementation of cheque truncation solution, the need to move the physical
instrument 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.
Major advantages of Cheque Truncation
Cheque Truncation thus is an important efficiency enhancement initiative in the Payments
Systems area that will help financial institutions in India to increase their top and bottom line and
above all ultimate customer satisfaction. Apart from operational efficiency, Cheque Truncation
has several benefits to the banks and customers in India
Faster fund availability
Better reconciliation and fraud prevention
Cost effectiveness - reduce overhead cost in cheque processing - savings in
transportation, storage of paper cheques
Online tracking and audit of cheque status at any point of time
Re-engineering the total receipts and payments mechanism of the customers
Human resource rationalization - improved efficiency of bank employees
Requirements of the software:
* Integration with the bank's database of customers
* Integration with the banks current system
* High speed internet connection
* Integration with the hardware i.e. scanners, computers and printers.
* Integration with the Clearing House Interface
Benefits:
To banks:
* Operational efficiency
* Robust reporting
* Secure
* No internal IT support required
* User friendly
* Greater customer satisfaction
* Higher ROI
* Cost reduction in terms of cheque processing and transportation
* Reduced risks in terms of operations and credit
* Free and automatic updates
* No Geographical Dependence
Efficiency of clearing cycle will increase.
reduced reconciliation and clearing fraud
Minimize transaction cost
Reduces risk involved in clearing cycle
reduce data entry operations of cheque details so that less staff can be engaged in this
work
To customers:
* Reduced bank fees
* Faster clearing of cheques
* Greater fund availability
* Quicker settlement of payments
* Better Customer Service Enhanced Customer Window
* T+0 for Local Clearing and T + 1 for inter-city clearing.
Faster clearing of fund, Local clearing would be on same day and intercity clearing on
next day of deposit
Since clearing cost reduces, there would be a chance to reduce intercity collection
charges.
Better customer service, no chance for misplacing instrument during clearing cycle as
there is no physical movement of cheque.
Challenges:
* Integration with the current system
* Security
* Dependence on technology i.e. incase of any problem with the software would halt the whole
process
* Customer acceptance
* Migration from the existing system to the new system for users
Comparison of the truncation Model in India and the US
The need for Cheque Truncation in India.
Cheque Truncation speeds up collection of cheques and therefore enhances customer
service, reduces the scope for clearing related frauds, minimizes cost of collection of
cheques, reduces reconciliation problems, 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 Bank 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.
There exists a high volume of paper cheques getting cleared and the cheques system cannot be
eliminated, Reserve bank has decided to increase the efficiency of existing cheque clearing
system. CTS is the major up gradation of existing clearing system. Cheque truncation system
ensure better customer service by speeding up the transactions, reduces the cost of clearing,
reduces the chance of fraudulent action involved in clearing cycle.
In addition to operational efficiency, Cheque Truncation has several benefits to the
banks and customers which includes introduction of new products, re-engineering the
total receipts and payments mechanism of the customers, human resource
rationalization, cost effectiveness etc.,
Cheque Truncation thus is an important efficiency enhancement initiative in the
Payments Systems area, undertaken by RBI.
significance of truncation system in India
India is doing something very unique because it has a very large cheque volume. It processes
about 1.2 billion instruments annually. The National Capital Region alone processes 6,00,000
cheques in a day. Countries such as Singapore have 4,00,000 instruments daily.
Impact on Government Departments.
Integration of CTS with the existing system is very easy. There will be no change in the existing
method of issue of cheques and no expenditure required to be made by Government
Departments. Department will continue to get paid scrolls. Linking and pairing of cheques with
Schedule-III will be done on the basis of online cheques images. If required, an image
replacement document can be printed by Department itself. Government Departments may have
to re-engineer their Codes and Manuals governing settlement of their cheques through legally
valid electronic images instead of physical cheques.
The method of imparting the uniqueness of the cheque 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. In addition, drawers could consider using holograms, barcoding
or such other features, which would add to the uniqueness of the images.
How RBI is proposing to implement Cheque truncation
RBI is proposing to implement the project on a PILOT basis in the National Capital
Region (NCR), New Delhi. Based on the experienced gathered, it would consider
extending the coverage to other centres.
In the process of implementation, banks have been given the freedom to decide the
point of truncation. RBI would be installing an interface with its system (CHI) at the
service branches of banks, who are members of New-Delhi Bankers Clearing House.
Banks have to decide the point of truncation and have to ensure that the images are
digitally signed after their capture. It would flow thereafter to the interface (CHI) provided
by RBI, from where the images would flow to the clearing House with the digital
signatures of the banks. These digitally signed images would reach the service branches
of the drawee branches clearing house interface. The service branches have to ensure
that these images are moved across their branches to ensure their processing.
The entire process flow envisaged in the cts
The CTS project envisages a safe, secured, faster and effective system for clearing of
the cheques. In the CTS the presenting bank will capture the data & images of the
cheques using their Capture System which is internal to them. They have to meet the
specifications and standards prescribed for data and images. To ensure security, safety
and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the
system. The banks will send the captured images and data to the central clearing house
for onward transmission to the payee/drawee banks. For that purpose RBI will be
providing the banks software called the Clearing House Interface (CHI) that will enable
them to connect and transmit data in a secure way and with non-repudiation to the
Clearing House (CH). The Clearing House will process the data and arrive at the
settlement figure for the banks and send the required data to payee/drawee banks for
processing at their end. The drawee/payee banks will use the same CHI mentioned
earlier for receiving the data and images from the Clearing House. It will be the
responsibility of the drawee bank Capture System to process the inward data and
images and generate the return file for unpaid instruments.
The infrastructure requirements for banks.
The infrastructure required for CTS from bank’s end are connectivity from the bank
gateway to the clearing house, hardware and software for the CTS applications.
RBI shall be providing member banks with the CHI and the banks have to procure other
hardware and system software for the CHI and the application software for their capture
systems on their own.
The hardware requirement is based on the volume of the cheques processed by the
banks. Based on the volume the CHI is categorized into four types and the hardware
requirement is different for each category.
The band width requirement for each bank is calculated based a number of factors like
the peak inward and outward volume of the bank, average size of an image, efficiency
factor of the network etc. In addition to that future requirement have been taken into
consideration for calculating the band with requirement.
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).
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 colour based on hoe 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 colour 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
The quality of the images.
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 will be specifying 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.
The security of the image and data transmitted over the network
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:
hash algorithm SHA-1
padding algorithm pkcs#1
RSA asymmetric encryption with 1024 bit key length
Triple DES (3DES, TDES) symmetric encryption with 168 bit key length
Certificates in x.509v3 format
The precautions required to be taken by the bank customers to avoid
frauds.
Bank customers should use image friendly cheques. They should preferably use dark
coloured ink while drawing the instruments. Care should be exercised in the use of
rubber stamp, so that it would not interfere with the material portions of the cheque. The
date of the cheque, payees name, amount and signature are the basic features which
are essential in a cheque. The use of rubber stamps, etc, should not overshadow the
clear appearance of these basic features in image. In order to ensure that all essential
elements of a cheque are captured in an image during the scanning process, bank
customers have to exercise appropriate care in this regard.
There will be no change in the process for the customers
There will be no change in the clearing process. Customers would continue to use
cheques as at present, except in the use of image friendly coloured ink for making the
instruments. Of course, such of those customers, who used to receive the paid
instruments, like Government Departments, would only receive cheque images instead
of the physical instruments. This will also facilitate in better processing at their end, as
they will be able to access online images in addition to the data. As the images are going
to be moved across, the time taken for the receipt of paid instruments at their end could
be reduced so that better and timely control could be exercised over payments. This will
also give an early opportunity to the drawers or issuers of cheques to detect frauds or
alterations in their cheques.
It is also possible for cheque issuers to consider newer techniques such as embedded
verifiable features such as bar-codes or logos or watermarks, encrypted codes,
holograms, etc., which would facilitate early interception of altered/forged instruments.
IRD Image replacement document
Under CTS, after the capture of the image, the physical cheque would be warehoused
with the presenting bank. In case the beneficiary or any other connected persons require
the instrument, the payee bank could issue a copy of the image, under its authentication,
which is called Image Replacement document. It is a legally recognized replacement of
the original cheque for re-presentment. The provisions of NI act also permit the usage of such
IRD.
Storage of the physical form of cheque.
The physical instruments are required to be stored for a statutory period. It would be
obligatory for presenting bank to warehouse the physical instruments for that statutory
period. In case a customer desires to get a paper instrument back, the instrument can be
sourced from the presenting bank through the drawee bank.
The potential of cheque truncation
Large corporates and government agencies, which transact in a large number of cheques, could
have tie-ups with their banks. Instead of sending the physical cheques, they can send them scan
images to the branch concerned, which would then forward it to RBI for settlement.
The truncation can also be done at ATMs. You could send the image of the cheque by inserting it
in the machine. The captured image will be send to the service branch for settlement and
clearing. Customers would get a receipt.
Other features of truncation
Banks can do a huge amount of analyis using the cheque images. The customer's payment pattern
would become known to the banks, who can then undertake cross selling, should they want.
The banks can prepare profile and thereby add value to the consumer.
