Cheque Truncation is the process of stopping the physical movement of cheques. As per the amended Negotiable Instruments Act 1881, in cheque truncation, the movement of the physical instrument is stopped and replaced by electronic images and associated MICR line of the cheque.
Cheques remain a popular form of payments in India even with the increased availability of alternate payment channels. RBI continues to classify paper clearings as a System-Wide Important Payment System (SWIPS) due to the high volumes of transactions. 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. 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.
RBI has mandated NPCI to operationalise CTS. NPCI will act as a Cheque Processing Centre (CPC) and will process electronic cheques and images received from member banks.
RBI will manage the Clearing House, carry out settlement of clearing transactions that NPCI processes and look into all policy related matters.
Speed Clearing is an arrangement to clear intercity non-at par items.
Grid Clearing is an arrangement that allows banks to present/receive cheques from/to multiple cities in a Single Clearing House through a service branch at one city.
There can be four types of participants viz.
i. Member banks of the Clearing House.
ii. Sub Member banks who will participate through members
iii. Indirect members who can participate for submission of data and images through a Member bank but will maintain a separate settlement account.
iv. Banks not present in the Clearing House but having presence in other cities when Grid is introduced (to be finalised in consultation with RBI). They can participate through sub membership or indirect membership route.
In CTS, presenting banks have the choice of deciding the point of truncation within their setup. Banks can choose the model best suited to them based on considerations of security, efficiency, scale & nature of operations, technology readiness, geography etc. Presenting banks can choose between centralised, distributed and hybrid. Images and MICR data alone are exchanged between the banks and the CPC.
As the payment processing is done on the basis of images, the onus of due diligence shifts to the Presenting Bank, as provided under explanation II to Section 131 of Negotiable Instruments Act. The member banks have to enforce KYC (Know Your Customer) norms in letter and spirit. The banks should observe all precautions which a prudent banker does under normal circumstances, e.g., to check the apparent tenor of the instrument, physical feel of the instrument, any tampering visible to the naked eye with reasonable care, etc. For enhanced attention, based on exceptions, the banks may employ suitable risk management techniques like scrutiny of high value transactions, limit based checking by officials, new accounts alerts, etc. The presenting bank takes full responsibility for collecting on behalf of the intended payee and exercises due diligence as per the conditions laid down in the amended Negotiable Instruments Act. RBI has also issued guidelines for Standardisation and enhancement of security Features in cheque forms. The guidelines outlines mandatory security features which can be leveraged by presenting banks while scrutinising cheques of drawee banks in CTS. These guidelines are called CTS-2010 standard.
The infrastructure required depends on the type of member a bank is, model of truncation a bank chooses and the inward & outward cheque volumes. The details are available in the Clearing House Interface Specifications document shared with member banks.
The image specifications are the same as published by RBI. There are three images as per the following standards
|Sr. No.||Image Type||Minimum DPI||Format||Compression|
|1||Front Gray Scale||100 DPI||JFIF||JPEG|
|2||Front Black & White||200 DPI||TIFF||CCITT G4|
|3||Reverse Black & White||200 DPI||TIFF||CCITT G4|
Image Quality Assurance (IQA) standards govern the quality of images fit for presentment. These standards are part of the capture solution that banks are required to procure for participation. The Clearing House Interface (CHI) software (Gateway software connecting the service branch of the presenting/drawee bank to the CPC) performs the second level of validation. The CTS-2010 Standards require banks to print cheques in light pastel colours and to keep the background clutter free. This will further improve the quality of images.
There will be no change in the clearing process for the customers for outward. However, cheque returns received by presenting banks are based only on electronic data sent by the drawee bank. The presenting bank prints the return memo for the customer.
Bank customers benefit in the following ways, if their bank participates in CTS a) Faster realization and Credit; b) Extended presentment Window c) Improved reconciliation services for Corporate Customers and Government Departments d) Reduction in Geographical dependence e) Reduced operational risk due to inbuilt security in the workflow f) Faster Customer Services- reduced TATs on Service Requests, queries and MIS