Cheque Truncation System

Cheque Truncation System or CTS is the cheque clearance system introduced by RBI to fasten up the clearing of cheques. In this system, instead of producing the physical cheques to the payee bank, just the electronic image of the cheque along with the MICR code and other cheque credentials are transmitted to the drawee bank for the payment through a clearing house.

Benefits of Cheque Truncation System

Cheque Truncation System brings elegance to the whole activity of cheque processing & clearing and offers numerous benefits to banks like time and cost savings, cost effectiveness, including human resource rationalization, business process re-engineering and enhanced customer service.

1. Time, money and manpower expended on physical transfer of cheques from banks to clearing house are eliminated
2. Clearing related frauds become less plausible
3. Probability of cheques misplaced in transit is eliminated
4. CTS are more advanced and more secure.
5. It provides quicker clearance of cheques
6. Reduces operational risk and risks related to paper clearing
7. There are no extra charges levied for the collection of cheques drawn on a bank located within the grid, further providing no geographical restrictions

How It Works?

A scanner in the local branch of the bank where the cheque is deposited is used to capture the image of the cheque and send it to an automated clearing-house and from there onto the paying bank. Returned cheques also follow the same route. Physical cheques will remain in the branch. In the pilot cheque truncation project the current paper based clearing might be replaced by image and data clearing for outward and inward and only data for return item processing.

Cheque data and images will be stored in image archives for all the outward and inward items. The archive at the clearing-house will retain all the clearing images and data for a minimum of eight years. The paper instruments are required to be preserved for eight years till further instructions on the subject are evolved.

The size and the configurations of the systems to be used for outward and inward processing is a function of the banks’ business necessities and is to be worked out by the banks based on the size of inward and outward instruments of the bank, the duration of retention of such inward and outward images and MICR data by the bank and size of the images of the cheques. The exact size of the three prescribed images of each image may vary according to the source instrument of the various banks. However, for the purpose of sizing, banks might choose conservatively 75KB as the size of the three prescribed images along with the digital signature. The point of truncation and the retention period shall have a bearing on the storage necessities and banks need to suitably work out the storage requirements of their systems accordingly. Banks should also consider the scalability of their systems depending upon the future requirements.

Who can participate in the Cheque Truncation System?

The criteria for banks participating in the Cheque truncation system are:

1. Membership of the clearing house in the NCR.
2. Membership of the Indian Financial Network (INFINET)

Risks involved in Cheque Truncation

Introduction of the truncation process might change the roles and responsibilities of the various participants in the truncation process and may lead to introduction of certain risks that will have to be mitigated. These are documented below:

• At the presenting bank level, the responsibility to confirm the genuineness of the cheque based on the apparent tenor or the visible features of the cheque presented for collection may lead to banks refusing to accepting a genuine cheque or accepting a forged/fake cheque based on a manual scrutiny. Images and MICR data to be sent to the clearing-house must be matched before they are released to the Clearing-house.
• The Clearing-house must assume that the data given by the banks is the data meant for that day’s clearing and will have to arrive at the settlement based on this assumption. If the MICR data given by the bank is not matching with the day’s image that the bank has sent for collection, it may lead to wrong settlement and large returns
• Truncating cheques involves additional operational risks. Banks will have to take sufficient measures to ensure that all necessary safeguards are provided for – in consonance with legal requirements and banking practice while making payments, especially for high value instruments
• The drawee bank must verify the signature on the image of a cheque. If a drawee bank decides to verify signatures on the images of cheques above a cut-off amount only, then it runs the risk of paying some forged instruments.

What type of cheques 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 supports 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.

Legal Issues

1. The collecting bank under a truncated environment must verify the authenticity of the cheque based on visible features
2. It is suggested that the clearing-house cannot be held responsible for fraud, forgery etc. As per the recommendations of the working group, the clearing-house will be doing settlement based purely on MICR data and will act as a pass through for the images. As a result, the clearing-house cannot be held responsible for the fraud, forgery of cheques as it cannot even open the images sent in by the banks
3. Protests should be lodged per the timings of the existing return cycle
4. On the right of the drawee bank to seek further information on the veracity/authenticity of the cheque, the amended Negotiable Instruments (NI) Act already provides for the same. The drawee bank can seek further information and the physical instrument for verification and can retain it if the payment has been made accordingly
5. Images should be retained for 8 (eight) years.