Of late you must have noticed advertisements in newspapers put up by banks urging account holders to stop circulating non-CTS compliant cheques and replace their old cheque books with new CTS enabled ones. Some banks also created awareness through various modes of communication like SMS alerts, letters, display boards in branches and ATMs, pop-up messages in internet banking and notification on website. All this is because we are moving from an old format to a new format of cheque clearance in India. Beginning 1st Apr ’13, Cheque Truncation System (CTS) would be implemented, whereby the flow of the physical movement of the cheque will be eliminated in the cheque clearing process. Instead, an electronic image of the cheque will be sent along with relevant information. While the existing cheque standard was supposed to be phased out from circulation beginning 2013, the Reserve Bank of India (RBI) extended the deadline to 31st Mar ’13 based on representations by some banks as they needed more time to set up the systems. The shift from the old system to the new cheque format essentially means that if you have given any post-dated cheques to your banks for loan EMIs you will have to replace them with new cheque leaves. And if you hold
any post-dated cheques beyond 31st March you will have to arrange to get it replaced with a new Cheque Truncation System cheque. CTS is an efficient way of clearing cheques. It is in fact, better than the existing method. This article attempts to explain CTS and its benefits both to account holders as well as banks.
WHAT IS A CHEQUE TRUNCATION SYSTEM
Cheque Truncation System (CTS) is a cheque clearing system undertaken by the Reserve Bank of India (RBI) for faster clearing of cheques. As the name suggests, truncation is the process of stopping the flow of the physical cheque in its way of clearing. In its place an electronic image of the cheque is transmitted with key important data. Cheque truncation thus obviates the need to move physical instruments across branches. This effectively eliminates the associated cost of movement of physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing. It is a system which is practised worldwide in the banking sector. Cheque Truncation System (CTS) was introduced and implemented in the National Capital Region (NCR) in February ’08 on a pilot basis. The number 2010 in ‘CTS-2010’ is because the guidelines for Cheque Truncation System came up in the year 2010.
In India, the RBI has made available inter-bank and customer payments online in near-real time in the form of RTGS and NEFT. However, cheques still remain a prominent mode of payment in the country. Physical cheques still account for 75% to 80% of all transactions. So, the RBI has decided to focus on improving efficiency of the cheque clearing cycle. Thus, offering CTS is an alternative. CTS also reduces operational risks in banking operations as clearing is a highly fraud-prone operation. This explains CTS from the regulators’ perspective.
HOW WOULD CTS WORK?
Before we answer this question, we have to understand the present system of cheque clearance. The clearing process begins with the deposit of a cheque in a bank. Under the old cheque-based clearing mechanism, physical cheque moves from the beneficiary of cheque to the payee bank. The payee bank takes the cheque to the clearing house. A clearing house is a place where each bank will send a representative to this central place and exchange cheques drawn on each other. The role of a clearing house is done by the RBI and in case there are no RBI offices in the region, a public sector bank like SBI performs the role of a clearing house. India has over 1,000 such clearing houses. At the bottom of every cheque is the MICR (magnetic ink character recognition) code. These numbers are printed with a special ink containing iron oxide, so that it can be automatically read by a special machine. Just as a postman comes to know about the destination of an envelope by looking at the PIN code, a clearing house can know the name of a bank, location of its branch from where the cheque was issued by using the MICR code. This helps in faster clearing of cheques. The clearing house settles the cheque with the drawer bank, which in turn, debits the account from the cheque drawer’s account. It is a lengthy process. If the drawer has no money in the account, then the cheque is returned back to the payee bank, taking the reverse route through the clearing house and the cheque bounces. This completes the cheque clearing process and the money is either credited or debited accordingly. In CTS, the presenting bank captures the data on the MICR band and the images of a cheque using their capture system comprising a scanner. The presenting bank sends the data and captured images duly signed and encrypted to the central processing location called the clearing house for onward transmission to the paying bank or drawee bank. The drawee bank receives images and data from the clearing house for payment processing. Hence, the entire essence of Cheque Truncation System technology lies in the use of images of cheques for payment processing. The infrastructure required for CTS from the bank’s end are connectivity from the bank gateway to the clearing house. Banks have to arrange for the hardware. The RBI shall provide the software for the interface with the clearing house. Through this, the clearing house information is exchanged between the two concerned parties - the banks and the clearing house. Further, under CTS the entire cheque volume in the country cleared across numerous locations will be consolidated into fewer numbers of grids. This will help in reaching far fetched places in India, helping in faster cheque clearing process.
BENEFITS TO ACCOUNT HOLDERS
Since there is no physical movement of cheques, there is no fear of loss of cheque in transit. Usage of CTS cheques also means quicker clearance, shorter clearing cycle and speedier credit of the amount to your account. Depending on whether the cheque is local or outstation, the cheque can get cleared on the same day or within 24 hours. The biggest advantage is that
CTS-compliant cheques are more secure than old cheques and, hence, less prone to frauds. Also, as the system matures, it is proposed to integrate multiple locations and reduce geographical restrictions in cheque clearing. Hence, there are chances of multi-city cheques getting cleared on the same day, going forward. While there are no changes in the clearing process for customers as they have to deposit the cheque leaf in the bank, they will have to ensure they use an image-friendly-coloured-ink while writing cheques. Also, no alterations in cheque like cancellations, etc will be processed under the CTS environment.
BENEFITS TO BANKS
Banks will have to reengineer internal processes to enable passing of cheques based on images. This means purchase of hardware. Banks will have to upgrade a few things to comply with CTS standards. In their branch offices, they would need to buy special scanners and install special software provided by the RBI (called as clearing house interface or CHI), to securely transfer and receive the scanned image as well as data. Banks will have to standardize all cheque leaves - size, shape, paper quality, information in the material field, etc. Banks will have to change the colour-scheme of chequebooks so that signature and handwriting are visible in the scanned image. While this will increase one-time costs and man power rationalization as no physical cheque is transferred, it is one of the biggest benefits of this system for banks.
For Banks The Benefits From CTS Could Be Summarized As Follows:
- -Shorter clearing cycle
- - Superior verification and reconciliation process
- - No geographical restrictions as to jurisdiction
- - Operational efficiency for banks and customers alike
- - Reduction in operational risk and risks associated with paper clearing
Also, to reiterate, scope for frauds are minimum under the CTS regime, which is good for banks. In addition to this, obviating the need to move physical cheques is extremely beneficial in terms of saving cost and time for banks. Certain benchmarks across the country have been prescribed like quality of paper, watermark, bank’s logo in invisible ink, void pantograph, etc, and standardization of field placements on cheques. This will achieve standardization of cheques issued by banks.
Source: My trading House NB.