Truncated Cheque Clearance
According to the Negotiable Instruments Act a truncated cheque is a cheque "which is truncated during the course of a clearing cycle either by the clearing-house or by the bank whether paying or receiving payment immediately on production of an electronic image for the transmission, substituting the further material movement of the cheque in writing".
Cheque Truncation is a system of cheque clearing and settlement between banks based on electronic data or images or both without material exchange of instrument. Cheque truncation is being presently used in many countries and is being introduced in India in April 2006. For introducing cheque truncation in India, a working group was constituted by the Reserve Bank (RBI). They submitted Part I of its report in July 2003 and suggested a model for the cheque truncation in India. Following are the major recommendations of the working group :
- The physical cheque must be truncated within the presenting bank.
- Within the presenting bank the point of truncation could be decided by each individual member bank providing for service bureau models where banks can approach or set up service bureau for capturing images and MICR data.
- Settlement must be generated on the basis of current MICR code line data
- Electronic images must be used for payment processing
- Grey scale technology must be deployed for imaging
- Images must be preserved for eight years
- A centralized agency per clearing location must act as an image warehouse for the banks. The group recommended norms for agencies to provide the service.
- Public Key Infrastructure must be deployed to protect images and data flow over the network.
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.
The RBI will provide only the Clearing-house Interface (CHI) application software to the member banks. The member banks have to purchase the following :
- Appropriate hardware
- Systems software and
- Networking infrastructure.
The CHI will perform as a gateway for outward and inward MICR data and the images of the instruments to be sent to/received from the Clearing-house over the network/media. The Clearing-house Interface (CHI) is a Windows based software with embedded Oracle Relational Database to be loaded on the Gateway Server. The Gateway shall be deployed using the Public Key Infrastructure for all its communication with the Clearing-house. The Clearing-house Interface (CHI) shall cumulative the images and MICR data received from the different branches for outward presentation and will deliver the inward images and MICR data drawee bank branch-wise to the respective Clearing-house Interfaces. The images have to pass the required Image Quality Assurance (IQA) and Image Quality Usability (IQU) specifications which are issued by the RBI, failure to do so may result in rejection of such images.
As CTS (Cheque Truncation System) clearing is based on images it is important that the source documents should be image-friendly. The Cheques should be printed on the MICR standard stationary given in the MICR procedural guidelines and the size of the cheque remains unchanged. However, banks need to take certain safety measures which include :
- The background color must be light to enhance the text and dark colors in the background may be avoided
- Features which are heavy on design or unnecessary use of micro-lettering should be avoided as they reduce the contrast between background and the text. Holograms and Logos and other unique characteristics of an instrument may remain on the face of the instrument.
As a guide, ideally the bank’s imaged based processing system/s should have the following characteristics :
- Redundancy with no single point of failure
- High availability
- Flexible to meet the bank’s present and future needs (centralized capture, distributed capture, cluster model, Image Service Bureau, ATM/POS, Corporate Customer capture etc).
- Faultless Interface to the RBI CHI (Clearing-house Interface) system
- Should meet the clearing window and recovery procedures with the Clearing-house Interface (CHI).
- Images and data must meet the IQA/IQU and security and other specifications from RBI
- Provide web-interfaces at the branches for marking returns and printing of images
- Capable of burning CDs for outward and inward presentation to the paying branches
- Track and observe the sending and receiving of the items from the various points of truncation
- Banks should update the bank account processing system
Benefits of cheque truncation
- The major advantage is reducing the delay, high costs and risk of fraud inherent in the paper based clearing system
- Bank customers would get their cheques realized faster in cheque truncation system (CTS). T+0 local clearing and T+1 inter-city clearing is possible in CTS. As straight through processing and automated payment processing are facilitated by CTS faster realization is accompanied by a decrease in costs for the customers and the banks. It is also possible for banks to offer innovative products and services based on Cheque truncation system. The banks have an additional advantage of reduced reconciliation and clearing frauds.
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.
- The collecting bank under a truncated environment must verify the authenticity of the cheque based on visible features
- 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
- Protests should be lodged per the timings of the existing return cycle
- 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
- Images should be retained for 8 (eight) years.