Monday, February 2, 2015

Cheque Truncation System (CTS)

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As per Negotiable Instrument Act, 1881, each and every cheque is required to be presented to the drawee bank (paying bank) for the payment.

Earlier, cheques deposited by customers, used to be presented by the collecting bank (customer's bank) to the paying bank (cheque issuer's bank). Thus, it required the physical movement of the cheque from collecting bank to the paying bank, consuming a significant amount of time to clear the cheque. (Consider several cheque to be cleared in several paying banks! How much time it could take!)

Then, came the concept of Clearing house. Banks decided to meet in this clearing house, which acted as the central place and settle their net amounts of cheques. Thus it reduced cheque processing time because they need not visit several paying bank, taking several cheques.

Cheque Truncation System (CTS)
At present, we got a new concept of cheque clearing. Instead of sending the cheque physically by the collecting bank to the paying bank, an electronic image (scan copy, along with all necessary details) is transmitted to the drawee/paying bank for payment through the clearing house.

This reduced the time drastically, as CTS stopped the physical movement of cheque from one bank to another, and also the costs involved with it.

Grid-based CTS clearing
RBI implemented CTS in the National Capital Region (NCR) of New Delhi, Chennai and Mumbai with effect from February 1, 2008, September 24, 2011 and April 27, 2013 respectively.

After migration of the entire cheque volume from MICR system to CTS, the traditional MICR-based cheque processing has been discontinued in these 3 locations

Based on the advantages realized and experience gained, RBI decided to operationalize CTS across the country. Accordingly, Grid-based CTS clearing has been launched in these 3 locations. 
  1. New Delhi Grid - NCR of New Delhi, Haryana, Punjab, UP, Uttarakhand, Bihar, Jharkhand, Chandigarh
  2. Mumbai Grid - Maharashtra, Goa, Gujarat, MP, Chattisgarh
  3. Chennai Grid - Andhra Pradesh, Telengana, Karnataka, Kerala, Tamil Nadu, Odisha, West Bengal, Assam, Puducherry

CTS Clearing Cycle

Step 1 - The Collecting bank (or branch) captures the data (on MICR band), and the images of a cheque using their Capture System (comprising scanner, core banking or other application)
To ensure security, safety and non-repudiation of data/images, end-to-end Public Key Infrastructure (PKI) has been implemented in CTS.

Step 2 - The Collecting Bank sends the data and captured images duly signed and encrypted to the central processing location (Clearing House).
The Clearing House processes the data, and arrives at the settlement figure and transfers the images and requisite data to the Paying bank. This is known as presentation clearing.

Step 3 - The Paying Bank receives the images and data from the Clearing House for payment processing. The paying bank generates the return file for unpaid instruments. The return file/data are then sent to the Clearing House.

Step 4 - The return file/data is processed by the Clearing House in the return clearing session and in the same way as presentation clearing session. Then these are provided to the Collecting bank.

Step 5 - The Collecting bank processes the data received from Clearing House. The whole process is known as Clearing Cycle.

The Clearing Cycle is treated as complete once the Presentation clearing and the associated Return clearing sessions are successfully processed. 

Amendment in NIA Act, 1881 for CTS
RBI has confirmed that with amendments to Section 6 and 1(4) and with addition of Section 81A in the NIA Act, 1881, the truncation of cheques has been legalized.

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