Legal Legal Law

What is Cheque Truncation System?

To fasten the cheque-clearing process, the Reserve Bank of India brought the concept of the Cheque Truncation System (CTS), which allows banks to adopt this system’s process. Under this process, only CTS cheques can be submitted to banks by customers. Moreover, this whole cheque clearance process gets completed either on the same day or the very next working day.

What Is Cheque Truncation?

The Cheque Truncation System (CTS) is an online image-based cheque-clearing system introduced by the RBI in 2010. It replaces the traditional physical movement of cheques for clearance and settlement purposes. Under the CTS, the entire process of cheque clearance is electronic and image-based, significantly reducing the time and effort involved in processing cheques. This modern system has been adopted to enhance efficiency, minimize risks, and eliminate delays in cheque processing.

In simple words, this system is introduced for quick clearance of cheques. It discontinues the flow of physical cheques issued by a drawer to the drawee branch. This ultimately eliminates the associated costs of the movement of the physical cheques. It further reduces the time needed for their collection and brings elegance to the wh activity of cheque processing.

How Does It Work?

• Cheque Scanning: The first step in the CTS process involves capturing cheque images. Banks and financial institutions use high-resolution scanners to capture the image of both sides of the cheque, ensuring all essential details are legible.
• Data Transmission: Once the cheque images are captured, they are encrypted and securely transmitted to the Clearing House for processing. The Clearing House acts as an intermediary, facilitating the exchange of cheque images among the participating banks.
• Data Verification: The electronic images are verified for quality and compliance with the CTS guidelines at the Clearing House. Any discrepancies or errors are flagged and returned to the respective bank for rectification.
• Data Exchange: The Clearing House redistributes the verified cheque images to the respective banks for further processing. The images are matched against the data stored in the banks’ systems.
• Settlement: After successful verification and matching, the settlement process occurs electronically. The necessary debits and credits are made to the accounts of the banks involved, ensuring a seamless fund transfer.

Benefits of the CTS

• Faster Clearing: The CTS reduces the time taken for cheque clearance from days to just a few hours, enabling quicker access to funds for both the payee and the drawer.
• Enhanced Security: Electronic images ensure that the cheque does not physically move through multiple hands, minimizing the risk of loss or theft.
• Reduction in Fraud: The CTS employs advanced security features like digital signatures, preventing alterations and counterfeit cheques, thus reducing the chances of fraudulent activities.
• Cost-Effectiveness: By eliminating the need for physical transportation and manual processing, the CTS reduces operational costs for banks and financial institutions.
• Environmentally Friendly: As a paperless process, the CTS contributes to conserving trees and the environment, aligning with sustainability goals.

CTS Implementation Challenges

While the Cheque Truncation System has been a remarkable advancement for India’s banking sector, its implementation did present some challenges. The initial costs of adopting new technology and training staff were significant for some smaller banks. Additionally, ensuring a seamless transition from the traditional cheque-clearing system to the CTS required meticulous planning and coordination among all stakeholders.

Introduction of Cheque Truncation System (CTS) In India

With ten pilot banks, RBI first introduced this system in the National Capital Region of India and New Delhi on 1 February 2008. The deadline was set as 30^th April 2008 for all the banks to acquire this system. After this, it was launched in Chennai on 24tn September 2011. Before introducing the Cheque Truncation System, instruments were used to get settled in MICR Clearing. In India, about 66 MICR centres used to undertake clearing and settlement in their local geography. Moreover, intra-clearing was considered outstation clearing.

New Approach to Cheque Truncation System (CTS) Implementation in India

As mentioned above, a new approach called the Grid-based approach has been introduced. The entire cheque volume of the country is now consolidated into three grids in New Delhi, Chennai and Mumbai. Each grid provides processing and clearing services to all the banks under its respective jurisdiction. Banks, branches and customers based at small/remote locations falling under the jurisdiction of a grid would benefit, irrespective of whether there exists a formal arrangement for cheque clearing or otherwise. The jurisdictions of the three grids are indicated below:

• New Delhi Grid: National Capital Region of New Delhi, Haryana, Punjab, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Rajasthan and the Union Territory of Chandigarh.
• Mumbai Grid: Maharashtra, Goa, Gujarat, Madhya Pradesh and Chhattisgarh.
• Chennai Grid: Andhra Pradesh, Telangana, Karnataka, Kerala, Tamilnadu, Odisha, West Bengal, Assam and the Union Territory of Puducherry.

Status of CTS Implementation in India

CTS has been implemented in New Delhi, Chennai and Mumbai from February 1, 2008, September 24, 2011, and April 27, 2013, respectively. The traditional MICR-based cheque processing has been discontinued nationwide after migrating the entire cheque volume from the MICR system to CTS.

Benefits to Account Holders

• No physical movement of cheques, hence no fear of loss of cheque in transit.
• Quicker clearance, shorter clearing cycle and speedier credit of the amount to your account.
• Cheques getting cleared on the same day or within 24 hours.

Benefits to Various Customers of Banks

• Comparatively 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
• Scope for frauds is minimum

Image Specifications in CTS in the Indian Context:

The imaging of cheques can be based on various technology options. CTS in India combines Gray Scale and Black & White images. Three images of each cheque need to be taken – front Gray Scale, front Black & White and back Black & White.

What Is CTS 2010?

CTS 2010 is a cheque truncation system, an image-bound method, for faster clearing of cheques. Truncation means the conversion of a physical cheque into electronic form. Moreover, per RBI guidelines¹, all banks providing cheque facilities to their customers have been advised to issue only ‘CTS-2010’ standard cheques.

Conclusion

The Cheque Truncation System (CTS) has undoubtedly revolutionized the cheque clearance process in India, making it more efficient, secure, and cost-effective. The CTS has established a more streamlined and modernized banking ecosystem by embracing digital technology and reducing manual intervention. As India continues its journey towards a cashless economy, the CTS is a significant milestone in the nation’s financial evolution, benefiting businesses and consumers.

FAQs

1. https://www.rbi.org.in/Scripts/DraftNotificationsGuildelines.aspx