What is Cheque Truncation System?

With an aim to fasten the cheque clearing process, Reserve Bank of India had brought the concept of Cheque Truncation System (CTS) which allows banks to totally adopt the process of this system. Under this process, only CTS cheques will be allowed to be submitted in banks by customers. Moreover, this whole process of cheque clearance gets complete either on the same day or on the very next working day.

Now let’s try to find out more interesting things about this system.

What is Cheque Truncation?

As per RBI, Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point by the presenting bank en-route to the paying bank branch. In its place an electronic image of the cheque is transmitted to the paying branch through the clearing house.

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

How does it work?

Cheque Truncation System is an online image-based cheque clearing system which involves scanning of cheque images and subsequent electronic movement / replication of these images within the system for processing and clearing of cheques.

Introduction of Cheque Truncation System (CTS) in India

RBI first introduced this system in National Capital Region of India and New Delhi from 1 February 2008 with ten pilot banks. The deadline for which 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 the introduction of Cheque Truncation System, instruments used to get settled in MICR Clearing. In India, there were about 66 MICR centers which used to undertake clearing and settlement in their local geography. Moreover, the intra clearing was considered as outstation clearing.

Now, a new approach called Grid-based approach has been introduced to manage the entire cheque volume in India.

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

As mentioned above, a new approach called 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 be benefitted, irrespective of whether there exists at present 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 have been implemented in 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 across the country.

Benefits to Account Holders

Account holders get a lot of benefits in terms of:

• 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

Banks have various benefits from CTS which could be summarized as under:

• 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 are minimum

Image specifications in CTS in the Indian context:

Imaging of cheques can be based on various technology options. CTS in India use a combination of Gray Scale and Black & White images. There are three images of each cheques that 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 conversion of a physical cheque into electronic form. Moreover, as per RBI guideline, all banks providing cheque facility to their customers have been advised to issue only ‘CTS-2010’ standard cheques.

Specimen of a CTS Cheque

A specimen of a CTS Cheque is as follows:

• 

Benefits of Grid based Cheque Truncation System to the Banking System

Various Benefits of Grid Based CTS are as follows:

• Cost Savings
• Minimization of investment in MICR Machines and related AMC Costs
• Reduction in liquidity requirements for the banks
• Reduction in Cheque Processing Fee
• Further, reduction in Operational Overhead
• Elimination of clearing differences and reconciliation issues etc.

Options Available to a Person who desires to see the Physical cheque issued by him

Banks can provide images of cheques duly certified or authenticated in case a person desires so. However, in case a person wants to see or get the physical cheque it would need to be sourced from the presenting bank for which a request has to be made to his/her bank. A cost may also be involved for this purpose. However, for the legal record, the presenting bank needs to preserve the physical instruments for a period of 10 years.

Process of Cheque Truncation System

The process of CTS can be discussed as follows:

• Collection of Cheques: Firstly, branches collect cheques from customer and then at scheduled time, send them to their respective service branch.

• Capturing of Data: Service branch captures the data (like MICR code, cheque number, amount etc) and the images of a cheque using their Capture System (containing scanner, core banking or CTS application) which is internal to them, and meeting the specifications and standards prescribed for data and image. After this complete information of cheque securely transmitted at Clearing House Interface (CHI) then from CHI to CH where actual settlement of clearing occur.

• Security of Data: To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been implemented in CTS. However, as part of the requirement, the collecting bank (presenting bank) sends the data and captured images duly signed and encrypted to the central processing location (Clearing House) for onward transmission to the paying bank (destination or drawee bank).

• Clearing House Interface: For the purpose of participation, the presenting and drawee banks are provided with an interface / gateway called the CHI that enables them to connect and transmit data and images in a secure and safe manner to the Clearing House (CH).

• Presentation Clearing: The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing.

• Processing of Payment: The drawee banks through their CHIs receive the images and data from the Clearing House for payment processing. The drawee Cheque Truncation System also generates the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing.
  
• Completion of Cycle: The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed. The entire essence of CTS technology lies in the use of images of cheques (instead of the physical cheques) for payment processing.

To Sum Up

Cheque Truncation System (CTS) was introduced by the Reserve Bank of India (RBI) for faster clearing of cheques. This system is a move in the right direction and will ensure efficiency, security, transparency and faster credit of the funds which will benefit both the customer and the bank. This system seems to be a win-win situation for both the parties.

For more information about this concept, you can email us at info@enterslice.com or can directly call to reach us.