Extension of Cheque Truncation System across all bank branches

Ashish M. Shaji

10 Sep, 2022

The Reserve Bank has asked all banks to implement the image based cheque truncation system across all branches by 30^th September 2021. This system is presently operational at major clearing houses of the country, and now it will be made operational across all branches. This is expected to improve customer service. In this article, we shall discuss the concept of the cheque truncation system and the advisory issued by Reserve Bank of India on the same.

About Image Cheque Clearing System

There is a new way of clearing cheques which is more easy and quick. This system permits banks and building societies to exchange images of cheques rather than moving paper across the country. This approach allows customers to withdraw money much sooner.

What is Cheque Truncation System (CTS)?

CTS is a cheque clearance system introduced by the Reserve bank with a view to fasten the clearing of cheques. Under this system, rather than producing physical cheques, only the electronic image of the cheque with MICR code and other cheque details are transmitted to the drawee bank for payment through the clearing house.

This system facilitates the electronic processing of cheque through the Magnetic Ink Character Reader data.

How does this system work?

A scanner in local branch of the bank where the cheque is submitted is used to capture the image of the cheque and sends it to an automated clearing house, and from there, it is sent to the paying bank. Returned cheques also follow the same path.

Physical cheques will remain in the branch. In the pilot CT project the current paper-based clearing may be replaced by image and data clearing for outward and inward and only data for return item processing.

The data of cheque and images would be stored in image archives for outward ad inward items. The archive at the clearing house shall retain clearing images and data for at least 8 years. The paper instruments should be preserved for 8 years until further instructions.

The size and the configurations of the systems to be utilized for inward and outward processing is a function of banks’ business necessities and is to be worked out by banks based on the size of outward and inward bank instruments, the retention duration of such outward and inward images and MICR data by bank and the size of the images of cheques.

The size of the three prescribed images may vary as per the source instruments of various banks. The point of truncation and the retention period will have a bearing on the storage requirements of their systems. Banks must consider the scalability of their systems as per the future requirements.

An overview on the RBI notification released in this regard

As part of the powers conferred to RBI under Section 10(2) read with Section 18 of Payment and Settlement Systems Act of 2007^[1], the RBI issued the below mentioned directives to banks.

The RBI stated that the CTS is in use since 2010 and currently covers close to 1,50,000 branches. All the erstwhile 1219 non- CTS clearing houses have been migrated to CTS from September 2020. However, the RBI noted that there are bank branches that are outside any formal clearing arrangement and customers face a lot of difficulty and hardship due to the amount of time taken and cost involved in collection of the cheques presented by them.

Therefore the Reserve Bank stated that in order to leverage the CTS availability and to provide a uniform customer experience regardless of the location of his/her bank branch, it is decided to extend the Cheque Truncation System to all bank branches in the country. The RBI further stated that to facilitate this, banks should ensure that all their branches participate in image based CTS under respective grids by 30^th Sep 2021.

Moreover, RBI also stated that banks are free to adopt a model of their choice, such as deploying infrastructure in every branch or following a hub and spoke model, etc., and concerned banks should co-ordinate with the respective RBI regional offices to operationalize this. The roadmap to achieve a pan-India coverage of CTS can be informed by banks to RBI at helpdpss@rbi.org.in and submit a status report before the end of April.

What are the benefits of using the Cheque Truncation System?

The benefits from this system can be summarized as follows:

• With this system in place, the clearing time is reduced;
• It involves method of superior verification and reconciliation;
• There are no extra charges for the collection of cheques drawn on bank located within the grid, further providing no territorial restriction;
• Chances of operating risk and related risks with paper clearing are less;
• Banks and customers benefit from operating efficiency;
• It is also a cost-effective system;
• Reduces the scope of loss of instruments in transit; and
• Removes reconciliation related and logistics issues.

Essential points to know regarding Cheque Truncation System

The following points may be noted:

• This system is devised in a way that only a clean image of the cheque can be transmitted to the recipient bank. It means that not a single cancelation on your cheque is permitted now. 
• In case you have made any mistake like misspelt the payee’s name or put in an incorrect amount, then you should use a new cheque leaf.
• Most of us used to make cancelations and thereafter sign next to them, but now with CTS, it’s not possible.
• Make sure that your cheque book is CTS compliant; and
• In order to avoid frauds, banks recommend using the CTS-2010 cheques that are not just image friendly but also have increased security features.

Conclusion

The move by RBI to provide Cheque Truncation System to all bank branches in the country is aimed at leveraging the availability of CTS and providing a uniform customer experience regardless of his or her bank branch location. 

Read our article:New Rule for Cheque Payments kicks in from Jan 1