Cheque Clearing is the process of Funds movement from one Bank on which cheque is drawn to another Bank where cheque is deposited, this process may include movement of physical cheque or may be through digitally under Cheque Truncation System (CTS) clearing. In this process the account of the drawer (issuer of the cheque) with the Bank cheque is drawn is debited and the account of the drawee (whom cheque is issued to) with the presenting Bank is credited.
Cheque clearing and Cheque Clearing Process:
Cheque Clearing process starts when customer deposits a cheque with his Bank, which may be drawn on other bank. The check then sent to central clearing unit of the bank which is further presented for clearing to Clearing House which is managed by RBI. Places where RBI is not present the Clearing House role is played by SBI and in case where SBI is also not present then same is done by Nominated Bank.
Clearing House is a place where representatives of each bank meet and exchange cheques and other instruments drawn on each other. The bank managing the operations of clearing is called as Settlement Bank. All Banks participating in the clearing, holds an current account with the Settlement Bank to facilitate the settlement of claims on each other.
The net balance of the clearing process is settled with the participating bank either crediting their account or debiting their account. Each participating bank must maintain sufficient balances in their account for execution of these settlements.
When cheques and instruments are received in the account of the customer of the bank are presented to other bank for clearing, it is termed as outward clearing. And when cheques and instruments are drawn on them and presented for clearing by other bank is termed as inward clearing.
In earlier times the cheque movement was done physically, these days this process is done through electronic clearing which is faster and reliable.
If the cheque is not in order due to any reason like, signature mismatch, invalid date, the amount is not readable, amount in words and figures is not matching, insufficient balance, date is expired, cutting or name mismatch etc., the cheque will get returned as a dishonoured cheque marked appropriate instructions as per guidelines.
What is Clearing Truncation System (CTS) and how it will impact Clearing Process:
CTS have been implemented in Metros like 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 will be discontinued across the country. RBI is intending to implement the CTS across country by September 2020.
Cheque Truncation System (CTS) is a system for cheque clearing undertaken by the Reserve Bank of India (RBI) for faster clearing of cheques. As the name suggests, truncation is the process of stopping the flow of the physical cheque for processing. In other words CTS is a process of electronic clearing, wherein the image of the cheque is transmitted to the paying bank / branch through the clearing house along with relevant information like, MICR band, date of presentation, amount, presenting bank, drawer and drawee etc.
CTS thus obviates the requirement of physical movement of cheques and instruments across banks and also help in reducing the cost of movement of physical cheques and reduces the time in cheque collection, presentation and settlement.
In process of CTS, banks use scanned copies of cheques for settlement instead of physical cheque. It makes the process of clearing partially electronic, shorter clearing cycle and help in faster verification and reconciliation. It also reduces the chances of bank losing the cheque while processed for physical clearing.
Majority of bankers have already starting participating under the CTS system for cheque clearing. Now with the CTS clearing the cheque collection time is reduced to Two working days.
In CTS the image of the cheque is presented to clearing house and also send to the drawee bank / branch. Each image transmitted is supported with digital signature from the presenting bank and there are multiple checks for authenticity of the image captured.
The benefits from CTS could be summarized as follows –
- Shorter Clearing Cycle.
- Safe and secure method of clearing.
- 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.
- No collection charges for collection of cheque drawn on a bank located within the grid.
- Reduces the risk of losing the cheque in the physical process.
CTS is electronic form of clearing process. It is simple and easy to adopt, help reduces the cost and time. By September 2020, all banks will participate through CTS clearing only, which will be beneficial to all stakeholders and it will further reduce time in clearing process.