CTS (Cheque Truncation System) Decoded

Cheque Truncation System (CTS) was pioneered by the Reserve Bank of India – RBI, for faster clearing of cheques. It involves sending an electronic image of the cheque together with its Magnetic Ink Character Recognition (MICR) data, and other relevant fields like date of presentation, presenting bank’s name, etc. This procedure would eliminate the need for physical transfer of cheques across branches, except in certain cases.

cts

How does it work?

This is an online image-based cheque clearing system wherein the collecting bank branch would deploy scanned images along with the magnetic ink character of the cheque which will be sent out electronically using their Capture System.

The captured images and the data are then signed and encrypted and sent to the clearing house or the central processing location and, thereafter, forwarded to the drawee or paying bank.

This helps speed up the cheque collection process.

Why Cheque Truncation in India?

  • Cheques remain a popular form of payments in India even with the increased availability of alternate payment channels. RBI continues to classify paper clearings as a System-Wide Important Payment System (SWIPS) due to the high volumes of transactions.
  • Cheque Truncation speeds up collection of cheques and therefore enhances customer service, reduces the scope for clearing related frauds, minimizes cost of collection of cheques, reduces reconciliation problems, eliminates logistics problems etc.
  • With the other major product offering in the form of RTGS, the Reserve Bank created the capability to enable inter-bank payments online real time and facilitate corporate customer payments.
  • Cheque Truncation is the alternative. Moreover contrary to perceptions, Cheque Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one point to another, thus, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle.
  • In addition to operational efficiency, Cheque Truncation has several benefits to the banks and customers which are discussed below.

Who can participate in the Cheque truncation system?

There can be four types of participants viz.

  1. Member banks of the Clearing House.
  2. Sub Member banks who will participate through members.
  3. Indirect members who can participate for submission of data and images through a Member bank but will maintain a separate settlement account.
  4. Banks not present in the Clearing House but having presence in other cities when Grid is introduced (to be finalised in consultation with RBI). They can participate through sub membership or indirect membership route.

How will CTS impact the account holder?

  • As the cheques would be cleared electronically, there is no fear of loss of cheque in transit.
  • Faster clearing leading to faster credit of funds to your account.
  • CTS compliant cheques being more secure, there are lesser chances of fraud.
  • As the system progresses and geographical restrictions are overcome, even multi-city cheques could be cleared on the same day.

What is Paper to Follow (P2F) and why is it required?

Paper to Follow is an operational convenience in CTS wherein the drawee bank can request for the physical instrument in case of any doubt or suspicion about the nature of instrument. The drawee bank can request presenting bank for physical instrument, in case, the image it has received for processing is not clear.

For Government cheques, Paper to follow is mandatory, since Government Departments continue to receive paid instruments. The presenting bank can send physical instrument to the drawee bank if, ab initio, it is identified that the image has failed IQA validation.

Benefits to bank

CTS ensures that along with the Account Holder, the benefits are passed on to its bank as well. As cheques continue to form nearly 80% of all banking transactions, simplifying and making the clearing process efficient and secure was the need of the hour. Hence, CTS was introduced by the regulators. Banks will benefit in many ways such as:

  • Reduction in cost of transit and errors due to manual work.
  • Reconciliation/verification will also be faster.
  • Shorter clearing cycle benefits both bank and customer.
  • CTS will give operational efficiency a boost as cheque clearing is a high-cost-low-revenue activity.
  • Reduction in risks involving paper clearing, as they are most prone to frauds.

Key Features of Cheque Truncation System

  • User friendly graphic user interface;
  • Automated coding and endorsing of cheques;
  • Encryption of data file before transmission to the clearing house or the service branch;
  • Employs a unique transaction follower process to confirm the status of cheque;
  • Improved and efficient settlement and prevention of fraud;
  • Equipped with enhanced archival procedure that stores images and data facilitating report generation along with future enquiry;
  • Alerts Relationship Manager in case of return of cheque due to insufficient funds.

Conclusion

CTS is a move in the right direction and will ensure efficiency, transparency, security and faster credit of funds benefiting both you as well as your bank. Hurdles due to jurisdiction and geographical restrictions will be obviated and you can have faster access to your funds. It’s a win-win situation for banks as well as customer.

CTS Compliant Cheque

References:
NPCI, Rediff, Itsallaboutmoney, Wikipedia

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