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Cheque Truncation system (CTS) in Banks

Cheque Truncation is settlement of clearing transactions on the basis of images and electronic data without the physical movement of the instruments. The Clearing Cheque is truncated at the presenting bank itself.

Cheque Truncation system (CTS) in Banks
 

Cheque Truncation System is also known as Image-Based Clearing System (ICS). In India, this project is undertaken by the Reserve Bank of India, for faster clearing of cheques.

Cheque truncation, would eliminate the need to move the physical instruments across branches, except in exceptional circumstances. This would result in effective reduction in the time required for payment of cheques, the associated cost of transit and delays in processing, etc., which speeds up the process of collection or realization of cheques.

 
Cheque Truncation System (CTS) Details
 
Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date ofpresentation, presenting banks etc. 
 
 
Cheque Truncation in India
 
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. The other product, National Electronic Funds Transfer, is an electronic credit transfer system. However, to wish away cheques is simply not possible and that is the reason why the Bank decided to focus on improving the efficiency of the Cheque Clearing Cycle. 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 includes introduction of new products, re-engineering the total receipts and payments mechanism of the customers, human resource rationalization, cost effectiveness etc., Cheque Truncation thus is an important efficiency enhancement initiative in the Payments Systems area, undertaken by RBI.
 
Uniqueness of the physical cheque be captured and imparted to the cheque image
 
CTS in India mandates the use of prescribed image specifications only. Images that do not meet the specifications are rejected.  As the payments are made on the basis of the images, it is essential to ensure the quality of the images.  To ensure only images of requisite quality move in the CTS processing cycle, there is a rigorous quality check process at the level of the Capture Systems and the Clearing House Interface (of the presenting bank).  The solution encompasses Image Quality Assessment (IQA) at different levels. The presenting bank is required to perform the IQA during the capture itself.  Further IQA is done at the gateway before onward transmission to clearing house. The images are captured with digital signatures of the presenting bank and thereafter transmitted to the Clearing House and then to the paying banks. Further, the paying banks, if not satisfied with the image quality or for any other reason, can ask for the physical instrument to facilitate payment processing.
 
Further, the new cheque standard "CTS-2010" prescribes certain mandatory and optional security features to be available on cheques, which will also add to the uniqueness of the images.
 
 RBI's proposal to implement Cheque truncation
 
RBI is proposing to implement the project on a PILOT basis in the National Capital Region (NCR), New Delhi. Based on the experienced gathered, it would consider extending the coverage to other centres.In the process of implementation, banks have been given the freedom to decide the point of truncation. RBI would be installing an interface with its system (CHI) at the service branches of banks, who are members of New-Delhi Bankers Clearing House. Banks have to decide the point of truncation and have to ensure that the images are digitally signed after their capture. It would flow thereafter to the interface (CHI) provided by RBI, from where the images would flow to the clearing House with the digital signatures of the banks. These digitally signed images would reach the service branches of the drawee branches clearing house interface. The service branches have to ensure that these images are moved across their branches to ensure their processing.
 
Services provided by RBI to facilitate cheque truncation
 
RBIís services include system development and installation at the clearing house, interfaces at the banksí end, network, handholding, awareness propagation and training.
 
Explaining Entire process flow in CTS
 
The CTS project envisages a safe, secured, faster and effective system for clearing of the cheques. In the CTS the presenting bank will capture the data & images of the cheques using their Capture System which is internal to them. They have to meet the4 specifications and standards prescribed for data and images. To ensure security, safety and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the system. The banks will send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks. For that purpose RBI will be providing the banks software called the Clearing House Interface (CHI) that will enable them to connect and transmit data in a secure way and with non-repudiation to the Clearing House (CH). The Clearing House will process the data and arrive at the settlement figure for the banks and send the required data to payee/drawee banks for processing at their end. The drawee/payee banks will use the same CHI mentioned earlier for receiving the data and images from the Clearing House. It will be the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments.
 
Cheque truncation system Participants
 
The criteria for banks participating in the Cheque truncation system are:
i. Membership of the clearing house in the NCR.
ii. Membership of the Indian Financial Network (INFINET)
 
Alternatives for non-INFINET member banks in participating in the CTS
 
In respect of banks who are not members of the INFINET, the following alternatives are available
 
(a) They may become the sub-members of the direct members or
(b) Such banks may use the infrastructure of the other banks having INFINET membership without being the INFINET members themselves and there clearing settlement can be done either directly or through the member through whom they are participating.
 
Infrastructure requirement for banks to implement CTS
 
The infrastructure required for CTS from bankís end are connectivity from the bank gateway to the clearing house, hardware and software for the CTS applications.
 
RBI shall be providing member banks with the CHI and the banks have to procure other hardware and system software for the CHI and the application software for their capture systems on their own.
 
The hardware requirement is based on the volume of the cheques processed by the banks. Based on the volume the CHI is categorized into four types and the hardware requirement is different for each category.
 
The band width requirement for each bank is calculated based a number of factors like the peak inward and outward volume of the bank, average size of an image, efficiency factor of the network etc. In addition to that future requirement have been taken into consideration for calculating the band with requirement.
 
Image specifications in the CTS
 
Imaging of cheques can be based on various technology options. The cheque images can be black and white, Grey Scale or coloured. Black and White images do not reveal all the subtle features that are there in the cheques. Coloured Images increase storage and network bandwidth requirements. So it was decided that the electronic images of truncated cheques will be in gray scale technology. There will be three images of the cheques i.e. front grey, front black & white and back black & white which will be made available to member banks.  The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).
 
Scanning images of cheques 
 
Images of cheques are taken using scanners. Scanners also function like photo-copiers by reflecting the light passed through narrow passage on to the document. Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called pixel. Images are classified as black and white, gray-scale or colour based on hoe the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a range of gray shades between black and white. The entire image of the original document gets mapped as some shade of gray, lighter or darker, depending on the colour of the source. In the case of black and white images, such mapping is made only to two colours based on the range of values of contrasts. A black and white image is also called a binary image.
 
Quality ensurance of images
 
As the payments will be made on the basis of the images, it is essential to ensure the quality of the images. For that purpose the solution proposes Image Quality Audit (IQA) at different level. RBI will be specifying the image standards to the member banks. The presenting bank is required to perform the quality audit during the capture itself. Further quality audit will be done at the gateway before onward transmission to clearing house. Further the drawee bank can ask for the physical instrument if it is not satisfied that the image quality is not good enough for payment processing.
 
Security of  image and data transmitted over the network
 
The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to payee bank will be ensured using the Public Key Infrastructure (PKI). The CTS is compliant to the requirement of the IT Act, 2000. It has been made mandatory for the presenting bank to sign the image & data from the point of origin itself. The image and data are secured using the PKI through out the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank. The PKI standards used are in accordance with the appropriate Indian acts and practices of IDRBT which is the certifying authority for banks & financial institutions in India. 
 
 
Types of Cheques presented in the CTS
 
All types of cheques can be presented in the CTS. It is no different from the use of traditional clearing infrastructure for clearing paper cheques.  Cheques presented as part of Speed Clearing are handled in CTS as well. Incidentally, given the fact that images of cheques (and not the physical cheques) alone need to move in CTS,  it is possible for the removal of the restriction of geographical jurisdiction normally associated with the paper cheque clearing.  For reaping this benefit , the concept of Grid-CTS clearing is being envisaged as part of roll-out of CTS at Chennai.  Under the grid clearing, cheques drawn on centres included in the grid will be cleared as part of local clearing. Banks may also present cheques onbanks situated outside the NCR, but such banks have branches in the NCR region. The
CTS also supports the intercity clearing and specialized clearing like high value clearing etc. The on-us instruments where both presenting and drawee banks are same are not allowed in the CTS. Images of such instruments would be stopped at the Clearing HouseInterface itself. 
 
Precautions required to be taken by the bank customers to avoid frauds
 
Bank customers should use image friendly cheques. They should preferably use dark coloured ink while drawing the instruments. Care should be exercised in the use of rubber stamp, so that it would not interfere with the material portions of the cheque. The date of the cheque, payees name, amount and signature are the basic features which are essential in a cheque. The use of rubber stamps, etc, should not overshadow the clear appearance of these basic features in image. In order to ensure that all essential elements of a cheque are captured in an image during the scanning process, bank customers have to exercise appropriate care in this regard.
 
Customer Friendliness
 
There will be no change in the clearing process. Customers would continue to use cheques as at present, except in the use of image friendly coloured ink for making the instruments. Of course, such of those customers, who used to receive the paid instruments, like Government Departments, would only receive cheque images instead of the physical instruments. This will also facilitate in better processing at their end, as they will be able to access online images in addition to the data. As the images are going to be moved across, the time taken for the receipt of paid instruments at their end could be reduced so that better and timely control could be exercised over payments. This will also give an early opportunity to the drawers or issuers of cheques to detect frauds or alterations in their cheques. It is also possible for cheque issuers to consider newer techniques such as embedded verifiable features such as bar-codes or logos or watermarks, encrypted codes, holograms, etc., which would facilitate early interception of altered/forged instruments.
 
 Benefits of cheque truncation to customers of banks
 
The benefits are many. With the introduction of imaging and truncation, the physical movement of instruments is stopped. The electronic movement of images of cheques speeds up the process of settlement and can facilitate reduction in the clearing cycles as well. Moreover, there is no fear of loss of instruments in transit. Further, limitations of the existing clearing system in terms of geography or jurisdiction can be removed, thus enabling consolidation and integration of multiple clearing locations managed by different banks with varying service levels into a nation-wide standard clearing system with uniform processes and practices.
 
CTS also benefits issuers of cheques. Use of images obviates the need to handle and move physical cheques at different points. The scope for frauds inherent in paper instruments is, thus, greatly reduced. The Corporates if needed can be provided with images of cheques by their bankers for internal requirements,if any. As only the images move, the time taken for receipt of paid cheques is reduced which also gives an early opportunity to the issuers of cheques to detect frauds or alterations, if any, in terms of what (and to whom it) was issued and what (by whom it) was realised.
 
CTS brings elegance to the entire activity of cheque processing and clearing. Cheque frauds can be greatly reduced with introduction of minimum security features prescribed under CTS Standards 2010, such as embedded verifiable features such as bar-codes, encrypted codes, logos, watermarks, holograms, etc., for early interception of altered / forged instruments. Obviating the need to move the physical cheques is extremely beneficial in terms of cost and time savings.
 
Thus the benefits could be summarized as:
 
Faster Clearing Cycle
Superior Verification and Reconciliation Process
No Geographical restrictions as to jurisdiction
Opeartional Efficiency to banks and customers alike
Reduction in operational risk and risks associated with paper clearance
 
Image Replacement Document (IRD)
 
Under CTS, after the capture of the image, the physical cheque would be warehoused with the presenting bank. In case the beneficiary or any other connected persons require the instrument, the payee bank could issue a copy of the image, under its authentication, which is called Image Replacement document. It is a legally recognized replacement of the original cheque for re-presentment. The provisions of NI act (Section 81(3) of the NI Act as amended) also permit the usage of such IRD.
 
Paper cheque options available to the customer
 
The physical instruments are required to be stored for a statutory period. It would be obligatory for presenting bank to warehouse the physical instruments for that statutory period. In case a customer desires to get a paper instrument back, the instrument can be sourced from the presenting bank through the drawee bank.
 
For any further clarifications
 
Please Contact 
 
The General Manager, National Clearing Cell, Reserve Bank of India, 7th Floor, Tower 1, Jeevan Bharati Building, Connaught Place, New Delhi – 110 001.
 
The Chief Executive Officer, National Payment Corporation of India, C-9,8th Floor, RBI Premises, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051

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