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RESERVE BANK of INDIA- CHEQUE TRUNCATION PROCESS Cheque Truncation - Pilot Implementation

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INTRODUCTION Cheque Truncation is a process in which the image of the relevant data of a cheque is electronically captured and transmitted to enable payment of that cheque to the payee's account and simultaneously debiting the account of the drawer without the physical movement of the cheque itself. Payment systems and payment services play a key role in the efficient functioning of the financial system within a country. The payment system needs to ensure that financial transactions are settled in a timely manner and complimented with reliability and security, which is vital to the maintenance of market confidence and to the safe and sound functioning of financial market. Even though there are various cashless payment instruments in the country, cash still exists as the most popular retail payment due to convenience in settling small value transactions and ready acceptance to the legal tender for payment of any amount in any part of the country. Cheques are mainly used for retail payments. More than 90 percent of the total value of cashless retail payments is done through cheques. This statistic alone highlights the importance of cheque-based transactions in the national payment system. To reduce the time taken in clearing and settlement of cheques, and to avoid physical transportation of cheques, and to enhance the reliability and the security of the retail payment system, cheque truncation/ imaging technology is introduced. Cheque Truncation System (CTS) is an image-based cheque clearing system, which replaces the physical cheque flow with electronic information flow throughout clearing cycle. This process eliminates the actual cheque movement involved in clearing and hence reduces the delays associated with the movement of cheques. This in turn increases the [Type text] Page 1 efficiency, reduce the operational cost and expedite the clearing process. CTS provide benefits across the board by providing the financial industry with a means for shorter clearing cycles and a centralized image archival system. Banks experience cost savings in the handling, transportation and storage of physical cheques. CTS also increase operational efficiency by giving bank staff easy access to real-time information on cheque status. [Type text] Page 2 ROLE OF TECHNOLOGY IN REVOLUTION OF INDIAN BANKING SYSTEM Technology is the current state of knowledge of how to combine resources to produce desired products ,to solve problems ,to fulfill needs or to satisfy wants. The history of Indian Banking had been ‘brick and mortar’ based but the future would be ‘click and mouse’ oriented. The future of banking will be technology driven. For Customers, it would be a new experience, as they would have the facility of home banking. The Utility bills will be paid without any hassles like cutting a cheque ,or filling in the cover form or mailing it by courier or post. These things will happen by single click of a button through products like ‘bill-pay’. A part of the technology costs shall have to be borne by customers for the accurate and prompt services offered by banks. Implementation of technology in any industry is to have a business case i.e., it must enhance its business value and increase its competitiveness. The new environment will require a complete paradigm shift –new styles of conducting business with technology, people and processes. Indian Banking, Indian IT vendors and Indian consulting firms will be dominating players in the global banking scenario in coming years and that will surely be boom time for all. Technology has also changed the functioning of clearing system. The settlement process has improved and is now faster & more accurate with Cheque Truncation it is expected that there will be further increase in the efficiency .It is apparent that technological advancement is not going to stop. Since the beginning of mankind has been constantly improving its life through adoption of newer and better technologies. In the history of mankind, there have been some revolutionary technological changes, which radically changed the lifestyle and living standards of human [Type text] Page 3 beings and started a new era. Today it is unthinkable for us to imagine life without computers,internet,cellphones,tv etc. The technological revolution started in a small way in Indian Banks in the second half of the twentieth century starting from Mainframe computers facilitating interoffice reconciliation, the technology transformation journey has taken us through Automated Ledger Posting Mchines,back office Automation,full branch computrisation and now to Core Banking.We now have the ability to process millions of transaction in a very short time with great accuracy.Technology will facilitate the transactions but it will be the man or woman behind the technology who will matter the most & have the last word. Any project or initiative which we venture into is full of challenges,but after we meet the challenges and overcome them,one can savour the taste of success. Ultimately, it is a question of hardwork, application of mind and a will to succeed,which transforms any new venture into a success. Today’ success mantra for achieving excellence lies in the optimal use of technology in a manner where the process of change is managed well enough to blend with customer expectations of excellent customer service. This in turn would result & improved bottom lines for the banks & above all in overall systematic efficiency. ‘A person who is willing to learn a better asset than one who is technology savvy but refuses to change’. [Type text] Page 4 THE CHEQUE TRUNCATION SYSTEM PROCESS FLOW ILLUSTRATION 1 :- CTS PROCESS FLOW PROCESS FLOW Banks worldwide spend millions of dollars each year to process cheques. The Cheque Truncation System (CTS) from BCS Information Systems PVT LTD is the recommended solution to high-cost cheque processing. [Type text] Page 5 In June 1999, BCS/BCSIS was granted approval by the Singapore Clearing House Association to develop and implement a nationwide Cheque Truncation System for the banking industry in Singapore. The Cheque Truncation System (CTS) replaces physical cheques with electronic images on all four legs of a clearing cycle. It is an online image-based cheque clearing system, where the cheque images and the Magnetic Ink Character Recognition (MICR) data are captured at the collecting bank/branch and transmitted electronically to the Singapore Automated Clearing House (SACH) via a secure broadband data communications network. The CTS is protected by comprehensive PKI-based security architecture. On top of the PKI technology, the security architecture also incorporates basic security and authentication controls such as dual access control; user ID and passwords with crypto box and smart card interfaces. Smart card device is used to activate system access to the CTS Backend Host (Be CTS) at SACH. Encrypted password using asymmetric keys is checked by Be CTS. Once access is granted, all transactions transmitted over the network are digitally signed and authenticated by both parties. The Cheque Truncation System supports flexible connectivity options for the participating banks ranging from distributed branch capture through the use of a Front End Cheque Truncation System (Fe CTS) to regional/ centralized approach through the banks' existing cheque imaging system. At the SACH, the Be CTS continuously receives and processes this cheque information transmitted from the presenting banks throughout the clearing window. Successfully processed outward data is sorted immediately and made available as inward data for downloading and processing by the paying banks instead of having to collect the physical cheques from the clearing house. The cheque images and MICR of the inward clearing [Type text] Page 6 cheques can be downloaded from the Be CTS throughout the day as soon as the outward batch is processed (real-time batch processing). This continuous inward download feature allows the banks to perform inward verification as soon as the items are ready for retrieval from clearing house. This information can then be used by the banks'/branches' signature verification system for the inward clearing process. The same unique features also apply to the return legs. With these powerful features, the Be CTS is able to compute its members' clearing statistics and positions in a real-time mode instead of the conventional batch mode at the end of each clearing cycle. With the CTS, real-time net settlement between settlement banks will be a possibility. At suitable intervals, both images and data received are also archived into a National Archive for storage and future retrieval by members. The CTS & the National Archive were launched successfully on a nation-wide basis in July 2003. [Type text] Page 7 CHEQUE TRUNCATION SYSTEM – CUSTOMER FRQ 1:- WHAT IS CHEQUE TRUNCATION? Cheque truncation system (CTS) is a system of cheque clearing and settlement between bank based on image and associated electronic payment data without the physical exchange of all the cheque 2:- HOW DOES CHEQUE TRUNCATION WORK Acceptence of a customer chque deposit the collecting bank takes an image of the cheque and read in the magnetic ink chacter recognition (MICR) Code line information from the cheque this information together with the cheque amount is sent to the paying bank through the automated clearing house to settlement 3:- HOW CTS IS DIFFERENT FROM THE CURRENT CLEARING PROCESS ? The current practice of transporting cheque from all bank branches countrywide to the automated clearing
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