What is Cheque Truncation?

Cheque Truncation System : Explation by RBI

Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch.

In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc.

Cheque truncation thus obviates the need to move the physical instruments across branches, other than in exceptional circumstances for clearing purposes.

This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.

Why Cheque Truncation in India?

As explained above, Cheque Truncation speeds up the process of collection of cheques resulting in better service to customers, reduces the scope for clearing-related frauds or /  loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation related & logistics-related problems, thus benefitting the system as a whole.

With the other major products being offered in the form of RTGS & NEFT, the RBI (Reserve Bank of India) has created the capability to enable inter bank & customer payments online and in near-real time.

However, as cheques are still the prominent mode of payments in the country and RBI has decided to focus on improving the efficiency of the cheque clearing cycle, offering Cheque Truncation System (CTS) as an alternative.

As highlighted earlier, CTS is a more secure system vis-a-vis the exchange of physical documents.

In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource rationalisation, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc...!

CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by RBI in the Payments Systems area.

The status of CTS implementation in India..!

The RBI has implemented CTS in the NCR (National Capital Region), New Delhi & Chennai with effect from February 1, 2008 & September 24, 2011.

After migration of the entire cheque volume from MICR system to CTS, , the traditional MICR-based cheque processing has been discontinued in these two locations.

Based on the advantages realised by the stakeholders & the experienced gained from the roll-out in these centres, it has been decided to operationalise CTS Pan India.

Accordingly, Grid based CTS clearing has since been started in in Chennai by including a few banks from Coimbatore & Bengaluru with effect from March 2012.

It has also been envisaged to bring all the bank branches in the states of Tamilnadu, Kerala, Karnataka, Andhra Pradesh & the Union Territory of Puducherry under Chennai Grid in a phased manner

New approach to CTS implementation in India..!

The new approach envisioned as part of the national roll-out is the grid-based approach.

Under this approach the entire cheque volume in India cleared across numerous locations will be consolidated into a much fewer number of grids. The concept of region wise grids will be replaced & operational freedom will be given to the operator in deciding the number of grids required to expand the reach of CTS accross India and also on choosing the locations for each grid for optimum use of the resources.

Each grid will provide processing & clearing services to all the banks under its jurisdiction,. Banks, branches and customers based at small / or  remote locations falling under the jurisdiction of a grid would be benefitted, irrespective of whether there exists at present a formal arrangement for cheque clearing or otherwise.

Src: RBI

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