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More on CTS related issues that needs to be taken care of before implementation

Investments

Huge Investments are required by the Banks to go for a Cheque Truncation System (CTS). The investments will be in the form of:-

  • Hardware and Connectivity
  • Linking core banking system to imaging system, and
  • Redesigning of process mechanisms, which would require immense training for the Bank officials.

The greatest requirement would be to provide an interface between the Core Banking Solution and the CTS such that:-

  • Data like signature, available balance, customer name etc. could be extracted from core banking system on the basis of MICR data, and
  • Image of the cheque is displayed simultaneously on the screen for verification.

The Banks that do not have a Core Banking Solution can avail the services of the Banks which have them. But, the need for the hour is to go in for a Centralized Banking Platform to service the customers in a much better and efficient way and above all to cut the operating costs of the Bank.

Cost Benefit Analysis

Factors like Cheque volumes, technology infrastructure, cost and other influencing factors would have to be taken into account before going for a Nation-Wide implementation of the Cheque Truncation System. An in-depth Cost-Benefit Analysis (CBA) has to be done for putting in place the infrastructure

  • At the customer and bank interface levels
  • Within Banks: at the branches and service branches
  • Between the Banks and the Clearing Houses
  • Between the Clearing House and the Settlement Banks

Banks have to decide “Which cheques should be captured as images” (Intercity, Same city, Within Bank) and whether there should be a cut-off amount beyond which the bank will do the cheque truncation or should it truncate all the cheques that are presented.

Time Reduction

With more and more banks trying to network their branches and having a centralized control, Cheque truncation is one solution, if implemented well, can do wonders for the Banking Industry.   It can help banks 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. Even it can result in same day return clearing if the funds are not sufficient in the payer’s account. The greatest beneficiary will be the Outstation cheques which can with Cheque Truncation be cleared in T+1 or T+2 at the most.

Usage of Image Replacement Document (IRD)

In case the cheques getting returned (due to their being Post Dated, Funds not available, Effects not clear or Exceeds Arrangement) banks around the world are using a substitute of the original cheque in the form of an IRD. IRD is passed to the customer instead of the physical cheque during the return cycle.

This IRD is a scanned image of the cheque taken on a paper with a watermark (for its authenticity) and can be presented again for clearing provided no alterations are done on it. Cases like absence of correct sign, discrepancy of words and figures etc. would require the issue of another cheque by the drawer.

The biggest benefit of IRD will arise if the RBI, in the future, decides to destroy the physical cheque and treat IRD as the next best thing available.

Cheque Truncation vs. EFT/credit transfer

There are two lines of thought on this point.

  • Some say that the increased use of cheque truncation will streamline the handling of cheques, bringing down the unit cost of processing, thereby promoting even greater use of the cheques.
  • The others respond by saying that the loss of float will result in customers moving away from the cheques and towards electronic means of presentment like Credit transfers, EFT and RTGS.

The cheques are so widespread in India that there are a large amount of people that still prefer writing cheques. Hence both these technologies will act complementary to each other rather than there being any competition as both cater to a different group of people.

Banks can also take a decision to route the High Value Clearing through the RTGS channel. If successful, the burden on the clearing system will reduce to a great deal.

Cheque Truncation and Standardization

Their can be two lines of thought for this issue.

  • RBI’s working committee points out that Cheque truncation and standardization (from security and image friendliness perspective) of cheque format should be independent initiatives with the latter being implemented after even after the introduction of cheque truncation. This is true as the truncation process should not be made to wait till the old cheques are fully withdrawn.
  • The second line of thought says that the Banking industry has to adopt new one-sized cheques for both corporate and individual customer’s way ahead of the launch of CTS so that they could get familiar with using these new cheques.

Keeping both these points in view and considering that the banks who have already printed a large number of cheques would entail a huge cost to get rid of them, a collective decision can be taken. The Banks could stop printing any new cheques and go for the standardized cheque format as and when the RBI decides it.

Security

Another issue is “How secure is it to send the MICR data and the images over the IP network – INFINET, VPN, Internet”. RBI has floated RFPs for Vendor selection and one of their demands is the transmission of MICR data and the images using INFINET. Some application can be built on the top of SFMS to send the instrument as a file consisting of both image and data files.

Security over IP is ensured by using a reliable technology called PKI (Public Key Infrastructure) where encryption is a feature – both for data transfer and provide options for encryption based data storage. Security can be further enhanced by incorporating basic security and authentication controls such as dual access control; user ID and passwords with crypto box and smart card interfaces on the top of the PKI technology. Once access is granted, all transactions transmitted over the network are digitally signed and authenticated by both parties.

Another way to increase security as it is done in Singapore is to introduce a check digit in the MICR line to enable verification of the genuineness of the cheque at the presenting bank itself in case of image misreads. But it requires additional costs as hardware and software changes. As we are in the implementation phase, settlement should be generated on the basis of the current structure of the MICR fields. Probably in the future we can go in for a check digit.

Fraud Prevention

The introduction of Cheque Truncation System will ensure Fraud Prevention in the following ways:-

  • With the advancement of technology, new and more sophisticated imaging techniques are available which can help detect frauds.
  • There are some mathematical representations of writing on the cheques, which can to a certainty authenticate whether the check is real or fraud.
  • Fraud could be prevented by creating a National Fraud Database and enabling the Anti-Money Laundering features by keeping a special watch on the High Value / Volume cheques, special accounts, hot accounts etc. This database could be extremely useful in consolidation of cases across geographies/financial institutions for better prosecution.
  • The real or Fraud cheque could be easily identified by matching the cheques to this fraud database before take any kind of action on it.

More on issues that has to be taken care of before CTS

Shared Services

There is no necessity for all banks to make huge investment in the technology and hardware procurement. Infrastructure can be shared either between banks or through independent service providers.

Banks like State Bank of India and Punjab National Bank have already invested a lot in the resources and technology required for Cheque Truncation. Hence, the other Banks can form a consortium with them by which they can avail services like:-

  • Imaging of Cheques which can be sent by the service branch of one Bank to the Image Processing Center of either SBI or PNB.
  • Transmitting images to clearing house where the other Banks would be utilizing the networking capabilities of these two Banks.
  • After clearing, these images can be returned to the service branches of the respective banks’ in diskettes or CD.
  • One of these two Banks can act as a Centralized Warehouse in a certain region to store the cheque images for the other Banks.

All these services and more can be provided by them for a charge as negotiated between them and the other Banks.

Bandwidth

Depending on the maximum cheque data and the image volumes to be transmitted, the bandwidth has to be calculated. The images do not take much of the Bandwidth but, the network may get congested if a lot of packets are sent at the same time. Hence network management is an extremely important issue to look at.

If images are sent batch wise then it may create bandwidth problem depending on the transmitting capacity of the Leased Line or the dial-up. A minimum of 2 Mbps (or more) line will be required to overcome congestion in the network. But, the thing to notice is that this connection would just be used once a day during batch upload and other than that the capacity will just go waste. The Banks can go in for this option provided they can effectively utilize the bandwidth available during lean hours.

A wiser option would be to go for an independent 64 kbps (or more) leased line between the service branch and the MICR Center to continuously send the data and image as and when they are scanned and the required details fed. This option would effectively utilize the bandwidth available during the working hours plus it would be easy on the pocket.

Cheque Imaging

Instead of the JPEG and GIF format for storing images as was originally thought, another option for the service branch of the presenting bank could be to save the scanned cheque images in the TIFF format and then FTP them to the Clearing House. This is because, images in TIFF format occupies very less space.  As the images go from Clearing House to the Paying Bank the TIFF files can be reconverted into gray scale enhanced JPEG images.

Grey Scale vs. Black & White Scanning

The Working group on cheque truncation has suggested grey scale scanning for the images. The clarity would definitely be better in case of grey scale but the option of black & white scanning should also be pondered upon as it would save cost due to Lower storage space requirement and bandwidth consumption. Therefore, for cheques below a certain amount, the usage of black and white scanning can be looked into by the Banks.

Storage

RBI has suggested that there should be a single agency or a bank which can look after the storing of the cheque images. Apart from that, the respective banks should also preserve the cheque images and store them in their service branch. These digital images can be sorted and also indexed by account number, cheque number, date, customer name or any other business criteria for their easy retrieval, if the need arises.

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