ChequeMan Blog

RBI’s Initiative in Cheque Truncation System – 2010

The RBI set up a working group on Cheque Truncation and e-cheques, which studied the Truncation and Imaging processes of other countries and came out with the following recommendations:-

• In India the cheques should be truncated at the presenting bank itself and there should not be any amount based restriction.
• An electronic image based model will be the mode of truncation.
• The storage requirement of the electronic image of physical cheques is necessary and the preservation period should be eight years.
• Truncation and standardization of cheque format are seen as independent initiatives with the latter being implemented even after the introduction of cheque truncation. Therefore, currently the settlement should be on the basis of the current structure of the MICR fields.
• Public key infrastructure (PKI) to be adopted to protect data and image flow over the network. Digital signatures should be used to establish authenticity, non-repudiation and integrity
• The security requirements for the storage of images by the banks or the centralized warehousing agency should be in consonance with the requirements of the IT Act 2000.
• From the point of view of efficiency and control, RBI is planning to set up a centralized clearing system and a central warehouse in Delhiwhere a single agency or individual drawee bank can act as the points of storage.

Keeping all these points in minds, RBI has already floated a RFP to various vendors to provide it with an all-inclusive technology for cheque truncation. It has plans of starting the Project in the National Capital Region by July 2005 and then rolling it out to other metros. The overall aim being to eliminate physical transfer of cheques in the peak centers in the next two years time.

Technology Behind Cheque Truncation Process

The technology used in cheque clearing process or technology behind the new cheque truncation process is as follows:-

1. Cheques are kept in the presentation bank and are never sent to the Clearing House or to the drawer’s bank. The information on the cheque is encoded or read using MICR and then image processing technologies are used to convert cheque images to digital form.
2. The image of the cheque is captured as it goes through the reader/sorter machine. This can be done by using either digital cameras to capture the digitized form of the front and back of the cheque or another alternative is by using a two-way digital scanner.
3. The image is captured in the JPEG or GIF extension and can be preserved as images on a microfilm, an arrangement that permits signature verification should the need arise.
4. During image compression the images should be of at least 100 dpi resolution so that the quality of the image is maintained.
5. All cheques are stamped with serial numbers for use in potential inquiries. These should match with the number of the image.
6. As most banks are gearing towards networked branches, Broadband and VPN could be the model adopted for providing connectivity. Dial-up or Leased Line can be used for transmission of MICR Codeline and images to the member banks via the Clearing House.
7. JAVA based API can facilitate internal/external interactions with the archive. Browser based interface with which the customer can receive the cheque image  statements via e-mail to see when the cheque was written, to whom it was made out and when was it cleared, will be extremely beneficial in the long run.
8. The Technology should allow Drawee Bank/branches to view the front and reverse of cheque images of individual instruments in a number of ways (flipped, rotated, turned or enlarged a particular field/section) using any standard browser interface.

Bank Draft Vs Certified Cheques

BANK DRAFTS :

A bank draft is an order to pay a sum of money on demand. It is addressed by a banker either to itself or to another banker and drawn on its head office or at a branch. It is issued and signed by two authorized signing officers of the bank; one being a “counter signature”. Once “signed”, bank drafts become a statutory obligation of the signing bank and are irrevocable.

Particulars Required for a bank draft are: The date, amount payable, and payee’s name must be typed on the draft prior to its delivery. It can be payable to a customer or creditor. On purchasing, the amount paid is placed in a special reserve account. When presented for payment, funds are withdrawn or collected from that account. The item is then collected through the ACSS. Not a Guarantee of Payment, although bank drafts are substitutes for cash, they cannot always be converted to cash immediately on deposit to a holder’s bank and are not a guarantee of payment. A collecting bank must be certain that the signatures are genuine and authorized. Funds are not realized until actual collection. The amount of the draft or the geographical distance between the place of issue and deposit, are factors that can increase/decrease the time of collection. Many devices exist for discovering counterfeit banknotes; however no corresponding devices exist for the discovery of forged or unauthorized signatures on a bank draft or certified cheque.

CERTIFIED CHEQUES:

“Certification” is the name given to the marking of a cheque by a bank to show that its customer has an existing account with sufficient funds to meet the drawn amount. Certification is demonstrated by a mark on the cheque, typically a stamp marked “certified”. It must be signed by a bank or other financial institution. Certified cheques are not a guarantee of payment; items bearing forged endorsements can be returned for up to six years.

Particulars of Payment Certified cheques are typically drawn by a bank’s regular customer and payable to a creditor or an endorsee. They are payable on demand and collected through the ACSS. The customer’s account is then debited and the amount set aside into a special suspense account. When presented for payment through the ACSS, the amount is charged to that account.

A bank may be able to refuse payment on a certified cheque, if it can be demonstrated that a payee would be unjustly enriched by payment. Certification therefore is a direct promise of a bank to pay, independent of a customer’s obligation to pay, even where a bank has mistakenly certified a cheque.

Verification is required whether funds are direct deposited by bank draft or certified cheque, there is no appreciable difference in risk in comparison to closings in the past. Remember however that financial institutions may not post funds to a trust account until the next business day and sometimes later if the other lawyer’s financial institution is not one of the major institutions, or, if a cheque is drawn on an account in another region of the country. Verification of both items is necessary as the ACSS does not guarantee payment by bank draft or certified cheque.