Cheque Truncation System in India


Shashank Kajaria
Student of PGP-Finance
[Class of 2007-09]
Alliance Business School

Banking sector is considered the heart of an economy; integration of the banking and the information technology industry has benefited the consumers in many aspects with respect to time, cost and operational efficiency.

Cheque is the most widely accepted Negotiable Instrument to settle transactions in the world. Paper cheques provide consumers and businesses critical alternative payments mechanism. Today billions of cheques are written and processed each year, and consumers and businesses remain confident and satisfied with writing cheques. However, cheque processing is experiencing a radical change as financial institutions and their customers now have new, more efficient ways to process and clear cheques. Financial institutions need to develop and implement a cheque image clearing strategy to remain competitive in the future.

The Centrals Banks of many countries have captured the opportunity of the technological innovations today and implemented the electronic transmission of images rather than the physical transportation of cheques for clearing.

US Scenario:

In the United States of America the Federal Reserve and the banking industry sought to decrease the banking system's dependence on the actual transport of paper cheques, as the 9/11 terrorist attacks had brought transportation and cheque clearing to a halt leaving $47 billion worth of cheques floating in financial limbo for days. Moreover banks, as well as vendors accepting a customer's payment of goods and services by cheques, view the long-established paper process as slow, costly and inefficient. This convinced the Federal Reserve Board to urge the creation of Check 21 and finally October 28, 2004
marked the beginning of an evolution in cheque processing. The Check Clearing for the 21st Century (Check 21 Act), federal legislation affecting all states, changed the method by which cheques were processed in the United States, and also changed the technology of cheque payment and acceptance. Check 21 moves banks away from paper and towards electronic and image exchange.

The Check 21 Act introduces new warranties, indemnities and special refund system called the Expedited Recredit which protects the customers from fraudulent presentation and processing of Substitute Cheques. A Substitute Cheque is the image of the front and the back of the paper cheque which is a legal equivalent of the same.

Indian Scenario:

In the five decades since independence, banking in India has evolved through four distinct phases. The Indian banking industry is in the midst of an IT revolution. A combination of regulatory and competitive reasons have led to the automation of the Banking Industry.

The Reserve Bank of India has made several reforms for a safe and efficient electronic mode of payment, along with improved efficiency in the paper based mode of payments. In order to foster faster cheque processing the Central bank has implemented Cheque Truncation system in India on a test basis in the National Capital Region, in February 2008. Amendments to the Negotiable Instruments Act and the Informational Technology Act have been made to facilitate the smooth functioning of the new technology.

The introduction of the new technology does not change the method of writing the cheques. Government Departments may have to re-engineer their Codes and Manuals governing settlement of their cheques through legally valid electronic images instead of physical cheques. India is doing something very unique because it has a very large cheque volume. It processes about 1.2 billion instruments annually. The National Capital Region alone processes 6,00,000 cheques in a day. Countries such as Singapore have 4,00,000 instruments daily.

Requirements of the software:

* Integration with the bank's database of customers
* Integration with the banks current system
* High speed internet connection
* Integration with the hardware i.e. scanners, computers and printers.
* Integration with the Clearing House Interface


To banks:

* Operational efficiency
* Robust reporting
* Secure
* No internal IT support required
* User friendly
* Greater customer satisfaction
* Higher ROI
* Cost reduction in terms of cheque processing and transportation
* Reduced risks in terms of operations and credit
* Free and automatic updates
* No Geographical Dependence

To customers:

* Reduced bank fees
* Faster clearing of cheques
* Greater fund availability
* Quicker settlement of payments
* Better Customer Service Enhanced Customer Window
* T+0 for Local Clearing and T + 1 for inter-city clearing.


* Integration with the current system
* Security
* Dependence on technology i.e. incase of any problem with the software would halt the whole process
* Customer acceptance
* Migration from the existing system to the new system for users


The US system has many similarities to the Indian system excepting for the concept of "Substituted Cheque" which is not in India. It also has several consumer protection oriented regulations.

The Indian law also appears to be strong on the other legal aspects of defining the presentation of truncated cheques and the protection for the collecting and paying bankers.

It may one day be possible for payees to accept cheques just as credit cards and debit cards are accepted today. Even point-of-sale terminals now being used for other applications - may possibly be image-enabled, so that truncated cheques may be viewed.

Comparison of the truncation Model in India and the US


* Bulletin issued by The Department of Payment and Settlement System of The Reserve Bank of India from the Central Office at Mumbai.
* Indian Cheque Truncation initiative by Ravi Trivedi of the IBM Business Consulting Services.
* Cheque Truncation- Business Opportunities by K.S. Bajwa
   o General Manager- IT, Punjab National Bank
* Bulletin issued by The RBI - RBI/2004-2005/28
   o Ref: DIT.CO.No. 1/09.63.36/2004-05 - July1, 2004
   o By: Rakesh Mohan
   o Deputy Governor
   o The Reserve Bank of India
* Public Key Infrastructure Overview
   o By JoelWeise - SunPSSM Global Security Practice
   o Sun BluePrints™ OnLine - August 2001
* Whitepaper by Unisys
* Educational Review: "Understanding Check 21" and its Current Status published by Securities Industry Association
* Educational Review: Distributed Check Processing in a Check 21 Environment by:
   o Angie De Jesus, Marketing Director, Panini North America
   o Michael Pratt, Principal, Impact Marketing LLC

Shashank Kajaria
Student of PGP-Finance
[Class of 2007-09]
Alliance Business School

Source: E-mail September 27, 2008




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