“CHEQUE TRUNCATION SYSTEM”: A TOOL REQUIRED FOR DIGITISATION IN BANKS
As we all know the environment around us is highly dynamic and volatile which necessitates continuous updation and improvement in order to survive competitively. The world is moving to a more modernised environment be it in any industry. Bearing this in mind, the Reserve Bank of India (RBI) has brought out a digitised system of efficiently handling and clearing cheques by banks called Cheque Truncation system(CTS)/Image – based clearing system. This project is taken up by RBI and has proposed to launch nationwide implementation on 1st April, 2013 and we all have to replace our existing cheque books with new ones. So this calls for a basic understanding of the new system which is explained in a very simplified manner as below:
1. Old system of clearing cheques
Let us take a simple example. Suppose a person deposits a cheque into his bank, say HDFC bank (drawer’s bank) and the cheque is drawing on a different bank, say Indian bank (drawee’s bank). Under the old system the cheques are physically transmitted to the drawee’s bank which involves a lot of time and risk (say, risk of loss during transit). So, this calls for a more safe and secure system of clearing as the banks are dealing with public money which is of utmost importance. Cheque clearing by this process takes 4 days.
2. New System: Cheque Truncation System (CTS)
First let us understand the meaning of “Truncation”. “Cheque Truncation” means stopping the flow of physical cheques issued by a drawer to the drawee branch. Under the new system the physical instrument is truncated (stopped) at some point (called the” Point of Capture”) of the transmission pathway en route to the drawee branch. After the cheque is truncated, an electronic image of the cheque is transmitted to the drawee bank along with other essential data necessary to complete the clearing process like date of presentation, presenting (issuing) bank, Magnetic Ink Character Recognition (MICR) band, etc. So here all the cheques are archived in a common warehouse of the presenting bank. In this way cheques are cleared in the same day in which they are deposited.
3. Why this paradigm shift?
The proposed system seeks to enable a paperless office and elimination of manual processes which are cumbersome by nature. Also, physical cheques account for 80% of all the transactions while electronic accounts account for the rest which clearly necessitates the need for technology - oriented tools like the CTS.
4. What are the benefits?
There is a plethora of benefits available with the proper implementation of the CTS outlined as follows:
For Banks –
1. Reduces the operational risk by securing the transmission route.
2. Reduces the cost of operating.
3. Better Know your customer (KYC) norms.
4. Minimises clearing frauds to a great extent.
5. Automated payment processing.
6. Huge time savings as there is no physical movement.
7. No risk of losing the cheque in transit.
8. Easy data storage and retrieval.
9. Huge customer satisfaction as he gets his money in the same day.
10. Better harmonisation and interoperability of electronic processes between various banks.
11. Easier and faster reconciliation of accounts.
For the Customer –
1. Elimination of float between presentation and clearance enabling faster credit to his account.
2. The money is safe and minimises the chance of fraud (say, laundering).
5. Security Concerns
CTS provides a very secure environment during the process of cheque clearing, as in order to avoid any repudiation of data/images or unauthorised intrusion, end - to end Public Key Infrastructure - PKI (a form of cryptography involving the use of asymmetric key algorithms to secure the digital image flow in its cheque truncation system with digital signature and encryption.) is installed in the system. Security can further be enhanced by incorporating basic security and authentication controls like dual access controls, user ID’s and passwords with crypto box and smart card interfaces on the top of PKI technology.
The CTS is a very important and efficient tool for banks in order to keep pace with the cutting edge of technology. So it’s high time for the ‘old school’ banks to reengineer their internal processes and adopt a payment system which has more relevance in today’s context and which helps them to gain their competitive edge. Also, with the growing benefits of this system the banks should exercise a lot of caution and diligence during both post and pre implementation of CTS.
R. SUDARSHAN BALAKRISHNA (CA IPCC)